finding the right idea for a business

Businesses are created by serving markets.  Markets are groups of willing buyers and willing sellers of a given product.  Or defined a slightly different way, as Clayton Christensen at the Harvard Business School would say, businesses are created by solving problems for people.  At Early Stage Legal, we believe that the problem of finding the right idea for a business can be somewhat simplified by categorizing new businesses into two broad groups:

  1. Creating a new market
  2. Improving an existing market

To start a business in the first category, you will generally need some kind of intellectual property.  You will have something very new and unique to offer to a set of customers who are not yet used to purchasing this kind of product or service.  The benefits of starting this kind of business is that you often can enjoy first-mover advantage and, if you can convince people to buy something new, you can often reap the rewards of helping to pioneer this new business category for years.  The drawbacks of these businesses include the need to change buyer behavior (which can be very difficult), loss-making years as you "educate" the market about the need for your product, the need to raise capital to fund those loss-making years, and the need for quite a bit of time to become successful. 

To start a business in the second category, you simply need to offer a product or service that is somehow superior than the products and services that are currently avaiable to purchasers.  This can generally be achieved by creating a product or service that is "better, faster, or cheaper."  The benefits of starting this kind of business is that you do not generally have to change buyer behavior, you often do not need to raise as much money, you can largely copy the success of other businesses, and you can often get your product or service to market quickly.  The major drawback is that these markets tend to be much more competitive.

As you begin the process of finding the right idea, keep these categories in mind because your choice will dramatically affect the type of entrepreneurial experience you have.

Brainstorming

Finding the right idea for a business is essentially an exercise in brainstorming.  You should start brainstorming well in advance of when you actually want to start the business.  This will help you to create a broad list of ideas upon which to draw, to be thoughtful about which idea you ultimately select, and it will give you time to vet and test the idea thoroughly.  Different people have different ways of brainstorming but here are a few ideas:

  • Use Your Own Experience.  Some of the best entrepreneurs we have worked with came up with the idea for their first (and second and third, etc.) startup by simply using their own experience.  In their own work experience they found sub-optimal experiences that they thought they could improve.  They found products or services that were lacking.  They found pain points in their organizations.  These became the genesis of their own businesses. 
  • Find or Create a Group.  Often the best ideas can come when you are working with smart and like-minded individuals.  Find or create a group of associates who are looking to do the same thing.  
  • Keep a List.  Writers have known for a long time that it is critical to keep an ongoing list of ideas.  Most writers have a "writer's notebook" in which they keep ideas for their next novel or book.  Entrepreneurs should keep a "startup ideas notebook" where they are constantly tracking ideas for new businesses.  Getting into this habit will allow you to find new business ideas regularly.
  • Pay Attention to Pain.  Many startup entrepreneurs believe that pain signals the biggest and best opportunity for a startup.  Buyers will pay for pleasure it is true, but often this is discretionary spending.  Eliminating severe pain is generally not discretionary.  The idea is to notice when people or businesses are experiencing severe pain because generally they would be willing to pay for a solution that eliminates the pain.  Because startups have a number of disadvantages relative to larger companies, many feel that they should focus on offering products and services that are even more necessary and desired than those offered by existing or large companies.  Again this emphasizes the idea of focusing on severe pain points.
  • Copy.  True creativity--creation of something out of nothing--probably doesn't exist.  So get over it and start looking for ways to copy or sort-of copy businesses that are successful.  Starbucks was created because the founding entrepreneur wanted to offer an Italian or European-like coffee experience to the US mass market.  He copied the taste, look, and feel of Italian barristas and transplanted it in a more scalable way to the United States.   
  • Follow Your Heart.  Starting a new business is a bit like falling in love.  It is generally irrational and it is often founded on emotion.  Like in love, you might not do some of the crazy things you do if you weren't fueled by an overwhelming passion.  This is OK.  Use it to your advantage.  A very large percentage of the entrepreneurs we work with came up with the idea for their business simply because it was an area they were passionate about.  Generally these entrepreneurs are the ones that are most likely to endure the inevitable dark periods that arise before a startup becomes successful. 

Some Ideas for Free

The founders of Early Stage Legal have been keeping a list of business ideas for years.  We even have a concept of "meta-business-ideas."  Meta-business-ideas are classes of new business ideas.  We tried to group  great business ideas into a range of categories.  By understanding these categories, we hoped to spur creative thinking about other similar businesses we could start.  We can only start so many businesses, so we would like to share these meta-ideas with our customers.  We hope you enjoy them!

  • Low price alternative.  One of the best and most tried-and-true methods for starting a successful new business is to focus on become the low-price leader.  This idea is at the root of Early Stage Legal, Wal-Mart, Costco, Dell, overseas outsourcing, generic prescription drugs, and so on.
  • Arbitrage between markets.  Look for opportunities to buy low in one market and resell high in another market.  This again is the root idea of many overseas outsourcing companies, import / export businesses, and other trading businesses. 
  • Value-added reselling.  This involves buying a product on the open market and bundling value-added services on top of that product.  The most common examples are in the technology industry where a value-added reseller (or VAR) will become expert in understanding a product and then sell installation, configuration, deployment, maintenance and repair services around that product.  In some ways website development fits into this business.  There are opportunities to become a value-added reseller around any product that is new, unique and / or somewhat difficult to learn or understand.
  • Leverage a market trend or dynamic.  Many successful businesses start by taking advantage of a market trend.  A close friend of ours started a home healt business which takes advantage of the enormous expected growth in the number of people needing such services as the baby boomers age.  Trends abound in the restaurant business where fast casual concepts such as Noodles & Co. have taken off.  Another example is Red Mango and Pinkberry that have taken advantage of the ongoing trend toward healhier eating.  Current trends toward green, or environmentally friendly, business are creating new opportunities frequently.
  • Piggy-back on a market leader.  Another proven model is to piggy-back on the success of another company.  For example, the success of the iPhone and iPod has created enormous sub-industries in branded headphones like SkullCandy, protective plastics like Zagg, and the millions of applications available for the iPhone.
  • Nichify, nichify, nichify. Sometimes you can achieve success by serving a defined niche that has a distinct business need but very little competition.  While these businesses cannot generally become very large by their very definition, they can create a lucrative and consistent cash flowing business for their owners.  Generally these businesses require unique and rare skills but these skills can be learned or developed.  Or perhaps you have already picked up some of these skills in your career to date.  Examples here migh including forensic accounting, litigation support services, and so on.
  • Formalize the informal. A friend of mine from early in my career Ashish Advani started a company called CircleLending.com.  He formalized something that has been happening informally for centures--non-bank loans between individuals, generally family memberrs.  CircleLending created a website that facilitated the creation and tracking of these loans.   Subsequently, this business and a few others like it have grown into an entire indsutry called social finance.  Look for opportunities to formalize the informal for your next business.
  • Leverage a new regulation. New regulations create businesses all of the time.  The Sarbanes-Oxley Act created a wave in risk consulting, audit services, and even board governance consulting.  Follow regulations carefully and see if you can find a way to create a new business based on the new regulations.
  • Use relationships to build a new business.  One of the most common ways of starting a business is to simply leverage your existing network and find out what business services are needed among your closest friends and associates.  Karl Israelsen, one of our advisors, decided to start his own law firm.  In doing so, he leveraged all of his previous relationships created over years of service in the law.
  • Make luxury goods affordable.  A classic and oft-repeated strategy for entrepreneurial success involves making luxury affordable.  Josiah Wedgwood became a personal business hero of mine in business school  He started the Wedgwood pottery and fine china company.  He made a name for himself by selling his products to the nobility, including the Queen, but he made his real wealth in selling similar, lower-priced products to the masses. 
  • Create new information.  Creating new sources of valuable information can be a great strategy.  Two examples come to mind:  PatientsLikeMe.com  and Sermo.com.  PatientsLikeMe creates online social networks of patients with the same health challenges.  Sermo creates an online social network of doctors.  In both of these cases the companies make much more money by selling data and information to healthcare companies about what the members of their social network are saying about treatments, drugs, and therapies than do by any other method.  Looking for novel ways to find, collect, aggregate and sell information can allow you to create a very valuable business.
  • Transplant a great idea.    We have frequently cited Starbucks as a great example on this site.  Starbucks took a European concept, that of upscale coffee and coffee houses, and transplanted it to the US.  Look for opportunities to take an idea that is working well in one context and move it to another context where it could also work well.
  • Find an market to disrupt.  Clayton Christensen's work on disrupting innovations is great in providing us with another model for successful entrepreneurship.  Often large companies fail to recognize the power of new technology to lower costs and they frequently overlook challenges to lower margin portions of their businesses by focusing almost exclusively on the higher-margin portions of their businesses.  This can often allow competitors (read: entrepreneurs) with superior technology to attack larger companies in their lower-margin businesses.  Because the entrepreneurs are adept at using new lower-cost technologies they can often enjoy significantly higher margins than the larger companies, even in those business lines that the larger companies have traditionally considered lower margin.  The point is to look for opportunities to apply cost-saving technologies to business.
  • Incrementally improve an existing product or service.   This is a simple strategy that involves finding a way to make something better, faster, or cheaper.  While not the most flashy of the strategies we have explored it is clearly one of the most successful. 
  • Eliminate the middleman.  Eliminating the middleman is another old strategy for entrepreneurial success.  Chistopher Columbus may be the first entrepreneur who made this strategy most famous by trying to find a more direct route to the West Indies thereby avoiding all of the expensive intermediary costs and tariffs associated with international trade at that time.  In more recent history, Dell Computers offered wholesale computer pricing direct to consumers through catalogs and later the Internet.  In fact, the Internet has enabled thousands of new businesses focused on cutting out transactions costs and middlemen.  Online real estate listings and online business-for-sale listings are challenging the brokerage business. 
  • Financial engineering.  A classic way to make money most frequenly used by private equity professionals or buyout professionsl is simply to buy an existing business and use financial engineering to improve its money-making potential.  You can do this by buying the business with debt and then using the cash flows of the business to pay down equity.  Or you can improve the cash flows of the business through careful operation.  Or you can buy the business at a low valuation and sell it later when market valuations have improved.  Some combination of all of theses strategies should allow you to be quite successful.

This represents an obviously incomplete list but check back frequently as we hope to update this list often.

Assessing Your Business

Entrepreneurs have to be skilled at both creativity and critical thought.  Finding a person that blends both of these traits is rare and this is, in our opinion, one of the reasons why it is really hard to be a great entrepreneur.  You have to be passionate about your idea (see above) but at the same time you have be extremely realistic about the challenges of your business.  And, before you allow yourself to become passionate about an idea, you have to make sure it is a good one.  This leads us to our next topic:  please read our article on Assessing Your Business Idea.