The idea of starting a business startup may appeal to a large group of people, but only a few will attempt to actually start a business. Why? Several reasons, but the most important is perhaps the fear of failure. According to the Small Business Administration, the failure rate of startups in 2019 was around 90%. If we look at why the companies failed, it can often be that the company should never have been founded. Sometimes it’s a solution looking for a problem, a failed set of assumptions or, more importantly, there was no clear market.
One of the ways to reduce your startup risk is to target marketplaces with the following characteristics:
– A small marketplace that is growing fast
– A large market with a growing segment or niche
– A large market ripe for disruption
Large or rapidly emerging markets have two things that startups really need: strong potential for rapid growth and lots of customers. While it is difficult to predict the right timing or trends that will cause a change in a market, there is no substitute for a large group of potential customers. If someone pushed you to start a different kind of taxi company during the recession in 2008, you would have laughed. Absolutely not, the industry is too regionalized, segmented, no real growth, too much capital in buying taxis to start and so on. But if you looked at the market, there was a large group of customers who simply tolerated taxis and their inconsistent service. When you put a new business model on a major marketplace, you have reduced your risk of failure. You still need the right solution, but the marketplace already exists. Uber.
Another element of research you can do is a PESTEL analysis. While this may not give you immediate ideas, potential problems can come to light and are better than ideas. PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal Factors. These are external market environment factors that shape the world we live in. A simple analysis is to identify your target industry or marketplace and look to the following for insights or additional questions.
Politics: Is there any movement that favors or jeopardizes the industry or the market?
Economic: where are we in the economic cycle, be it growth or disruption?
Social: What changes and trends are occurring that affect the industry or the market?
Technological: how does new technology affect the industry or the market?
Environment: are there environmental or sustainability opportunities?
Legal: Have recent changes in the laws governing the industry created an opportunity?
You also need to start thinking like an investor. Put yourself in the shoes of potential investors who will ask, ‘Why now, what is the problem, how much time and money does it take to be successful?’ Investors also want to reduce their risk while maximizing their opportunities. What an experienced investor is looking for are really good answers to the following questions. Why is now the right time to start this business? What has changed in the market or industry where consumers are willing to pay for a new solution? Perhaps most importantly, how much money and time will it take to bring this solution to market? And what about the timing… are you too early, just right, or too late?
To understand potential success, you need to look at companies that seem to have a simple solution, a business model and a large market and learn from what they did well in the early days and in the later days. Understand what AirBnB did early on and how they scaled a relatively simple solution. How did Uber take advantage of the relative customer dissatisfaction that was so bad that people would be willing to get into a vehicle with strangers? Do you think what Chewy did in offering pet supplies online was genius? They just heard customers say, “Why do I have to go to the pet store every six weeks to buy the same dog food?”
If you really want to start a business, do research and analysis to identify an emerging or large marketplace where customers will tolerate an existing service or product. Find a solution to that problem and you could just build a successful business. After all, you already have a large marketplace and millions of potential customers.