Entrepreneurs, Reduce Your Startup Risk. Don’t Start With The Idea, Start With The Marketplace
The notion of creating a startup company might appeal to a large group of people but only a few will attempt to actually start a company. Why? Several reasons but the most important might be the fear of failure. According to the Small Business Administration, in 2019, the failure rate of startups was around 90%. Quite often when looking at why the companies failed, it might be because the company should have never been started. Sometimes it’s a solution in search of a problem, a failed set of assumptions or most importantly, there was no clear marketplace.
One of the ways to reduce your startup risk is to target marketplaces with the following characteristics:
– A small marketplace that is growing rapidly
– A large market with expanding segment or niche
– A large market that is ripe for be disruption
Large or rapidly emerging marketplaces have two things startups really need: a strong potential for rapid growth and lots of customers. While it’s hard to predict the right timing or trends that will drive a change in a marketplace, there is no substitute for a large group of potential customers. If someone would have pitched you on starting a different kind of taxi company during the recession in 2008, you would have laughed. No way, the industry is too regionalized, segmented, no real growth, too much capital in buying taxi’s to get started and so on. But if you looked at the marketplace, there was a large group of customers were who simply tolerating taxi’s and their inconsistent service. When you overlay a new business model on a large marketplace, you have reduced your risk for 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 might not provide you any direct ideas, it might surface potential problems and they are better than ideas. PESTEL stands for Political, Economic, Social, Technological, Environmental, and Legal factors. These are external marketplace environment factors that shape the world we live in. A simple analysis is to identify your target industry or marketplace and look at the following for insights or additional questions.
Political: Is there a movement that favors or endangers the industry or marketplace?
Economic: Where are we in the economic cycle whether for growth or disruption?
Social: What changes and trends are occurring that will impact the industry or marketplace?
Technological: How is new technology going impact the industry or marketplace?
Environmental: Is there an environmental or sustainability opportunity?
Legal: Have recent changes in the laws governing the industry created an opportunity?
You also should start to think 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 will it take to be successful?’ Investors also want to reduce their risk while maximizing their opportunity. What an experienced investor will be looking for is really good answers to the following questions. Why is now the right time to start this company? What has changed in the marketplace or industry where consumers would be willing to pay for new solution? Perhaps most importantly, how much money and time will this solution take to get to market? And what about the timing…are you early, just right or too late?
In order to understand potential success, you should look to companies who seem to have a simple solution, business model and a large marketplace and learn from what they did well, in the early days and in the later days. Understand what AirBnB did early and how they scaled a relatively simple solution. How did Uber leverage relative customer dissatisfaction that was so bad, people might be willing to get into a vehicle with strangers? You think what Chewy did in offering pet supplies online was genius? They simply heard customers saying, ‘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 company, then put in the research and analysis to identify an emerging or large marketplace where customers are tolerating an existing service or product. Find a solution to that problem and you might just build a successful company. After all, you already have a large marketplace and millions of potential customers.