Three Ways to identify opportunities

There are three approaches entrepreneurs use to identify an opportunity their new venture can choose to pursue (see Figure 2.2). Once an entrepreneur un- derstands the importance of each approach, s/he will be much more likely to look for opportunities and ideas that fit each profile. We discuss the three ap- proaches in the next three sections.

1. observing trends

The first approach to identifying opportunities is to observe trends and study how they create opportunities for entrepreneurs to pursue. The most impor- tant trends to follow are economic trends, social trends, technological ad- vances, and political action and regulatory changes. As an entrepreneur or potential entrepreneur, it’s important to remain aware of changes in these areas. This sentiment is affirmed by Michael Yang, the founder of Become.com, a comparison shopping site, who believes that keen observation skills and a willingness to stay on top of changing environmental trends are key attributes of successful entrepreneurs:

One of the most important attributes of a good entrepreneur is having a keen observation ability. Basically seeing what’s needed in people’s everyday lives and coming up with innovative new ideas and services that meet those needs … I al- ways believe the entrepreneurs that anticipate trends and maintain observations of what’s needed … to solve those needs will have a higher chance of succeeding in the marketplace.3

When looking at environmental trends to discern new business ideas, there are two caveats to keep in mind. First, it’s important to distinguish between trends and fads. New businesses typically do not have the resources to ramp up fast enough to take advantage of a fad. Second, even though we discuss each trend individually, they are interconnected and should be considered simulta- neously when brainstorming new business ideas. For example, one reason that smartphones are so popular is because they benefit from several trends con- verging at the same time, including an increasingly mobile population (social trend), the continual miniaturization of electronics (technological trend), and their ability to help users better manage their money via online banking and comparison shopping (economic trend). If any of these trends weren’t present, smartphones wouldn’t be as successful as they are and wouldn’t hold as much continuing promise to be even more successful in the future.

Figure 2.3 provides a summary of the relationship between the environ- mental factors just mentioned and identifying opportunity gaps. Next, let’s look at how entrepreneurs can study each of these factors to help them spot business, product, and service opportunity gaps.

Economic Forces Understanding economic trends is helpful in determin- ing areas that are ripe for new business ideas, as well as areas to avoid.4 When the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives. In contrast, when the economy is weak, not only do people have less money to spend, they are typically more reluctant to spend the money they have, fearing the economy may become even worse, and that in turn, they might lose their jobs because of a weakening economy. Paradoxically, a weak economy provides business opportunities for start-ups that help consumers and businesses save money. Examples include GasBuddy and GasPriceWatch.com, two companies started to help consumers save money on gasoline. A similar example is WaterSmart Software, a 2009 start-up. WaterSmart Software sells software to water utili- ties that makes it easier for their customers to save water and money.

When studying how economic forces affect business opportunities, it is important to evaluate who has money to spend and what they spend it on. For example, an increase in the number of women in the workforce and their related increase in disposable income is largely responsible for the number of online retailers and boutique clothing stores targeting professional women that have opened the past several years. Similarly, the increased buying power of minority populations has resulted in an upswing of ethnic restaurants and ethnic supermarkets in the United States. Baby boomers are another potential group to examine. These individuals, who were born between 1946 and 1964, are retiring in large numbers and will be retiring in even larger numbers over the next five years or so. The expectation is that these people will redirect a sizeable portion of their assets to products and services that facilitate their retirement. This trend will invariably spawn new businesses in many areas, largely because baby boomers have greater disposable income relative to previ- ous generations. For example, baby boomers tend to take pride in their homes and lawns. Recent data indicates that baby boomers who own homes are 21 percent more likely than all American adults to have spent $10,000 or more on home improvements.5 Other areas that baby boomers spend heavily on include health care, travel, and consumer packaged goods. The high cost of energy, coupled with a desire to be socially responsible, has also spawned a growing number of startups that are developing products and services that help busi- ness and consumers become more energy efficient. An example is Nest Labs (www.nest.com), a 2010 startup. Nest Labs—which was acquired by Google in 2014—makes the world’s first learning thermostat. The thermostat, which can be used in homes or businesses, learns from your temperature adjustments and programs itself to optimize a building’s comfort and energy efficiency.6

An understanding of economic trends also helps identify areas to avoid. For example, a decision to launch a company that sells products or services to public schools was not a wise one during the recent economic downturn. In the United States—and other countries, as well—public schools have been hit hard by budget cuts from governmental funding agencies. The cuts have significantly reduced the ability of schools to purchase new products and services.

Social Forces An understanding of the impact of social forces on trends and how they affect new product, service, and business ideas is a fundamental piece of the opportunity recognition puzzle. Often, the reason that a product or service exists has more to do with satisfying a social need than the more trans- parent need the product fills. The proliferation of fast-food restaurants, for ex- ample, isn’t primarily because of people’s love of fast food, but rather because of the fact that people are busy and often don’t have time to cook their own meals. Similarly, social networking sites like Facebook, Twitter, and Instagram aren’t popular because they can be used to post information and photos on a website. They’re popular because they allow people to connect and communi- cate with each other, which is a natural human tendency.

Changes in social trends alter how people and businesses behave and how they set their priorities. These changes affect how products and services are built and sold. Here is a sample of the social trends that are currently affecting how individuals behave and set their priorities:

■ Aging of the population

■ The increasing diversity of the workforce

■ Increased participation in social networks

■ Growth in the use of mobile devices

■ An increasing focus on health and wellness

■ Emphasis on clean forms of energy, including wind, solar, biofuels, and others

■ Continual migration of people from small towns and rural areas to cities

■ Desire for personalization (which creates a need for products and services that people can tailor to their own tastes and needs)

Each of these trends is providing the impetus for new business ideas. The continual migration of people from small towns and rural areas to cities, for example, is creating more congestion in cities. Businesses like Zipcar, a car- sharing service, and Alta Bicycle Share, a bicycle-sharing service, were started in part to address this problem. Similarly, the aging of the population is creat- ing business opportunities from vision care to home health care to senior dating sites. An example is Glaukos, a company that’s developing a new approach for treating glaucoma, which is an age-related eye disorder.

The proliferation of smartphones is a social trend that’s opening business opportunities for entrepreneurs across the globe. More than 1.75 billion peo- ple worldwide owned mobile phones in 2014, and that number is expected grow to 2.5 billion by 2017. By 2017, nearly 50 percent of mobile phones will be smartphones, like the Apple iPhone and Android-equipped devices. The proliferation of smartphones will spawn new businesses both in the United States and throughout the world. Sometimes social trends converge to create a particuarly compelling business idea. For example, CareZone, a 2012 startup, was launched by Johathan Schwartz, who was looking for ways to better manage the care of five aging parents and in-laws. CareZone is an app for smartphones, tablets, or computers that allows those involved in a person’s care to share and save information in a secure, online setting. CareZone’s potential is bolstered by two societal trends: the aging of the population and the growth in the use of smartphone apps and other con- nected devices.

The increasing interest in social networking sites such as Facebook, Twitter, and LinkedIn is a highly visible social trend. A total of 69 percent of men and 78 percent of women use one or more social networking sites.7 In addition to providing people new ways to communicate and interact with each

other, social networks also act as platforms for other businesses to build on. Zynga, for example, the maker of popular online games like FarmVille and Scramble, became popular by making browser-based games that worked as application widgets on Facebook. Similarly, entrepreneurs have launched businesses for the purpose of starting social networks that cater to specific niches. An example is PatientsLikeMe, the subject of Case 1.2, which is a so- cial networking site for people with serious diseases.

Technological Advances Advances  in  technology  frequently  dovetail with economic and social changes to create opportunities. For example, there are many overlaps between an increased focus on health and wellness and technology. Wearable devices, like the Fitbit Flex and the Jawbone Up, help people maintain a healthy lifestyle by monitoring their movements and sleep. In fact, ABI Research projects that 90 million wearable computing devices will be shipped in 2014.8 There are a growing number of mobile apps and activity trackers that beam the data they collect to their health care providers so they can keep tabs on their activities and inform treatments. Insurance companies and corporations are increasingly partnering with technology companies like RedBrick Health and Audax Health, which establish programs to help encour- age healthy lifestyles.

Technological advances also provide opportunities to help people perform everyday tasks in better or more convenient ways. For example, OpenTable. com is a website that allows users to make restaurant reservations online and now covers most of the United States. If you’re planning a trip to Boston, for example, you can access OpenTable.com, select the area of the city you’ll be visiting, and view descriptions, reviews, customer ratings, and in most cases the menus of the restaurants in the area. You can then make a reservation at the restaurant and print a map and the directions to it. The basic tasks that OpenTable.com helps people perform have always been done: looking for a restaurant, comparing prices and menus, soliciting advice from people who are familiar with competing restaurants, and getting directions. What OpenTable. com does is help people perform these tasks in a more convenient and expedi- ent manner.

Another aspect of technological advances is that once a technology is cre- ated, products often emerge to advance it. For example, the creation of the Apple iPod, iPhone, iPad, and similar devices has in turned spawned entire industries that produce compatible devices. For example, Rokit is a high-end mobile accessories company that makes smartphone cases, headphones, portable USB device chargers and Bluetooth speakers. Rokit wouldn’t exist if it weren’t for the advent of the smartphone industry. Similarly, there are a growing number of start-ups working on smartphone apps. An example is Ubersense, the subject of the You Be the VC 5.2 feature. Ubersense has made a smartphone and tablet app that allows athletes, coaches, and parents to shoot video of an athlete’s move or competition, and then analyze the video in a variety of ways.

Political Action and regulatory  Changes Political  and  regulatory changes also provide the basis for business ideas. For example, new laws often spur start-ups that are launched to take advantage of their specifications. This is currently happening as a result of the passage of the Affordable Care Act (Obamacare). The combination of new regulations, incentitives for doctors and hospitals to shift to electronic records, and the release of mountains of data held by the Department of Health and Human Services (on topics such as hospital quality and nursing home patient satisfaction), is motivating entrepreneurs to launch electronic medical records start-ups, apps to help patients monitor their medications, and similar companies.9

On some occassions, entire industries hinge on whether certain govern- ment regulations evolve in a manner that is favorable to the industry. For ex- ample, there are several start-ups poised to commercialize the use of drones, or Aerial UAV’s. Drones can be used for a number of domestic purposes, such as helping farmers determine the optimal level of fertilizer to place on crops or helping filmmakers shoot overhead scenes. Amazon.com created quite a bit of buzz in late 2013 when it suggested it would like to use drones for package delivery. As of spring 2014, the FAA permitted drones to be used for personal use, and restricted their use to below 400 feet, within eyesight of the control- ler and away from airports and populated areas. Drone start-ups, like 3D Robotics, are waiting for the FAA to develop more liberal rules and standards that will allow drones to be used for expanded purposes.10

Political change also engenders new business and product opportuni- ties. For example, global political instability and the threat of terrorism have resulted in many firms becoming more security-conscious. These companies need new products and services to protect their physical assets and intel- lectual property, as well as to protect their customers and employees. The backup data storage industry, for example, is expanding because of this new trend in the tendency to feel the need for data to be more protected than in the past. An example of a start-up in this area is Box.net, which was funded by Mark Cuban, the owner of the Dallas Mavericks. Box.net allows its cus- tomers to store data “offsite” on Box.net servers, and access it via any Internet connection.

Table 2.1 offers additional examples of changes in environmental trends that provided fertile soil for opportunities and subsequent concepts to take advantage of them.

One  thing  entrepreneurs  invarably  do  when  a  changing  environmen- tal trend prompts them to think about a business opportunity is to learn more about the trend in an effort to shape and mold their idea. The “Savvy Entrepreneurial Firm” feature in this chapter focuses on how to learn more about specific environmental trends through the effective use of social media.

2. Solving a problem

The second approach to identifying opportunities is to recognize problems and find ways to solve them. Problems can be recognized by observing the challenges that people encounter in their daily lives and through more simple that have yet to be solved. Commenting on this issue and how noticing problems can lead to recognizing business ideas. Philip Kotler, a marketing expert, said:

Look for problems. People complain about it being hard to sleep through the night, get rid of clutter in their homes, find an affordable vacation, trace their family origins, get rid of garden weeds, and so on. As the late John Gardner, founder of Common Cause, observed: “Every problem is a brilliantly disguised opportunity.”11

Consistent with this observation, many companies have been started by people who have experienced a problem in their own lives, and then realized that the solution to the problem represented a business opportunity. For ex- ample, in 1991, Jay Sorensen dropped a cup of coffee in his lap because the paper cup was too hot. This experience led Sorensen to invent an insulating cup sleeve and to start a company to sell it. Since launching his venture, the company, Java Jacket, has sold over four billion cup sleeves. Similarly, after watching countless women walk home barefoot after a long night in heels, New York University finance students Katie Shea and Susie Levitt started a company named CitySlips to make easily portable, comfortable shoes. They created a pair of flats that fold up to fit into a pocket-size zip pouch, which easily fits into most women’s purses. When a woman pops on the shoes, the pouch unfurles into a tote bag to carry the high heels. The two began selling CitySlips in 2009; today, their product is carried in over 500 stores.12

Advances in technology often result in problems for people who can’t use the technology in the way it is sold to the masses. For example, some older people find traditional cell phones hard to use: the buttons are small, the text is hard to read, and it’s often difficult to hear someone on a cell phone in a noisy room. To solve these problems, GreatCall, Inc. is producing a cell phone called the Jitterbug, which is designed specifically for older users. The Jitterbug features a large keypad that makes dialing easy, powerful speakers that deliver clear sound, easy-to-read text, and simple text-messaging capa- bility. Another company, Firefly Mobile, has created a cell phone designed specifically for kids and tweens. The phone weighs only 2 ounces, and is de- signed to fit in a kid’s hand. The phone includes a full-color screen, built-in games, built-in parental controls that allow parents to restrict incoming and outgoing calls as well as limit or restrict texting, and special speed dials for mom and dad.

If you’re having difficulty solving a particular problem, one technique that is useful is to find an instance where a similar problem was solved and then apply that solution to your problem. For example, Yogitoes, a company that makes nonslip rugs for yoga enthusiasts, was started in this man- ner. Several yoga positions require participants to strike poses where they balance their weight on their feet at an angle. In this position, it is easy to slip when using a regular yoga mat. The company’s founder, Susan Nicols, looked for a yoga mat that would prevent her from slipping, but found that no one knew how to make one. So she started looking for an example of a product that was designed specifically to prevent it from slipping on a hard floor, to study how it functioned. Eventually, she came across a dog bowl with rubber nubs on the bottom to prevent it from sliding when a large dog ate or drank from it. Using the dog bowl as a model, Nichols found a manu- facturer who helped her develop a rug with small PVC nubs that prevents yoga participants from slipping when they perform yoga moves. Nichols started Yogitoes to sell the rugs, patented her solution, and has now been in business for more than 10 years.13

Some business ideas are gleaned by recognizing problems that are associ- ated with emerging trends. For example, SafetyWeb has created a Web-based service that helps parents protect their children’s online reputation, privacy, and safety. The social trend toward more online activity by children resulted in the need for this service. Similarly, the proliferation of smartphones en- ables people to stay better connected, but results in problems when people aren’t able to access electricity to recharge their phones for a period of time. A number of companies have solved this problem in innovative ways. Examples include BioLite, which is a stove for campers that uses wood to create energy to recharge smartphones, and BikeCharge, which is a set of devices that are placed near the rear wheels of your bike and on your handlebars that charges your smartphone while you ride.

Additional examples of people who launched businesses to solve problems are included in Table 2.2.

3. Finding gaps in the Marketplace

Gaps in the marketplace are the third source of business opportunities. There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all. Part of the problem is created by large retailers, like Wal-Mart and Costco, that compete primarily on price and of- fer the most popular items targeted toward mainstream consumers. While this approach allows the large retailers to achieve economies of scale, it leaves gaps in the marketplace. This is the reason that clothing boutiques, specialty shops, and e-commerce websites exist. These businesses are willing to carry merchandise that doesn’t sell in large enough quantities for Wal-Mart and Costco to carry.

Product gaps in the marketplace represent potentially viable business op- portunities. For example, Tish Cirovolo realized that there were no guitars on the market made specifically for women. To fill this gap, she started Daisy Rock guitars, a company that makes guitars just for women. Daisy Rock guitars are stylish, come in feminine colors, and incorporate design features that accommo- date a woman’s smaller hand and build. In a related manner, Southpaw Guitars located in Houston, Texas, carries only guitars that are designed and produced for left-handed players. Another company that is filling a gap in the market- place is ModCloth, a firm selling vintage and vintage-inspired clothing for 18- to 32-year-old women, which is a surprisingly large market. A start-up in a com- pletely different industry is GreenJob Spider. GreenJob Spider fills a gap in the online recruiting industry by supporting a job site for employers and prospective employees in “green” industries such as solar, wind, recycling, green buildings, and LED lighting.

Additional examples of companies started to fill gaps in the marketplace are provided in Table 2.3. A common way that gaps in the marketplace are recognized is when people become frustrated because they can’t find a product or service that they need and recognize that other people feel the same way. This scenario played out for Lorna Ketler and Barb Wilkins, who became frustrated when they couldn’t find stylish “plus-sized” clothing that fit. In response to their frustration, they started Bodacious, a store that sells fun and stylish “plus-size” clothing that fits. Ketler and Wilkins’s experience illustrates how compelling a business idea can be when it strikes just the right chord by filling a gap that deeply resonates with a specific clientele. Reflecting on the success of Bodacious, Wilkins said:

It’s so rewarding when you take a risk and it pays off for you and people are tell- ing you every single day, “I am so glad you are here.” We’ve had people cry in our store. It happens a lot. They’re crying because they’re so happy (that they’re finding clothes that fit). One woman put on a pair of jeans that fit her, and she called me an hour later and said, “They still look good, even at home!” Sometimes people have a body change that happens, whether they have been ill or had a baby, and there’s lots of emotion involved in it. If you can go and buy clothes that fit, that helps people feel good about themselves.14

A related technique for generating new business opportunities is to take an existing product or service and create a new category by targeting a completely different target market. This approach essentially involves creating a gap and filling it. An example is PopCap Games, a company that was started to create a new category in the electronic games industry called “casual games.” The games are casual and relaxing rather than flashy and action-packed, and are made for people who want to wind down after a busy day.

One thing that entrepreneurs must remain mindful of in pursuing business opportunities, regardless of whether the opportunity results from changing en- vironmental trends, solving a problem, or finding gaps in the marketplace, is that the opportunity must ultimately be fashioned into a successful business. The nearby “What Went Wrong?” feature focuses on Everpix, a company that re- sulted from its founders’ frustration regarding the lack of a good service to store and organize photos. Regrettably, the founder spent too much time focused on the opportunity at the expenses of the business, as you’ll see in the feature.

Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.