Is Your Industry Hot or Not?
No matter how experienced an entrepreneur you are or how solid your business idea is, there will always be factors outside your control. If you pick a strong industry with good growth potential, that can eliminate one major source of anxiety that's outside your sphere of influence. But picking a winning industry is not as simple as it sounds.
The most head-smackingly obvious sign of a strong industry is vibrant and consistent growth in total revenue, but that alone is not enough of an indicator. "What you're really looking for is an industry that's growing faster than the general economy," says George Van Horn, a senior analyst at the market research firm IBISWorld, which provided research instrumental to selecting Inc.'s Best Industries 2010. He suggests looking for "an industry that's taking business away from another industry."
Other important factors include how much the industry is regulated, whether it is dominated by a handful of extremely large companies, and the steepness of the financial barrier to entry. You will also want to consider whether there are any geographic opportunities to set up shop where the field is less saturated. No single factor should be considered a deal breaker, though. In fact, you can sometimes turn around a seemingly disadvantageous metric like a high barrier to entry so that it's in your best interest. If you can finagle the funds to enter the field, "that increases the likelihood that you can operate your business successfully without having lots of new competitors," Van Horn says.
In addition to perusing the market research, you want to hit the pavement to gather anecdotal evidence of an industry's well being and future from trade associations. When checking out an industry, "meet with people who are already involved in the space and see what they think of [your] concept and whether it has legs," says Rex Falkenrath, the regional director of the Miller Business Innovation Center, a business incubator based in Sandy, Utah. He adds that he would try to get a sense of "how [your] business concept can be differentiated from what everybody else is doing."
The conventional wisdom in entrepreneurial circles is to get in on the ground floor. But what if the industry you are entering is too young to even have a trade association? Falkenrath recommends scoping out the Internet for clues about the industry's prospects, but Eric Von Hippel, a professor of technological innovation at Massachusetts Institute of Technology, has a more specific suggestion.
"Many new companies are most effectively founded by people who are users, because they have a direct understanding of what's up," Von Hippel says. "Watch the activity in the user community and the early pioneer user companies and how rapid the growth is and then jump in."
However, jumping into an industry early is not for everyone. "The timing as to when to get into an industry is really a function of what someone's risk tolerance might be," Van Horn says. "Getting in at the earliest stages of an industry emerging into growth has the best potential reward, but it also has more start-up risks involved."
Some entrepreneurs have gone so far as to seek out mature and declining industries in which to launch their ventures. Falkenrath ran one such business supplying automotive engine parts until 2008. The trouble is, when you're in a moldering industry, there's less room for error. "If you get to the market when it's [in] early growth, you can probably even be stupid about it and make a buck," says Falkenrath, "but as soon as it matures, you better be better than stupid; otherwise, an opportunity is going to slip away from you very fast."
Another way to measure the health of your industry or the demand for your product is by reaching out to consumers directly. To help businesses get a sense of how successful their products or services might be, Anne Beall queries groups of thousands of consumers to find out: "is this something you're interested in? How likely are you to actually buy it? What needs does it really fulfill, if any?" The president of Beall Research & Training, a market research firm in Chicago, then subdivides the multitude of responses by gender, income, race, and geographic region, among other factors, to figure out the size and identity of the target market.
"If you are a new business and you do not have a lot of money to do market research, you need to talk to every single person you've ever met about your idea and whether this is something that they would purchase," Beall says.
Rather than tap the crowd of consumers, some companies keep track of hot trends and industries via a network of in-the-know experts. For example, Trendwatching.com, a London-based consumer trend monitor, has 600 trend watchers in more than 100 countries, with the aim of keeping an eye on opportunities around the world.
As Chris Turner, the company's head of research and analysis, puts it, "If you're a U.S.-based entrepreneur, you want to keep a constant eye on innovations coming from the rest of the world; while the U.S. remains a formidable market, the sources for ideas and inspiration are truly global now."