The Three Criteria for a Successful New Business
So you have an idea for a revolutionary product in a business that doesn't even exist yet? Unless you're Thomas Edison, you'd better pass
People get so much bad advice about going into business that I sometimes wonder how anyone survives. You often hear, for example, that to be successful you need a unique product or service, something nobody else has. Or that you should choose a business with as little competition as possible, that you're better off having a market to yourself.
My advice is exactly the opposite. I never want to be first in a market, and I always like to have a lot of competitors. Yes, I want to be different from them, but the more people who are making money in an industry, the better I feel about going into it. There are actually three simple criteria I use in evaluating every new business I start. I suspect they'd work for about 80% of the people who are going into business for the first time.
Number one, I want a concept that's been around for 100 years or more. OK, maybe less than 100 years. The important thing is that it's an established concept, one that everybody understands. It's not something new and revolutionary. Why? Because there is nothing more expensive than educating a market.
I found that out the hard way when I took my delivery business to Atlanta in the early 1980s. At the time, companies there handled deliveries by putting a secretary in a cab and sending her off with a package. The secretaries didn't want our service -- they liked having time out of the office -- and the companies didn't know they needed it. We had to do mailers, run ads, develop a whole public-relations campaign. And it was a delivery service we were educating people about, not some radical new technology. I'm telling you, it was very, very expensive, and we took a beating. Me, I'd rather be in the biggest, most competitive market in the world and go head-to-head with a hundred other companies.
Of course, if you're going to compete, you have to be able to differentiate yourself with customers. Which brings me to the second criterion: I want an industry that is antiquated. I don't necessarily mean "old-fashioned." I'm talking about a business in which most companies are out of step with the customer. Maybe the customer's needs have changed and the suppliers haven't paid attention. Maybe they're not up-to-date on the latest technology. In any case, there has been a change, and the industry hasn't followed it.
My storage company, CitiStorage, is a good example here. When I first looked into the business, about six years ago, I noticed that, except for a couple of big players, records-storage companies were asleep. They had ancient warehouses designed to store dead files for customers. Meanwhile, the industry had completely changed. Real estate had become so expensive in major cities that customers were looking to store active files -- that is, files they still had to get at from time to time. The records-storage business was turning into the archive-retrieval business, and almost nobody seemed to notice. The two big exceptions were Iron Mountain and Pierce Leahy, which recognized the change and built huge, modern archive-retrieval facilities out in the countryside. They became the driving force of the industry.
I sensed an opportunity here, but there was something I didn't understand. How could the other guys stay asleep? Why were they still in business? Why hadn't they lost their customer base? The answer, I discovered, was that some of the biggest customers wouldn't move their files. Why not? Because they didn't want their records to be so far out of town. What if they needed a particular file in an hour?
That gave me my third criterion for a successful new business: a niche. I would build a huge, modern facility in the city. I'd distinguish myself from the old records-storage companies by designing the facility specifically for archive retrieval, using the latest technology. I'd distinguish myself from the giants by my location. The customers would be close to their records.
In fact, having a niche is critical to every start-up, but not for the reason most people think. It has to do with those high gross margins you must have to make sure your start-up capital lasts long enough for your business to achieve viability. (See "How to Succeed in Business in Four Easy Steps," July 1995, [Article link].) If you're the new kid in town, you can't compete on price, because you'll go out of business. On the other hand, you do have to get customers. That means offering them more value at the going rate.
But how do you offer more value without increasing your direct costs, cutting your gross margins, and running through your start-up capital? The answer usually lies in the niche you've selected. I realized, for example, that the latest archive-retrieval technology allowed me to cut my direct costs by building a facility with much higher ceilings than my competitors have. I now get 125,000 boxes in 10,000 square feet, whereas those guys are getting 40,000 or 50,000 boxes in the same space.
So those are my three criteria for starting a successful business: a 100-year-old concept, an antiquated industry, and a niche. I know some people are thinking, "If everybody followed those criteria, we still wouldn't have the wheel." Well, they're right. I don't mean to discourage the visionary geniuses out there. I'm all for advances in technology and the creation of new industries. If you're another Thomas Edison, Fred Smith, or Bill Gates, forget my criteria. Go right ahead. Change the world.
But most of us go into business with more modest goals. We're happy to wind up with a company that survives and grows. If you're one of us, take my advice: Don't try to turn that revolutionary new concept into a business. Find a great old concept instead.
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Norm Brodsky is a veteran entrepreneur whose six businesses include a former Inc. 100 company, a three-time Inc. 500 company, and a start-up that he hopes will qualify for the list in 1996. His column, Street Smarts, appears every other month. Readers are encouraged to send him questions care of Inc.
This column was coauthored by Bo Burlingham.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.