The old adage that timing is everything in business is incomplete. When it comes to launching a successful startup, the other crucial ingredient is identifying a new, untapped market opportunity. Breaking into any industry is hard, but certain sectors are particularly ripe for new entrants.
Inc.'s annual look at the best industries for starting a business is based on interviews with entrepreneurs, venture capitalists, and industry experts, plus reams of the latest research on hot niche sectors. While it's still early days for most of these fields, the first-movers are already well on their way to proving long-term viability. Read on to see where entrepreneurs are laying the groundwork for the fast-growing companies of the future.
|Fantasy Sports Services||Gamification Services|
|Relaxation Beverages||Yoga and Pilates|
|Legal Marijuana||Food E-commerce|
|Public-Sector Technology||Agricultural Software|
Fantasy Sports Services
The fantasy sports services industry, made up of companies that develop software and online platforms for multiplayer fantasy sports, is growing rapidly thanks to skyrocketing interest in fantasy sports and the growing number of broadband and mobile connections. Estimated to be a $1.4 billion market, the sector also benefits from growing advertising spending and an overall increase in sports viewership.
Why it's hot: Fantasy sports site FanDuel was valued at more than $1 billion during its last investment round, in September 2014, when it raised $70 million from NBC Sports Ventures and two private equity firms, KKR and Shamrock Capital Advisors.
Skills needed: Startups in this space will need strong Web software development and other IT skills.
The downside: Fantasy sports companies require highly skilled creative types, such as software developers, which makes compensation a significant expense.
Competition: Major players include Yahoo, with 18 percent market share, followed by ESPN, at 13 percent, and CBS Corporation, at 7 percent, according to IBISWorld.
Growth: The industry is estimated to have grown 7.7 percent in 2014, and is expected to grow at an average rate of 7.3 percent annually, to $2 billion, in the next five years.
Relaxation beverages--the opposite of energy drinks--are a $150 million industry in the U.S. With more than 70 million Americans reporting that they have trouble sleeping, the market opportunity for sleep-aid drinks is large. A separate opportunity exists for beverages designed to help increase focus. Although beverage shelves included some 450 different types of relaxation drinks in 2014, the market is not yet saturated, according to IBISWorld. Increasing demand from convenience stores and other retailers is expected to propel continued growth.
Why it's hot: Industry experts have chalked up growth in this industry to the novelty of the product. Interest in relaxation beverages may also be linked to a backlash against the growth of energy drinks like Red Bull, Monster, and others.
Skills needed: The ability to build brand awareness through traditional channels and social media is key in this segment.
Barriers to entry: Barriers to entry are low in this industry, but startup costs for a manufacturing operation are high.
The downside: The product development phase can take years, and there is the threat of stricter regulation from the Food and Drug Administration, which classifies relaxation beverages as a dietary supplement. Regulators may also come up with stricter guidelines for product labels, which could have an impact on marketability for some companies.
Competition: While just 37 companies offered relaxation beverages in 2009, there are now more than 80 fighting for market share, and the number of new entrants is expected to continue to grow.
Bubbling up: Relaxation beverage revenue grew 23 percent in 2014, to $153 million, and has risen at an annualized rate of 30 percent since 2009. Industry revenue is expected to increase at an annualized rate of 12 percent, to $263 million, in the next five years, according to IBISWorld.
Legal marijuana has become big business in the U.S. since Colorado licensed vendors to sell recreational cannabis at the beginning of 2014. While the industry hasn't been around long, the first companies growing and distributing marijuana and related products are seeing very strong demand. Revenue for medical marijuana growers has risen 16 percent per year since 2009, reaching roughly $2 billion in 2014, according to IBISWorld.
Heating up: Demand for marijuana in all forms--edibles, concentrates, extracts--is booming and expected to only grow as more states legalize weed. In just the first three months of 2014, Colorado raised $25 million from businesses for taxes, licenses, and fees.
Barriers to entry: All marijuana businesses, whether growing in-house, selling other companies' products, or manufacturing edibles, must comply with strict legal and regulatory hurdles, such as having a system that traces all products back to their original plants. Recreational marijuana businesses must also obtain a license.
Major bummer: Recreational marijuana is legal in only four U.S. states (Colorado, Washington, Alaska, and Oregon) and most banks still won't take money from "cannabusinesses," though credit unions are in the process of receiving federal approval to accept cash deposits and provide other banking services. U.S. tax law also bars any business involved with marijuana, which is categorized as a Schedule I drug under federal law, from taking deductions for the costs of doing business. This can take the effective tax rate for marijuana businesses to more than 60 percent.
Competition: More than 500 companies launched in Colorado alone last year, including growers, dispensaries, and tech firms providing enterprise software for marijuana retailers.
Heady growth: Colorado's retail marijuana market generated $350 million in revenue in 2014 and is projected to grow 20 percent, to $420 million, this year. Colorado Governor John Hickenlooper also predicts that combined sales from recreational and medical cannabis will reach $1 billion by 2015.
Industry buzzword: "Seed-to-Sale" refers to the tracking systems that all businesses must use to trace their marijuana products all the way back to their seeds.
Believe it or not, many public-sector agencies at the federal, state, and local levels still use technology from the 1980s. As a result, hardware and software are sorely needed to build the infrastructure for 21st-century government. Innovations including cloud computing and mobile technology are making it possible to significantly increase efficiencies within the public sector, creating more cost-effective ways to do business in the $450 billion government IT market.
Outlook: Governmental budget constraints, adoption of the cloud, and open data are converging to create an opportunity for startups that provide hardware and software to the public sector.
Why it's hot: The $9 billion software company Palantir, co-founded by Peter Thiel, has helped attract attention to this burgeoning sector. The recent launch of Govtech Fund, the first-ever venture fund dedicated to government technology startups, has also helped raised this industry's profile.
Skills needed: Startups in this space will need strong cloud, web software development, and other IT skills, in addition to knowledge of compliance and regulatory issues.
Barriers to entry: Startup costs for hardware companies are high, and winning contracts in the compliance-driven government market can be a lengthy process.
Competition: The number of startups in this space is growing. Notable entrants during the past three years include Amigo Cloud, Department of Better Technology, and Seamless Docs.
Gamification--the application of game dynamics to business settings--has been around for decades, but it's only relatively recently that digital technology has merged with the concept to create gamified software. Perhaps the most common example of gamification is the sales contest, where companies use game mechanics to stoke competition between workers. But startups are also offering other forms productivity software to help make work environments more enjoyable. Look no further than corporate titans Comcast, PayPal, and Stanley Black & Decker for evidence that big businesses are taking this strategy seriously.
Outlook: The use of game elements in non-gaming fields to engage employees and customers is expected to grow rapidly in the near future, in areas such as e-commerce and human resources.
Skills needed: Software development skills and the ability to educate potential customers on the high-concept power of the software.
The downside: Gamification has yet to live up to the expectation of many industry experts who predicted the technology would take off more than it has.
Competition: Competition is understood to be very low, as in most cases, companies are competing against old-school approaches such as whiteboards, gongs, and spreadsheets, rather than against each other.
Growth: The gamification market is expected to grow from $420 million in 2013 to $5.5 billion in 2018, according to data from Dallas-based research firm MarketsandMarkets.
Yoga and Pilates
Yoga and Pilates studios have been around for decades, but the industry has grown a great deal recently thanks in part to the rising number of health-conscious Americans. During the next five years, the number of yoga and Pilates studios in the U.S. is expected to grow at an annualized rate of 3.7 percent, to a total of 30,415. Including the sale of related products, yoga is estimated to be a $10 billion-plus industry.
The outlook: According to data from a Yoga Journal study, 20 million Americans participated in yoga in 2012, up from roughly 15.8 million in 2008. Separate data from the Sports & Fitness Industry Association shows that yoga participation grew 4.5 percent in 2013. Today, nearly 45 percent of Americans say they are interested in trying yoga.
Barriers to entry: While yoga and Pilates businesses can hire contracted instructors and part-time employees, real estate costs associated with opening brick-and-mortar studios represent a significant barrier to entry.
The downside: Fitness taxes have led many yoga studios to add a tax to membership fees, which could dissuade customers with limited income. According to the International Health, Racquet & Sportsclub Association, 25 states tax health club memberships, including yoga memberships, and more states are expected to add this tax during the next five years.
Competition: Competition is growing from both traditional yoga studios as well as websites offering on-demand yoga services. Health and fitness clubs are also adding yoga classes as a part of their monthly memberships.
The trillion-dollar U.S. food industry represents a gargantuan market, but only a very small percentage of food sales comes through e-commerce. That's expected to change in the next five to 10 years. Why? People are increasingly comfortable buying things online, and the infrastructure exists to distribute food with an e-commerce model. Companies in this space are also developing new, innovative ways of selling and distributing food online, including the use of subscription services.
Big appetite: Foodie culture has exploded in the U.S. thanks to the rise of celebrity chefs and food-focused TV shows, blogs, and other media. Consumers' growing awareness that buying food online can be more convenient than shopping at grocery stores is also helping drive this sector, as is the desire for healthier specialty food, which can be easier to find online than in local stores.
The downside: Consumers have been slow to accept the e-commerce model for food compared with virtually every other retail market.
Skills du jour: Experience in both food services and logistics, as well as website construction.
Competition: The $500 million startup Blue Apron is a major player in the field, delivering more than a million meals per month, while Amazon Fresh and Instacart represent competition for new grocery-focused startups.
Growth: Food and beverage e-commerce revenue grew to an estimated $6.8 billion in 2014 from $4.3 billion in 2011, according to market research company eMarketer. The industry is expected to reach $9.4 billion by next year.
A fresh crop of startups is in the process of revolutionizing agriculture by creating software that makes its processes more efficient. Farmers today are up to their ears in digital data, and there is a huge opportunity to turn that information into useful software and financial products--a fact that precision agriculture systems and services companies and venture capitalists have begun to wake up to.
Why it's hot: The venture capital community recently began piling into agriculture after identifying the opportunity to bring significant innovation to agriculture. The industry also attracted significant attention last November when Monsanto purchased farm tech startup the Climate Corporation for $930 million.
Field expertise: Startups will need deep knowledge of the agricultural sector as well as strong web software development and data science skills.
Competition: Hot farm tech startups to pay attention to include Solum, Blue River Technology, Farmeron, and Edyn.
Barriers to entry: The rapidly changing technology in agriculture represents a significant hurdle for companies looking to break into the sector.
Sprouting nicely: The precision agriculture systems and services industry grew revenues at an annualized rate of 5.3 percent over the five years to 2014, to $1.5 billion, and is expected to grow at an annualized rate of 7 percent, to $2 billion, during the five-year period ending 2019, according to IBISWorld.