Lately I keep running into young entrepreneurs who think the secret to startup success is to find a business concept no one has thought of before. Once they get the business up and running, they'll have the market to themselves. And the less competition they have, the better off they'll be. Or so they believe.
I have the opposite philosophy. When I start a business, I want it to be in an industry that's been around for 100 years, preferably one with a lot of competition. To me, it's a good sign if others are already making money doing what I plan to do. But I also want an industry that's a little antiquated--that is, one in which companies haven't kept up with technology. I can establish a niche by taking advantage of that failing.
Those are, in fact, the three criteria I use to evaluate startup opportunities: a 100-year-old industry, antiquated business practices, and the potential for a niche.
Why? First, to minimize the cost of educating the market, which is one of the most expensive undertakings in business. I learned that lesson in the 1980s, when I expanded my first company, a messenger service, to Atlanta. Ours was the only messenger service in the city. I thought, "Hooray, no competition!" Then I discovered the downside: no demand. It cost me a fortune in advertising and PR to explain why potential customers should use our service. Never again.
Of course, if you have a lot of competitors, you still have to figure out how to make sales. The easy way is to charge less, but lower prices usually mean lower gross margins, which will force you to spend your startup capital faster than you should. Most new companies can't survive as commodity businesses competing on price.
That's why I like industries with antiquated business practices. By applying the latest technology, you can find ways to differentiate your company. In my messenger business, we were among the first to invest in a computer. That allowed us to tailor our invoices to the specific needs of each customer, which our competitors weren't able to do. In my records-storage business, we used new technology to build warehouses with much higher ceilings than our competitors had. As a result, we could store up to three times as many boxes as they could in a given amount of square footage. That meant we could charge less and have higher gross margins.
In the process, we developed our initial niche in each business. I say "initial" because no niche lasts forever. If you have a profitable one, sooner or later other people will figure out that there's money to be made and start copying you. At that point, you have to find a new niche. I'm facing that challenge with my hotels in the Bakken fracking region of North Dakota. When our main competitors were the so-called man camps, our niche was reasonably secure. Now some of the big hotel chains are moving in, and we're figuring out how to respond.
Let me be clear that I am not discouraging young entrepreneurs from trying a business concept no one has thought of before. A small percentage of them will succeed, and some will have a huge impact on society. But the odds of building a viable business are far better for entrepreneurs who follow my three criteria. If you don't fancy yourself the next Mark Zuckerberg, you might want to think about using them.