October 22, 2014

How Do Entrepreneurs Come Up With New Business Ideas?

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How does the typical entrepreneur come up with the idea for his or her new business? The popular perception is that most entrepreneurs search for them, looking at newspapers, magazines, the Internet, and so on for information about market trends and business opportunities unfolding in the market place.

But the reality is different. Here’s some data from my book Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By that shows what I mean. (More information on the sources of these data is in the book).

Only one-third (33.2 percent) of new business founders surveyed in the Panel Study of Entrepreneurial Dynamics (PSED) responded that they engaged in a deliberate or systematic search for their new business ideas.

Moreover, 70.9 percent of the founders of new businesses surveyed in the PSED indicated that the identification of their business opportunities wasn’t a “one-time thing”, but instead unfolded over time.

If entrepreneurs don’t search for business ideas, how do they tend to find them? Most entrepreneurs get their ideas from their experience working in an industry. The PSED found that 55.9 percent of new firm founders in the United States attribute the identification of their new business idea to their experience in an a particular industry or market.

Particularly important are the interactions that entrepreneurs had with customers in their prior jobs. A study by the National Federation of Independent Businesses found that the founder’s prior job was the source of the idea for a new business 43 percent of the time, that 61 percent of new businesses serve the same or similar customers as their founder’s previous employer, and that 66 percent of the new businesses were in the same or similar product line.

In short, most entrepreneurs come up with new business ideas by noticing gaps and problems in how customers are being served, while working for someone else.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

17 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

17 Reactions

  1. That makes a lot of sense.

    I was going to suggest also that often new ideas come from applying new ideas/approaches to existing businesses, but now that I think about it, that;s filling a gap of sorts too.

  2. Hi Scott, Is the idea of looking at trends and starting a business in one’s former industry always unrelated?

    Some of the strongest small businesses come from learning from the industry you are in and solving problems your former employer was not able or interested in solving. But how you deploy the solution, or how you price it, or how you position the product or service, or the particular niche within that industry you are serving — all of those things may well be influenced in small or large ways by societal trends.

    Many people pick up something as nebulous as “trends” almost by osmosis. They may be more influenced by trends than they themselves realize or can articulate. They chalk things up to intuition, but who knows how much they were influenced by reading widely?

    They subconsciously overlay “trends” on top of a frame of reference they already know … the industry they have experience in. It strikes me that could be the best of both worlds.

    Anita

  3. I also think this makes sense. It’s easier to identify a need for something better when you have had first hand experience.

  4. Bernd Schmitt from Columbia Business School speaks/writes on this subject often — he posts frequently on the B-school’s blog, check it out here:

    http://www4.gsb.columbia.edu/publicoffering/post?&top.title=Kill+Your+Sacred+Cow&main.id=10763&main.ctrl=contentmgr.detail&main.view=bloga.detail#

  5. Alright Mr. Shane,

    You’ve caught my attention. I’ve read several articles mentioning your latest book, each of which was engaging and spot-on as far as my interests go. I’m just writing to let you know I’ll check out your book right now on amazon, and see if I can’t get to reading it over the next week or two.

    Well done, your writing has thus far has engaged my interests.

    Regards,
    S. Grove

  6. Interesting post. Good entrepreneur ship doesn’t necessarily relate to new ideas. I have written about this myself recently see http://www.businessangelblog.com/?p=8.

    Permjot

  7. Great Post. Micheal Gerber discribes some of what you talk about as the “entrepreneurial Moment”, where the technician say’s ” I can do it Better!”

    Many times they can… Especially the ones that do their job and are real performers.
    The thing is though, business is much more than meet’s the eye always, and especially from the perspective of the employee or technician. Get this too, many businesses are built on lack of customer fullfilment, where fullfilment would mean the end of the customer relationship.. Huh!

    I see this in the medical industry, big time in the logistics industry, the auto-service industry, the point is most industry.

    I talk with and work with entrepreneur’s who have a vision for who they want to be and how they want to live. Our client, customer, or target market is the entrepreneur who knows what they want out of live and we build from that. Working from personal purpose is powerful approach to small business success.

    Your post is insightful and very accurately describes how things happen or why they happen in small business start ups. I wonder if first thought or initial motivation is why the failure rate of small business is so high???

  8. “. . new firm founders in the United States attribute the identification of their new business idea to their experience in an a particular industry or market.”

    I’ve seen this again and again. Spinoffs created to fill a gap that may have existed and the like. Makes perfect sense to me.

  9. Sean Grove: I will make a plug for my review of Scott Shane’s book. Click on my name (“Martin Lindeskog Says:”) if you want to read it. When will open your site, Co Think?

  10. I agree that my latest business came from the lack of competence and service I was provided and had access to when I tried selling my first website business – hammocks.com . I was ultimately poorly represented and subsequently after many other websites developed and sold, was asked by friends and associates to help them sell their business. Eventually that lead to my latest venture as a website business broker specialist and my site websiteproperties.com

    I have also developed many other website businesses often inspired by where I was at in my life – after having kids and seeing how many strollers my wife “needed” – I bought the domain name strollers.com and developed and sold it and then 2 years later sold it for the new owners….!
    David Fairley

  11. I can only hope that people are considering the other aspects of owning a business other than just filling a gap that their employer lacked. It’s easy to think you can do something better but the realities of owning your own business will hit later. I think it’s very important to look at all aspects of business ownership before you take that leap.

  12. Sometimes people who have a passion for hobbies, activities, things, etc. sometimes come up with a business idea simply because they find a way to make money at what they love. A friend of mine went to high school with a kid who loved movies so much he knew he was destined to be director. More than 20 years later, after working all kinds of jobs in different capacities, he never lost his love of movies or his drive to make a living in the business. He never hit it big as a director, but he did find a way to start a business that allows him to be apart of the industry, and he’s loving it!

  13. Scott, I could not agree with you more! I am jumping through my monitor to tell you, “You are Right.”
    Living your industry is what helps you to come up with ideas. I am a third generation greengrocer and I developed http://www.Buyblitz.com so all food & liquor retailers (big & small) across the globe can have their own website for $1 a day! I was on Fox Business News this past January and living your industry is what makes you have the ideas!

    Another point you made is also accurate. One idea leading to another. Buyblitz.com has led me to develop The SOC Exchange –
    http://www.thesocexchange.com is where you can sell anything you want, sell as much as you want, sell for as long as you want – for $1 a MONTH – FLAT RATE.

    Scott, keep up the great articles!

  14. While the experience and customer insight gathered in one’s job may make it easier to find new opportunities, sometimes the “I can do it better” inspiration can simply come from the pain you feel yourself as you’re trying to solve a problem. You think to yourself – there’s got to be a better way, and after searching, you can’t find it – so you create it. I recall that being exactly the case when Matt Glickman, the founder of BabyCenter left Intuit many years ago – he and his wife were expecting, he had a heck of a time finding out all the right stuff they would need and boom – a great business was born.

    While we can’t claim anywhere near the same kind of success, we’re currently trying to build a business around http://www.paybackable.com. My business partner and I were spending way too much time on reimbursing ourselves for business expenses and couldn’t find a simple enough web app that could also plug our data into QuickBooks. So over the Christmas holidays, we built one that cuts a 30 minute chore into a 5 minute task. We’ve since opened it up to others and it’s beginning to grow.

    To me, the keys are passion around the problem, a strong sense for how to solve it better, and a willingness to listen to where the market wants to take you. But ask me again in 6 months:-)

  15. I’m really curious about the successful serial entrepreneurs who seem to do it over and over again, across diverse industries. One person that comes to mind is John Osher.

  16. One of the most recent gaps that has just begun to be filled is the website brokerage gap. Organizations like iMerge Advisors specialize in advising site owners on how to increase their sites’ value and also on how to successful sell it.

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