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Start Your Business in a Favorable Industry That You Know Well

Last week, when I wrote a post about differences in failure rates across industries, Joe commented, “Good point about selecting an industry with high survival rates for a startup . . . but does not an entrepreneur have to stick to the industry he or she knows? Perhaps the information is valuable for angel investors but I think entrepreneurs cannot change their spots, stick with your strengths.”

To my way of thinking Joe is half right. Entrepreneurs won’t be successful if they try to start businesses in industries they don’t know. We have a lot of data that show that various dimensions of start-up performance – survival, sales growth, employment growth, and profitability all increase with the number of years of experience that an entrepreneur has in the industry in which he or she is starting a business.

But Joe and many other people are missing an important part of the success story, operating in a favorable industry. I can tell from the comments on my posts about picking a good industry that people are frustrated by this point because it creates a problem for many people. The dilemma is that if your experience lies in an industry – like autos or steel or retail – that isn’t favorable to start-ups, you’re disadvantaged relative to your friends in computer software. Their fifteen years of experience in software positions them well to start a business; your fifteen years of experience in autos or steel or retail does not. The frustrating part is that you can’t change your history.

But this dilemma doesn’t change the facts. Success as an entrepreneur is enhanced by being experienced in a favorable industry; being inexperienced or operating in an unfavorable industry puts you at a disadvantage. Even if you want to fight the odds, it’s an uphill battle because investors, customers, and suppliers understand the situation.

To illustrate my point about where the best chances for entrepreneurs lie, I drew the two-by-two matrix below (I’m a business school professor after all).

scott-shane3.jpg

Your chances of success are best in a favorable industry that you know well and worst in an unfavorable industry that you don’t know at all. Your odds are in between if you are in an unfavorable industry you know well or a favorable industry you don”t know well.

I don’t know which of the two off diagonal choices is better. What I do know is that you will maximize your chances by being in the upper left hand cell.

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About the Author: Scott Shane [1] 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.