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.

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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.