Archive for October 1, 2012

Amar Bhide: Start With Affordable Bets in Markets Too Small to Interest Large Players

Written by Sean Murphy. Posted in Books, skmurphy

Four quotes from Amar Bhide‘s “Origin and Evolution of New Business.

“Entrepreneurs who undertake uncertain initiatives face a wide spread between desirable and undesirable outcomes, but they cannot quantify the odds they face or even fully anticipate the possible results. The uncertainty is irreducible to the degree it cannot be resolved without actually undertaking the initiative by prior testing and research.”

Testing and research can reduce the ambiguity  and uncertainty associated with the entering new markets but they cannot eliminate it. A few hours on Google can save you a few months pursuing an opportunity that a little more research might have indicated was a non-starter but even there I think you are still well served by a dozen conversations with people who have direct knowledge of the problem: there is an important category of information that has not been written down (yet) and cannot be found in Mr. Google’s basement.

If you attack a large and well established market there is much less uncertainty but there will be established competitors.

“Serving niche markets not only allows entrepreneurs to start a business with limited funds, it also limits the competition they face from well capitalized entities. Established corporations and professional venture capital funds expend considerable resources on evaluating and monitoring their investments. They tend to avoid investments in niche opportunities whose profit potential isn’t large enough to cover their fixed evaluation and monitoring costs. Therefore, the  bootstrapped entrepreneur in a niche market faces direct competition mainly from other undercapitalized businesses.”

But larger well capitalized firms normally avoid ambiguous markets because they can earn more certain returns in established markets and they are less deterred by the idea of competing with other large firms.

Ambiguity is known to be missing information or not knowing relevant information that could be known.

The key ambiguity to resolve is to develop a model for the impact of your product on your prospect’s business–the costs you are imposing and the value of the benefits that you are delivering–as a way of fine tuning your feature set, messaging, and business model. You may need a slightly different one for each niche or customer segment you are considering. This gets updated the more you learn in exploring the market. This approach is “outside in” where customer reality drives your decisions.

One way to choose a new market is to pick a space that has not changed in a while. It’s more likely that you can learn something that the incumbents have either ignored or decided not to pursue because it would conflict with a currently successful business model.

Promising startups cluster in market niches characterized by high uncertainty generated by technological, regulatory, or other such exogenous changes or by the amorphous nature of customer wants. High uncertainty and low capital and opportunity costs create a “heads-I-win-tails-I-don’t-lost-much” proposition for entrepreneurs.

This is a second approach, to look for markets likely to be impacted by new technology, new regulation, or changes in the zeitgeist.  By making small bets you can risk little but potentially find a significant opportunity.

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