The NYT recently published an article describing the growing phenomenon of job seekers giving up on traditional employment and deciding to start their own businesses. Here’s my advice to these first-time, “accidental” entrepreneurs.
As I often tell my students, spend plenty of time upfront on the logic of the new enterprise. Step one is to decide whether you’re filling an open gap in the competitive landscape or doing what someone else is already doing in a superior way. The distinction makes a big difference to step two.
For the open gap strategy, try to understand why the space exists — is it because no one has been as clever as you or because the economics aren’t viable? Until you’re convinced that it’s the former, don’t move forward. As a cautionary tale, I often use the example of very high-end daycare, which I’ve written about before. I’m repeating it here because it really brings the issues to life, and because every year students talk to me about wanting to fill this space. Their logic is that professional parents would have a very high willingness-to-pay for the exquisite care of their pride and joy. Their analysis eventually reveals, however, that a service like this costs about the same as a nanny. And while new parents might, at equal cost, choose daycare over a nanny for the first child, they’re unlikely to do so for the second child, when the cost of daycare doubles, and the cost of that nanny stays the same.
Alternatively, for a beat-someone-at-their-own-game strategy, the task is to build either a better or cheaper mousetrap. If you want to compete on price, be brutally clear about how your own cost structure is lower than the incumbent’s, both at a small and larger scale. A risk here is not counting your own labor as cost, even if you won’t draw a salary in the beginning. While that may be viable at a small scale, at some point, someone will need to be paid for their work, and it’s important to understand these costs in the design phase.
I have seen lots of ventures fail because the founders’ labor was not incorporated into the cost structure since it would be “made up for” in equity. It’s OK to not take a salary as the founder, but it’s unwise to exclude your labor from the economic logic of the enterprise. Only after you can perform at a lower cost — inclusive of labor — do you have a scalable idea.
If you’re competing on non-cost dimensions, first figure out how to reliably deliver higher performance. If you can do it faster, make sure you reliably have control over the speed bumps. If you can deliver higher quality, make sure you have reliable access to higher quality inputs. If you’ve figured out how to perform better with the same cost structure as the incumbents, then you’re well on your way. But if you’re better as a result of higher costs, you also have to determine whether customers really are willing to pay you more. There are other ways to fund premium inputs, but this is the most common. As with the daycare service, designing better quality is often relatively straightforward, but driving up customers’ willingness to pay is rarely simple.
I resist peddling guarantees, but I do promise that if you wrestle with these questions in the conceptual phase of your new business, then you’ll increase your probability of success. By the time your venture launches, I guarantee that it will feel much less accidental.