When it comes to choosing the right industry to enter, entrepreneurs have no shortage of advice. Magazines like Entrepreneur, Forbes, and Inc. often provide lists of industries that entrepreneurs should consider. Among those lists are top fastest-growing industries, top startup-friendly industries, top recession-proof industries and the like. Are those lists helpful to potential entrepreneurs? Perhaps. Yet they rarely give consistent advice, and are often based on anecdotal evidence rather than on strong research foundation. What is troubling is that industries recommended as attractive vary greatly from landscaping to energy to consulting to temporary staffing to food services to Internet and data services to home-based healthcare to fashion design; often, there seems to be no common ground behind the recommendations. Many of the lists pay attention to factors of marginal importance and do not address the all-important question: Would the industry I am thinking of provide me an easy way to find a safe and highly profitable business opportunity?
To sort out conflicting recommendations, researchers from Kent State University’s Center for Entrepreneurship and Business Innovation and from Sweden’s CiiR, a leading Scandinavian entrepreneurship research think-tank, have conducted a large-scale scientific study of the high-quality business opportunities and business entry rates across multiple industries over several years. Rather than looking at vague parameters such as business attractiveness or startup friendliness, the researchers went straight to the central point of the entrepreneurial startup decision: They analyzed the availability of easy-to-grab opportunities and checked the startup rates (net of business failure) against those opportunities. What emerged may come as a surprise to the readers of Entrepreneur, Forbes, or Inc. magazines. Some of the industries that appear on their startup-friendly lists may be overly crowded by the entrepreneurs, may lack ready-to-grab opportunities, or both.
Here is what happens, according to the research. Although occasionally startups hit the news headlines by developing a radically new technology or offering a product that previously did not exist, most new businesses are very different from Google, Facebook, or Microsoft. Successful entrepreneurs often create “me-too” businesses to go after a low-hanging fruit – a profitable opportunity to replicate something done by others and make money. It turns out that some industries offer great opportunities for replication, and that entrepreneurs who start their businesses there by copying industry leaders may do much better than a typical industry firm. Other industries do not offer such opportunities because everybody’s effectiveness is roughly the same. Thus, it makes little sense replicating business leaders there, since at best you are going to get average results.
The study that has developed a technique for assessing easy-to-grab opportunities suggests that entrepreneurs may be wise to go after replicating business leaders in industries where high-potential opportunities exist and where such imitation is a guaranteed shortcut to lasting success. There, entrepreneurs are more likely to survive and have enough room for growth even if they do not come up with breakthrough technologies themselves. At the same time, choosing the wrong industry, where the very survival is problematic and typical returns are meager, may doom new businesses to dismal prospects. It matters not if startup costs are low there if you are likely to lose your investment.
So how does the advice extended by business magazines stack up against the new research evidence? Food services, healthcare services, temporary staffing agencies – all of which have been suggested to be startup-friendly, recession proof or offering most promise to entrepreneurs – turn out to lack the opportunities required for entrepreneurs to succeed. The same is true for industries deemed fast-growing (such as certain transportation services and wholesale trade). At the same time, consulting services, information services, software publishing, advertising services offer much better opportunities for success through low-risk replication. So next time you look at the list of entrepreneur-friendly industries, go beyond analyzing startup costs or rates of growth – think instead of the opportunities to outdo a typical company by copying industry leaders.