How to pick the right business to start your entrepreneurial journey

Posted by John Melchior on February 8th, 2018

There are a certain number of people who know that they want to run their own business, but they don't know which business they want to be in. Harvard Business School ("HBS") even offers a class, Entrepreneurship through Acquisition (http://www.hbs.edu/coursecatalog/6452.html), which is aimed at people who want to be entrepreneurs, but feel they don't have the right business idea to get started. Could its teachings help you pick a business that allows you to succeed in your entrepreneurial goals?

Acquiring an existing business is a lower-risk way to getting started than starting from scratch, however it has some problems of its own. For starters, you need to either be personally wealthy or you need to raise money from investors. Raising money from investors might defeat the purpose of going out on your own in the first place. One of the key allures of running a business for most people is independence. By raising money from investors you do sacrifice some of that independence.

Nonetheless, there are some good ideas that have come from this "Entrepreneurship through Acquisition" path that can be useful if you are trying to start your own business from scratch. The key idea in the "Entrepreneurship through Acquisition" path is to lower the risk of failure. When you apply it to starting a business from scratch, you need to focus on businesses that sell into existing markets. If you are trying to open up new markets these ideas don't work so well.

Find a business that can be enduringly profitable

The first key to a successful acquisition as taught at Harvard is to find a business that has enduring profitability. This doesn't just apply to acquisitions but is helpful advice for anyone who is trying to start a new business. It seems evident, but it is worth emphasizing. Businesses such as Twitter or Uber which gather a lot of attention are only able to survive because of their ability to raise larger and larger amounts of capital. If you plan to keep all of the equity in your business, you need to plan for profitability.

Recurring customers

The first filter in the path to enduring profitability is recurring customers. HBS defines it as customers who buy from your business again and again. Think about the local cable business where you have been a customer since buying your home. The dry cleaner, which you keep going to, because it is the most convenient. The closest grocery store. You get the general idea. The opposite of this is the website designer who only does a website once at the start of the business and then has to go look for new customers.

Find a unique selling proposition

The second filter is reputation. This is a tough one for a new business. However, the idea of reputation is still applicable. If you want a new business to be successful you need it to stand out to provide a carrot for customers to switch from their current providers. You need to come up with a unique selling proposition ("USP"). The word unique is a bit misleading because you don't need a feature that is entirely unique to your business. A better way of explaining is that you need to emphasize a feature that the competition doesn't emphasize. How did Lyft differentiate from Uber? What was Lyft's USP?  They started out as the fun ride sharing company. Its warm image was enough to make it appear as a different alternative to Uber despite that both companies offered virtually the same service. Think about what could make your company 10% better than the existing competition. Discover is the fourth largest credit card issuer in the U.S. How can they stand out if they are that much smaller than Visa, MasterCard and American Express? Well, one way is by advertising that they have 100% U.S. based customer service. The USP is not meant to make your business appealing to the entire potential customer base, but to make you the preferred provider to a subset of all overall potential customers.

Be unimportant

The next filter that HBS emphasizes is "the importance of being unimportant". What it means is that  you don't want any of your customers to be a large part of your overall revenue. The reason is that large customers can impose terms on you, including pricing. They know if you lose them it would be devastating to the overall health of your business. You need to consider this in two ways. It is important in choosing the industry you operate in, but it is also important in how you run your business. As to the first one, if you decide to run a warehouse it will be unavoidable to have a few large customers. Be aware from the first day what that means in terms of your dependence on them. In terms of running your business it means that if you are a home-cleaning business with many small customers you might be offered the opportunity to clean one large office building in its entirety. This will provide you with the opportunity to grow your revenues by a large amount in one swoop. Be aware that this opportunity will likely come with large demands on your time. After a year or two you will realize that your business is dependent on that relationship and that you have to invest your time in an effort not to lose the business. Further, the customer is likely to reduce what he's willing to pay every year. That time investment is taking its toll on your ability to continue to grow the rest of your business. 

How to find the information you need?

How do you figure out whether the industry that you are trying to enter checks these boxes? One way to learn about an industry is to read the "Franchise Disclosure Documents" of franchises in that industry. If you sign up as a potential franchise, they will actually have to provide you with that document. Another way is to find the public financial filings of companies in the industry that are traded on the stock market. If you go on their website and click on the "investor relations" tab you can find helpful information including financial statements and company presentations. 

About the Author:

John Melchior is the founder of Kapture Pest Control in Bergen County, New Jersey. Kapture is the only pest control company designed for busy families.