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August 13, 2008

Which Industries are Good for Start-ups?

Business Etiquette Rules
Scott Shane

Small Business Trends

Summary

The industry in which you start your company has a large effect on your performance as an entrepreneur. It affects the odds that your busin

The industry in which you start your company has a large effect on your performance as an entrepreneur.

It affects the odds that your business will survive over time, its sales growth, and its profitability. So choosing an industry is one of the most important decisions you will make as an entrepreneur.

Research on the performance of start-up companies reveals two important patterns. First, the performance of new businesses increases with the number of years of industry experience that entrepreneurs have. Therefore, you should start your business in an industry that you know well.

But there's a problem with this piece of advice alone. Some industries are better than others for start-ups. We have a lot of evidence that start-ups do better:

-in young industries where all your competitors aren't ahead of you on the learning curve;
-businesses that don't take a lot of capital, which is difficult for new companies to raise; and
-industries that are technology intensive, and offer the chance for a change that will undermine the advantages of established companies.
-To see where the best chances for entrepreneurs lie, take a look at the two-by-two matrix below.

If you have a lot of experience in a favorable industry, you're in good shape to start a company.

If you have no experience in a lousy industry for start-ups, you have nothing going for you and probably shouldn't start a business.

And if you have little experience in a favorable industry, your strategy is pretty simple. Just wait a few years and get some more experience.

But if you have a lot of experience in an industry -- like autos or steel or retail -- that isn't favorable to start-ups, you face a dilemma. Your chances of success aren't good because the industry is unfavorable to start-ups.

This is a very frustrating situation to be in. You have the experience necessary to do well, but you aren't likely to do so because your industry is unfavorable to start-ups. There's not much you can do. You can't change your history and get experience in a more favorable industry and you can't make your industry better for start-ups.

So what should you do? Unfortunately, there's no magic bullet. You need to accept that the odds of your success are not as great as you'd like them to be and that there's little you can do to change them. You might go ahead anyway, knowing that the odds of success are low. Or you might decide not to start a business. But at least you'll be making an informed choice.

If you want to have high odds of success as an entrepreneur you need to start up in a favorable industry that you know well.

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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.

Scott is part of the Small Business Trends Expert Network.