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CHAPTER 2 Recognizing Opportunities and Generating Ideas OPENING PROFILE MyLab Entrepreneurship WIIVV ✪Improve Your Grade!...

CHAPTER 2 Recognizing Opportunities and Generating Ideas OPENING PROFILE MyLab Entrepreneurship WIIVV ✪Improve Your Grade! If your instructor is using MyLab Entrepreneurship, visit Solving Foot Pain and Fatigue via Custom www.pearson.com/mylab/entrepreneurship for Fitted 3D Printed Insoles videos, simulations, and writing exercises. Web: https://wiivv.com Facebook: wiivvit Twitter: @wiivvit S hamil Hargovan and Louis-Victor (LV) Jadavji met at a 3D printing conference in 2013. They quickly discovered that they had two things in common: first, they were both affiliated with Claremont McKenna College in California—­ Hargovan as an alumni and Jadavji as a student—and second, they LEARNING OBJECTIVES both had an active interest in 3D printing. After studying this chapter you should be After the conference, Hargovan and Jadavji kept in touch. At the ready to: time, Hargovan worked for Hewlett-Packard as a Group Product Man- ager and 3D Printing Lead. Jadavji remained in school and worked for 1. Explain the difference between opportu- nities and ideas. a software company in the San Francisco Bay area. The two continued 2. Describe the three general approaches to share their interest in 3D printing. Hargovan was kicking around entrepreneurs use to identify several ideas, outside his job at HP, including using 3D printing to cre- opportunities. ate products for athletes, such as helmets. In early 2014, Jadavji had 3. Discuss the personal characteris- a bad experience with a pair of orthotics, and the thought occurred to tics of entrepreneurs that contribute to their ability to recognize business him to utilize 3D printing to create customized, affordable insoles that opportunities. would provide users maximum support. 4. Identify and describe techniques entre- In April of that year, Hargovan and Jadavji decided to work together preneurs use to generate ideas. on the 3D printed insoles idea. The idea made sense on several levels. First, many people have trouble with their feet and struggle to find a solution. Individu- als who spend hours a day standing or walking, such as nurses and security guards, are the most susceptible. Second, there was a gap in the marketplace for products to help people with foot fatigue and other issues. On one end of the market were custom orthotics, which cost $400 or more. Along with the cost, being fitted for orthotics usu- ally requires a visit to a podiatrist and is a time-consuming process. On the other end of the market were inexpensive insoles, which are basically small cushions you put in your shoes. Because the insoles aren’t custom fitted, they often don’t fit right or provide adequate support. What was missing was a product in the middle—a quality, custom fitted insole that could be obtained quickly at an affordable price. That was the sweet spot that Hargovan and Jadavji felt 3D printing was ideally suited to accommodate. Wiivv, the company the two started, took shape in 2014 and 2015. It took time for the idea to be fleshed out and for the manufacturing process to be developed and the prod- uct to be tested. To test the process and product, Wiivv assembled a group of people called the Wiivv 100. These were people who spent a lot of time on their feet, and who beta tested the custom printed insoles Wiivv was 3D printing. The group was utilized for 71 72    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS six months and saw the product through 72 iterations. Some of the testers were surveyed and others were brought into Wiivv’s offices to be interviewed and for their insoles to be examined (after various lengths and types of use). The Wiivv 100 ultimately became strong advocates for the product and spread the word about Wiivv via social media. Wiivv launched in early 2016 via a Kickstarter campaign. The campaign raised $235,054 and had 2,765 backers. The idea for the campaign wasn’t so much to raise money, but to validate that there was a market for high-quality, 3D-printed custom insoles at a modest price. If you’d like to look at Wiivv’s Kickstarter campaign, which includes a video, go to www.kickstarter.com and type in Wiivv. The campaign was suc- cessful and was the largest Kickstarter campaign at the time for a 3D printed product. The market validation that the campaign provided also helped Wiivv raise money from investors down the road and generated substantial positive publicity. The way Wiivv works is really cool. To purchase a Wiivv custom insole, you start by going to Wiivv’s website to buy a purchase code. The code costs $69 or $89, depending on the insole you buy. You then download the Wiivv app, watch a short tutorial, and tailor the insole to your liking. You can pick from various colors (for the bottom) and patterns (for the top). You then take five photos of your feet using your smartphone. The app guides you through the process, which doesn’t take more than a few minutes. You finish up via a standard checkout process. In 7–14 days, your custom insoles arrive in the mail. Using the insoles is easy. You just place them in your shoes. You can slip the insoles in and out of all the shoes you own. Most people immediately notice a difference in terms of less foot fatigue. If you are not completely satisfied, Wiivv provides a 30-day satisfaction guarantee. Behind the scenes, Wiivv’s operations are complex. To manufacture the insoles, the firm uses a process called adaptive manufacturing. The part of the insole that provides a custom fit is 3D printed, and the rest is built via traditional manufacturing processes. A lot of thought regarding the user experience went into how the insoles are ordered and the photos are taken. Once the photos reach Wiivv, they are turned into data that Wiivv’s commercial-grade 3D printers can understand. All of Wiivv’s products are manufactured in San Diego, CA. To grow its business, Wiivv has raised $7.88 million through two seed rounds and a Series A round. Wiivv’s ultimate vision is to add active mental years to people’s lives by producing custom fit footwear, orthopedics, and wearable products that encourage them to lead a more active lifestyle. A second line of products, in addition to insoles, is in the works but has yet to be announced publicly. I n this chapter, we discuss the importance of understanding the difference between ideas and opportunities. While ideas are interesting and can intrigue us as possibilities, not every idea is in fact the source of an opportunity for an entrepreneur to pursue. In addition to describing the differences between ideas and opportunities, this chapter also discusses approaches entrepreneurs use to spot opportunities, as well as factors or conditions in the external environment that may result in opportunities. As you will see, too, certain characteristics seem to be associated with individuals who are adept at spotting viable busi- ness opportunities. The Differences Between Opportunities LEARNING OBJECTIVE and Ideas 1. Explain the difference Essentially, entrepreneurs recognize an opportunity and turn it into a success- between opportunities and ful business.1 An opportunity is a favorable set of circumstances that creates ideas. a need for a new product, service, or business. Most entrepreneurial ventures  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    73 are started in one of two ways. Some ventures are externally stimulated. In this instance, an entrepreneur decides to launch a firm, searches for and recog- nizes an opportunity, and then starts a business, as Jeff Bezos did when he created Amazon.com. In 1994, Bezos quit his lucrative job at a New York City investment firm and headed for Seattle with a plan to find an attractive oppor- tunity and launch an e-commerce company. Other firms, such as Wiivv, are internally stimulated. In this instance, an entrepreneur recognizes a problem or an ­opportunity gap and creates a business to address the problem or fill the identified gap. In this instance, Wiivv’s founders’ seek to build “... a better foundation for every step you take with made-to-fit-you insoles and footwear.”2 A bionics company, Wiivv uses 3D-mapping technology to solve a problem of shoes not fitting customers as well as they want to be the case. Regardless of which of these two ways an entrepreneur starts a new busi- ness, fresh opportunities are tough to spot. Identifying a product, service, or business opportunity that isn’t merely a different version of something already available is difficult. A common mistake entrepreneurs make in the opportu- nity recognition process is picking a currently available product or service that they like or are passionate about and then trying to build a business around a slightly better version of it. Although this approach seems sensible, such is usually not the case. The key to opportunity recognition is to identify a product or service that people need and are willing to buy, not one that an entrepreneur wants to make and sell. As shown in Figure 2.1, an opportunity has four essential qualities: It is (1) attractive, (2) timely, (3) durable, and (4) anchored in a product, service, or business that creates or adds value for its buyer or end-user. For an entrepre- neur to capitalize on an opportunity, its window of opportunity must be open. The term window of opportunity is a metaphor describing the time period in which a firm can realistically enter a new market. Once the market for a new product is established, its window of opportunity opens. As the market grows, firms enter and try to establish a profitable position. At some point, the market matures, and the window of opportunity closes. This is the case with Internet search engines. Yahoo, the first search engine, appeared in 1995, and the mar- ket grew quickly, with the addition of Lycos, Excite, and several others. Google entered the market in 1998, sporting advanced search technology. Since then, the search engine market has matured, and the window of opportunity is less prominent. Today, it would be very difficult for a new start-up search engine firm to be successful unless it offered compelling advantages over already estab- lished competitors or targeted a niche market in an exemplary manner. Bing, Microsoft’s search engine, is gaining ground with approximately 20.9 percent market share (compared to 63.9 percent for Google), but only after Microsoft has exerted an enormous amount of effort in head-to-head competition with Google.3 FIGURE 2.1 Four Essential Qualities Attractive Timely of an Opportunity Opportunity (rather than just an idea) Anchored in a product, service, or business that Durable creates or adds value for its buyer or end user 74    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS It is important to understand that there is a difference between an oppor- tunity and an idea. An idea is a thought, an impression, or a notion. An idea may or may not meet the criteria of an opportunity. This is a critical point because many entrepreneurial ventures fail not because the entrepreneurs that launched them didn’t work hard, but rather because there was no real opportu- nity to begin with. Before getting excited about a business idea, it is crucial to understand if the idea fills a need and satisfies the criteria for an opportunity. Three Ways to Identify Opportunities LEARNING OBJECTIVE There are three approaches entrepreneurs use to identify an opportunity their 2. Describe the three gen- new venture can choose to pursue (see Figure 2.2). Once an entrepreneur under- eral approaches entre- stands the importance of each approach, she or he will be much more likely preneurs use to identify to look for opportunities and ideas that fit each profile. We discuss the three opportunities. approaches in the next three sections. Observing Trends The first approach to identifying opportunities is to observe trends and study how they create opportunities for entrepreneurs to pursue. The most important trends to follow are economic trends, social trends, technological advances, and political action and regulatory changes. As an entrepreneur or potential entrepreneur, it is important to remain aware of changes in these areas. This sentiment is affirmed by Michael Yang, the founder of Become.com, a comparison shopping site, who believes that keen observation skills and a willingness to stay on top of changing environmental trends are key attributes of successful entrepreneurs: One of the most important attributes of a good entrepreneur is having a keen observation ability. Basically seeing what’s needed in people’s everyday lives and coming up with innovative new ideas and services that meet those needs... I always believe the entrepreneurs that anticipate trends and maintain observations of what’s needed... to solve those needs will have a higher chance of succeeding in the marketplace.4 When looking at environmental trends to discern new business ideas, there are two caveats to keep in mind. First, it’s important to distinguish between trends and fads. New businesses typically do not have the resources to ramp up fast enough to take advantage of a fad. Second, even though we discuss each trend individually, they are interconnected and should be considered simul- taneously when brainstorming new business ideas. For example, one reason that smartphones are so popular is because they benefit from several trends converging at the same time, including an increasingly mobile population (social trend), the continual miniaturization of electronics (technological trend), and their ability to help users better manage their money via online banking and comparison shopping (economic trend). If any of these trends weren’t present, smartphones wouldn’t be as successful as they are and wouldn’t hold as much continuing promise to be even more successful in the future. Figure 2.3 provides a summary of the relationship between the environmen- tal factors just mentioned and identifying opportunity gaps. Next, let’s look at how entrepreneurs can study each of these factors to help them spot business, product, and service opportunity gaps. FIGURE 2.2 Three Ways to Identify Finding Gaps in the Observing Trends Solving a Problem an Opportunity Marketplace  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    75 As baby boomers age, opportunities will grow for firms that provide unique services to the age group. Look for the resulting expansion in organic foods, travel, and technologies that enable older people to easily connect with their families and friends. StockLite/Shutterstock Economic Forces. There are a number of economic forces that help deter- mine areas that are ripe for new business ideas, as well as areas to avoid. These forces include topics such as whether consumer spending is rising or falling, whether housing starts are up or down, whether international trade is strong or weak, and whether interest rates are stable, falling, or increasing. At the time this chapter was written (spring, 2017), personal income was rising, housing starts were up, international trade was flat, and interest rates were inching up. Economic Forces FIGURE 2.3 State of the economy Environmental Trends Level of disposable income Suggesting Business, Consumer spending patterns Product, or Service Opportunity Gaps Social Forces Social and cultural trends Demographic changes Business, Product, What people think is “in” or Service New Business, Opportunity Gap Product, and Difference between Service Ideas Technological Advances what’s available and what’s possible New technologies Emerging technologies New uses of old technologies Political and Regulatory Changes New changes in political arena New laws and regulations 76    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS When personal income is rising, consumers have more money to spend and are willing to buy discretionary products and services that enhance their lives. That bodes well for start-ups that provide discretionary products or services. For example, SoulCycle, the subject of Case 1.1, offers spinning classes in hip urban studios. The classes cost $34 per session. At that price, SoulCycle is more likely to gain new members when personal income is rising and the economy is strong. In contrast, when personal income is falling, not only do people have less money to spend, they are less willing to spend it, opting instead to accumulate cash. This environment provides business opportunities for start-ups that help consumers and businesses save money. An example is GasBuddy, a company started to help consumers and businesses save money on gas. Pause reading for a moment and go to GasBuddy’s website, at www.gasbuddy.com, to see how the site works. A similar example of a service that helps people save money is YouNeedaBudget, which is an app that helps users reduce debt and manage their spending. Both GasBuddy and YouNeedaBudget would likely gain more users when personal incomes are falling rather than rising. Another important economic force to evaluate is who has money to spend and what they spend it on. For example, an increase in the number of women in the workforce and their related increase in disposable income is largely respon- sible for the number of online retailers and boutique clothing stores targeting professional women that have opened the past several years. Similarly, the increased buying power of minority populations has resulted in an upswing of ethnic restaurants and ethnic supermarkets in the United States. Baby boom- ers are another group to examine. These individuals, who were born between 1946 and 1964, are retiring in large numbers and will be retiring in even larger numbers over the next five years or so. Approximately 76 million people are classified as baby boomers in the United States; currently, roughly 10,000 of them are retiring every day. The expectation is that these people will redirect a sizeable portion of their assets to products and services that facilitate their retirement. This trend will invariably spawn new businesses in many areas, largely because baby boomers have greater disposable income relative to pre- vious generations. Areas that baby boomers spend heavily on include health care, travel, and consumer packaged goods. PillPack, the subject of “You Be the VC 2.1” in this chapter, makes a product with the ability to help baby boomers encountering difficulty when it comes to effectively dealing with their prescribed medications. The high cost of energy, coupled with a desire to be socially responsible, has also spawned a growing number of start-ups that are developing products and services that help business and consumers become more energy efficient. An example is Nest (www.nest.com), a 2010 start-up. Nest—which was acquired by Google in 2014—makes the world’s first learning thermostat. The thermostat, which can be used in homes or businesses, learns from your temperature adjustments and programs itself to optimize a building’s comfort and energy efficiency.5 An understanding of economic trends also helps identify areas to avoid. For example, a decision to launch a company that sells products or services to pub- lic schools is not always wise when economies are not growing or perhaps are declining. When tax revenues decline because economies (national, state, and/ or local) are not growing, schools’ budgets are cut. In turn, budget cuts reduce the ability of schools to purchase new products and services. Social Trends. An understanding of the impact of social forces on trends and how they affect new product, service, and business ideas is a fundamental piece of the opportunity recognition puzzle. Often, the reason that a product or service exists has more to do with satisfying a social need than the more transparent need the product fills. The proliferation of fast-food restaurants, for example, isn’t primarily because of people’s love of fast food, but rather because people are busy and often don’t have time to cook their own meals. Similarly,  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    77 social networking sites like Facebook, Snapchat, and Instagram aren’t popular because they can be used to post information and photos on a website. They’re popular because they allow people to connect and communicate with each other, which is a natural human tendency. Changes in social trends alter how people and businesses behave and how they set their priorities. These changes affect how products and services are built and sold. Here is a sample of the social trends that are currently affecting how individuals behave and set their priorities. Aging of the population The increasing diversity of the population Millennials entering the workforce Growth in the use of mobile devices An increasing focus on health and wellness Emphasis on clean forms of energy, including wind, solar, biofuels, and others Continual migration of people from small towns and rural areas to cities Desire for personalization (which creates a need for products and services that people can tailor to their own tastes and needs) Each of these trends is providing the impetus for new business ideas. The continual migration of people from small towns and rural areas to cities, for example, is creating more congestion in cities. Businesses like Zipcar, a car- sharing service, and Zagster, a bicycle-sharing service, were started in part to address this problem. Similarly, the aging of the population is creating business opportunities from vision care to home health care to senior dating sites. An example is Glaukos, a company that’s developing a new approach for treating glaucoma, which is an age-related eye disorder. The proliferation of mobile devices is a social trend that’s opening business opportunities for entrepreneurs across the globe. More than 2.1 billion people worldwide owned mobile phones in 2016, and that number is expected to grow to 2.87 billion by 2020. An increasing percentage of the mobile phones are smartphones, like the Apple iPhone and Android-equipped devices.6 The prolif- eration of smartphones will spawn new businesses both in the United States and throughout the world. Sometimes social trends converge to create a particuarly compelling business idea. For example, CareZone, a start-up in the health-care space, was launched by Jonathan Schwartz, who was looking for ways to bet- ter manage the care of five aging parents and in-laws. CareZone is an app for smartphones, tablets, or computers that allows those involved in a person’s care to share and save information in a secure, online setting. CareZone’s potential is bolstered by two societal trends: the aging of the population and the growth in the use of smartphone apps and other connected devices. The increasing interest in social networking sites such as Facebook, T ­ witter, and LinkedIn is a highly visible social trend. In 2016, 78 percent of U.S. ­residents had a social media profile, a five percent increase from the year before. A ­ ccording to estimates, the number of worldwide social media users reached 1.96 billion in 2016 and is expected to grow to 2.5 billion by 2018.7 In addition to providing people new ways to communicate and interact with each other, social networks also act as platforms for other businesses to build on. Zynga, for example, the maker of popular online games FarmVille and Scramble, became popular by making browser-based games that worked as application widgets on Facebook. Similarly, entrepreneurs have launched businesses for the purpose of starting social networks that cater to specific niches. An example is PatientsLikeMe, the subject of Case 1.2, which is a social networking site for people with serious diseases. 78    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS Technological Advances. Advances in technology frequently dovetail with economic and social changes to create opportunities. For example, there are many overlaps between an increased focus on health and wellness and technology. Wear- able devices, like the Fitbit Charge 2 and the Jawbone Up, help people maintain a healthy lifestyle by monitoring their movements and sleep. In fact, according to Statista, the global market for wearable devices is expected to reach 19 billion dol- lars in 2018, more than 10 times its value in 2013.8 The projected 19 billion dollar market includes wearable devices that have a variety of applications. For example, the Valedo Back Therapy is a wearable device that uses sensors to detect the nature of a user’s lower back pain. Based on the data the sensors collect, the device suggests exercises the user can complete in a game format to relieve the pain.9 Technological advances also provide opportunities to help people perform everyday tasks in better or more convenient ways. For example, OpenTable.com is a website that allows users to make restaurant reservations online and now cov- ers most of the United States. If you’re planning a trip to San Francisco, for exam- ple, you can access OpenTable.com, select the area of the city you’ll be visiting, and view descriptions, reviews, customer ratings, and, in most cases, the menus of the restaurants in the area. You can then make a reservation at the restaurant and print a map and the directions to it. The basic tasks that ­OpenTable.com helps people perform have always been done: looking for a restaurant, comparing prices and menus, soliciting advice from people who are familiar with competing restaurants, and getting directions. What OpenTable.com does is help people perform these tasks in a more convenient and expedient manner. Another aspect of technological advances is that once a technology is cre- ated, products often emerge to advance it. For example, the creation of the Apple iPhone, iPad, and similar devices has in turned spawned entire industries that produce compatible devices. For example, Rokit Boost is a high-end mobile accessories company that makes smartphone cases, headphones, portable USB device chargers, and Bluetooth speakers. Rokit Boost wouldn’t exist if it weren’t for the advent of the smartphone industry. Similarly, there are a growing num- ber of start-ups working on smartphone apps. An example is Lumbo Body Tech, the subject of the “You Be the VC 10.2” feature. Lumbo Body Tech has made a smartphone app that analyzes a user’s running form and offers personalized coaching to help the user exceed his or her running goals. Political Action and Regulatory Changes. Political and regulatory changes also provide the basis for business ideas. For example, new laws often spur start-ups that are launched to take advantage of their specifications. This happened with the initial passage of the Affordable Care Act (ACA) in the United States in 2010. The combination of new regulations, incentitives for doctors and hospitals to shift to electronic records, and the release of mountains of data held by the Department of Health and Human Services (on topics such as hospital quality and nursing home patient satisfaction), yielded opportunities for entre- preneurs to launch electronic medical records’ start-ups, apps to help patients monitor their medications, and similar companies.10 Changes proposed for the ACA by the new administration that entered the White House on January 20, 2017 also yield opportunities for entrepreneurs to pursue. On some occasions, entire industries hinge on whether certain government regulations evolve in a manner that is favorable to the industry. For example, there are several start-ups poised to commercialize the use of drones, or Aerial UAV’s. Drones can potentially be used for a number of domestic purposes, such as helping farmers determine the optimal level of fertilizer to place on crops, deliver- ing medicine to remote locations, and helping filmmakers shoot overhead shoots. As of June, 2016, the FAA permitted drones to be used only under certain condi- tions, such as within eyesight of the operator, maximum weight of 55 pounds, daylight-only operations, and a maximum altitude of 400 feet above ground. Several companies, including CyPhyWorks, the subject of the “You Be the VC 8.1”  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    79 feature, are working on more advanced applications, such as drones delivering packages in residential neighborhoods. Drone start-ups are waiting for the FAA to develop more liberal rules and standards that will allow drones to be used for expanded purposes. Drone technology will also need to advance before farsighted applications like package delivery are possible and economically attractive. Political change also engenders new business and product opportunities. For example, global political instability and the threat of terrorism have resulted in many firms becoming more security-conscious. These companies need new products and services to protect their physical assets and intellectual property, as well as to protect their customers and employees. An example of a start- up in this area is Evolv, a Waltham, MA-based startup funded in part by Bill Gates. Launched in 2013, Evolv assembled a multidisciplinary team of experts to identify, invent, and apply new technologies to meet current terrorism-related threats. Combining sensors, artificial intelligence, and human IQ, the company developed Evolv Mosaiq, a security platform which is currently one of the world’s most advanced threat detection systems.11 Table 2.1 offers additional examples of changes in environmental trends that provided fertile soil for opportunities and subsequent concepts to take advantage of them. TABLE 2.1 Examples of How Changes in Environmental Trends Provided Openings for New Business and Product Opportunities Resulting New Business, Product, Changing Environmental Trend and Service Opportunities Companies That Resulted Economic Trends Rising personal incomes Technology products, travel services, Jawbone, Hipmunk, Whole Food organic food Markets Baby boomers entering retirement with In-home care, health and wellness apps, Honor, Guardian Medical disposable income financial services for older people, travel- Monitoring, Betterment, Senior related services for older people Travel Services Social Trends Increased interest in different, tastier, Healthy-fare restaurants, ethnic packaged Froozer, Beyond Meat, Hint (bottled and healthier food foods, craft beer, functional beverages water), Popchips Increased interest in fitness as the result Fitness centers, pilates and yoga studios, SoulCycle, 24 Hour Fitness, of new medical information warning of exercise apps, weight-loss programs and Yogaview (Chicago), Peloton, Noom the hazards of being overweight apps Technological Advances Smartphones Smartphone operating systems, smartphone Android, Instagram, Snapchat, apps, smartphone accessories Rokit Boost, iSkin Wearable technology Wearable fitness devices, wearable lifesytle Apple Watch, Spectacles, Oculus devices (like Google Glasses), and wearable Rift, Recon Jet tech gadgets Political and Regulatory Changes Increased EPA and OSHA standards Consulting companies, software to monitor MobileEpiphany, SWAC, ESS compliance Group, Air Quality Consultants Affordable Care Act Electronic health records, new models of CareCloud, VillageMD, Aledade, primary care, apps and technologies to Ginger.io, Dispatch deliver care more efficiently 80    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS Solving a Problem The second approach to identifying opportunities is to recognize problems and find ways to solve them. Problems can be recognized by observing the challenges that people encounter in their daily lives and through more simple means, such as intuition, serendipity, or chance. There are many problems that have yet to be solved. Commenting on this issue and how noticing problems can lead to recognizing business ideas, Philip Kotler, a marketing expert, said: Look for problems. People complain about it being hard to sleep through the night, get rid of clutter in their homes, find an affordable vacation, trace their family origins, get rid of garden weeds, and so on. As the late John Gardner, founder of Common Cause, observed: “Every problem is a brilliantly disguised opportunity.” 12 Consistent with this observation, many companies have been started by people who have experienced a problem in their own lives, and then realized that the solu- tion to the problem represented a business opportunity. For example, in 1991, while leaving a local coffee drive-thru as he was taking his daughter to school, Jay Sorensen dropped a cup of coffee in his lap because the paper cup was too hot. This experience led Sorensen to invent an insulating cup sleeve and to start a com- pany to sell it. Since launching his venture, the company, Java Jacket, has sold over four billion cup sleeves. Similarly, after watching countless women walk home barefoot after a long night in heels, New York University finance students Katie Shea and Susie Levitt started a company named CitySlips to make easily portable, comfortable shoes. They created a pair of flats that fold up to fit into a pocket-size zip pouch, which easily fits into most women’s purses. When a woman pops on the shoes, the pouch unfurls into a tote bag to carry the high heels. The two began selling CitySlips in 2009; today, their product is carried in over 500 stores.13 Advances in technology often result in problems for people who can’t use the technology in the way it is sold to the masses. For example, some older people find traditional cell phones hard to use: the buttons are small, the text is hard to read, and it’s often difficult to hear someone on a cell phone in a noisy room. To solve these problems, GreatCall, Inc. is producing a line of mobile phones targeted to sell to older users. The Jitterbug Flip, for example, is a simple and easy-to-use cell phone while the Jitterbug Smart was the largest smartphone the firm produced in 2017. Both phones feature large keypads that make dialing easy, powerful speakers that deliver clear sound, easy-to-read text, and simple text-messaging capability. Another company that was founded in Australia, Kisa, has created a cell phone designed specifically for kids. The phone has a simple design and allows children to call up to 10 pre-set phone numbers. The back of the phone features an SOS button and can include medical or contact information. The large, bright display can be customized in a number of ways, including to display the names and photos of the people the child is allowed to call. For example, the screen might display boxes that say Mom, Dad, Grandma, Grandpa, Aunt Sarah, Uncle Jason, and so forth. All the child has to do is press the box to make a call. The phone is light enough that it isn’t a burden for a child to carry, but durable enough to withstand a fall or two on the playground.14 Some business ideas are gleaned by recognizing problems that are asso- ciated with emerging trends. For example, sales of traditional low-cal sodas, like Diet Pepsi and Diet Coke, are down, largely due to growing concerns that people have with consuming artificial sweeteners. This trend has left an opening for start-ups such as Sparkling Ice and Spindrift Soda, which make carbon- ated beverages that are tasty but are made from natural ingredients. Similarly, the proliferation of smartphones enables people to stay better connected, but results in problems when people aren’t able to access electricity to recharge their phones for a period of time. A number of companies have solved this problem in innovative ways. An example is the $70 Eton BoostTurbin 2000, which is a device that weighs less than four ounces. It combines a 2000-mAh battery with  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    81 a hand crank that provides enough power to fully charge a typical smartphone. The device itself can be recharged via a USB port or the hand crank. The $155 HiNation HiLight is a little bulkier but packs more power and has multiple functions. It has a battery that can recharge an iPhone at least three times. The device itself can be recharged via solar power in about 10 hours. On some occasions, individuals see problems that are rather obvious, but for some reason, no one has addressed them in a meaningful way. With a little ingenuity, a business can be created. For example, Jeannine Fradelizio liked to entertain. Because she lives close to Northern California’s wine country, her parties always include good wine. One thing Ms. Fradelizio noticed is that when people put down their wine glass, they often forgot which one was theirs, so they would abandon the drink or reach for somebody else’s. To solve this problem, she initially grabbed a marker from her drawer and scribbled people’s names on the wine glasses. People liked the idea and Ms. Fradelizio realized she was on to a business idea. She needed a marker that was nontoxic, odorless, and wouldn’t interfere with the bouquet of the wine. In addition, it needed to dry quickly with- out smudging but also needed to wash off easily. She enlisted the help of a chem- ist, and about a year later, the Wine Glass Writer was born. That was 2011. Today, Wine Glass Writers are sold at wineries, cooking stores, and other retailers in the United States and several foreign countries. Sales for 2015 topped $1.5 million.15 Additional examples of people who launched businesses to solve problems are included in Table 2.2. Social ventures, a new type of entrepreneurial venture, are launched for the purpose of solving a range of social problems including poverty, hunger, and a lack of access to services such as water and electricity. These ventures can be for-profit firms or not-for-profit agencies. Many businesses are created when an attempt to solve a problem results in an opportunity being identified. TABLE 2.2 Businesses Created to Solve a Problem Name of Business That Entrepreneur(s) Year Problem Solution Resulted Annie Halsall 2015 In an unfamiliar area, there is no Create an online “Yelp”-like Winnie (www.winnie.com) and Sara easy way for parents to know the platform that allows parents to Maskopf retail locations and restaurants rate locations on “child-friendly” that are stroller friendly. attributes David Zhang 2014 No way to instantly have a Create an instant camera case Prynt and Clement physical photo to share with for smartphones that can print a (www.pryntcases.com) Perrot friends from a picture taken on beautiful photo within seconds a smartphone Parking Panda 2011 There is no easy way to find Create a web-based platform that Parking Panda (www. a parking place in a city, allows users to find and reserve parkingpanda.com) particularly for a concert or a guaranteed parking in a city major sporting event Sherwin Sheik 2011 It’s not easy to find reliable Build an online platform that CareLinx (www.carelinx caregivers for elderly people empowers families to easily find.com) who would like to stay in their and hire caregivers who match homes, and most professional their specific needs and budgets caregiver services are expensive Perry Chen, 2009 No easy-to-access platform for Create a web-based Kickstarter Yancey Strickler, funding creative projects, like “crowdfunding” platform that helps and Charles indie films, record albums, or artists, musicians, and people Adler food-related projects involved in other creative projects raise money from the public 82    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS SAVVY ENTREPRENEURIAL FIRM Careem: Mobilizing a Solution to a Problem C areem, the Middle East’s first and leading taxi- booking app-based service, was created as a result of two entrepreneurs’ attempts to a solve a region- wide problem. Mudassir Sheikha, a 39-year-old Stanford- educated Pakistani, and his Swedish colleague Magnus special service during Eid-al Adha, a popular Muslim fes- tival during which an animal, usually a sheep or a goat, has to be to sacrificed and distributed to family, friends, and the poor. This requires trips to farms, where they are sac- rificed and then brought home. Careem offered to provide Olsson travelled extensively in their capacity as consul- this service: its drivers got the animal, sacrificed it for the tants for McKinsey & Company. During their travels to customers, and brought it to customers’ homes accord- the Middle East and North Africa (MENA) region, they ing to the tradition. In situations where customers wanted struggled to find an easy, quick, efficient, and reliable the live animal to be transported to their homes, Careem means of transportation. It also quickly became apparent arranged for pick-up vehicles for that too. that although Uber had provided a great solution to com- muters’ needs in many markets around the world, it had Dealing with the Rivalry not yet entered the MENA region, and this presented an Uber entered the Middle East market in 2013 as a global attractive opportunity. Inspired by the global transforma- brand with international appeal, changing the competitive tion of taxi-booking services and recognizing an under- dynamics in a growing market that presented an attractive served market, the two tech-savvy consultants launched opportunity. Both Uber and Careem adopted competitive Careem in the city of Dubai, the United Arab Emirates, in strategies to capitalize on that opportunity. Careem already 2012. Although Careem was initially launched for business had a strong hold on the market due to its first-mover’s customers, the company soon found that its users were advantage and local orientation. Due its global dominance, booking rides for personal use, like airport trips, schools Uber was able to a raise $15 billion in venture capital drops, and pick-ups. compared to $425 million that Careem had raised. Faced with a changing competitive scenario and an aggressive Expanding Regionally opponent, Careem focused on providing more localized Careem is touted as one of the UAE’s most successful start- solutions to the region, including better maps, pre-booking ups, with growth of 30 percent month on month. Within five services, dedicated call centers, and a varied fleet. Careem years of its launch, it has expanded to 60 cities across 11 claims that other services operate only as a limo service, countries, claims over 10 million registered users, and has but it offers a different ride experience for everyone. For over 250,000 contract drivers. Careem has ambitious plans example, in Dubai, Careem offered different types of rides: to become leading transporter of people and things in the Economy, Business, Careem Kids, MAX, First Class, and Middle East. With car ownerships as low as 2 to 5 percent in Ameera. While Uber seeks global dominance, Careem is some countries and a large population of 700 million people concentrating on being a leading regional player with a in the region, there is a potential of between 150 million and strong focus on local needs and wants. 200 million trips a day—a huge opportunity for Careem. Taking the Home Advantage Questions for Critical Thinking As a homegrown player, Careem has unmatched insight 1. Identify the market gaps that Shiekha and Olson filled into the region’s consumers, topography, infrastructure, by launching Careem in the Middle East. What role did neighborhoods, roads, and local commuting needs, their personal commuting experience in the region play allowing it to quickly act on the opportunity to develop in identify the opportunity? better maps than and have a competitive advantage over 2. Comment on how being a local player helped Careem Uber. Many cities and their neighborhoods in the region to cater to the needs of users in the region. What were inadequately covered by Google Maps and Nokia factors have contributed to its regional popularity? Maps, so Careem sent its own team to build a location 3. As the taxi-booking segment matures in the Middle database. The brand name, which means “generous” in East, how relevant will factors like innovativeness and Arabic, also worked very well with the local consumers. first-mover’s advantage be to sustainability and contin- ued success? Playing the Local Favorite 4. Considering the strong competition from global leader Close familiarity with the cultural and traditional values Uber, do you think Careem will be able to maintain its helped Careem to serve the regional markets well. In hold in the region? Saudi Arabia, where women were banned from driving Sources: Frank Kane, “Gentlemen, Start Your Engines: It’s Uber vs until October 2017, Careem had a massive female follow- Careem,” The National, November 24, 2015, available at https://www. ing, making up nearly 80 percent of its customers. It even thenational.ae/business/gentlemen-start-your-engines-it-s-uber- introduced a pre-booking facility for women so they could vs-careem-1.13430 (Accessed November 7, 2017); Parmy Olson, conveniently plan their trips. In Dubai, Careem launched its “Meet the Unicorn That’s Beating Uber in The Middle East,” Forbes, Ameera services, a ladies-only ride with a woman chauffer. June 15, 2017, available at https://www.forbes.com/sites/parmyol- In September 2016, in Saudia Arabia, Careem offered a son/2017/06/15/dial-a-caravan/ (Accessed November 7, 2017).  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    83 “­ The Savvy Entrepreneurial Firm” presents the case of Careem, a car-booking app in the Middle East, which was launched by two ex-McKinsey employees who faced problems finding efficient means of transport in the region. Finding Gaps in the Marketplace Gaps in the marketplace are the third source of business opportunities. There are many examples of products that consumers need or want that aren’t avail- able in a particular location or aren’t available at all. Part of the problem is cre- ated by large retailers, such as Walmart and Costco, which compete primarily on price and offer the most popular items targeted toward mainstream consumers. While this approach allows the large retailers to achieve economies of scale, it leaves gaps in the marketplace. This is the reason that clothing boutiques, specialty shops, and e-commerce websites exist. These businesses are willing to carry merchandise that doesn’t sell in large enough quantities for Walmart and Costco to carry. Product gaps in the marketplace represent potentially viable business oppor- tunities. For example, Tish Cirovolo realized that there were no guitars on the market made specifically for women. To fill this gap, she started Daisy Rock guitars, a company, which makes guitars just for women. Daisy Rock guitars are stylish, come in feminine colors, and incorporate design features that accom- modate a woman’s smaller hand and build. In a related manner, Southpaw Guitars located in Houston, Texas, carries only guitars that are designed and produced for left-handed players. A start-up in a completely different industry is TopTal, the subject of the “You Be the VC 9.1” feature. TopTal fills a gap in the online recruiting industry by supporting a platform that enables companies to find top-notch software engineering developers and designers who are rigor- ously screened and are willing to work on a contract basis. Additional examples of companies that started to fill gaps in the marketplace are provided in Table 2.3. Gaps in the marketplace are commonly recognized when people become frustrated because they can’t find a product or service they need and recog- nize that other people feel the same way. This scenario played out for Lorna Ketler and Barb Wilkins, who became frustrated when they couldn’t find stylish There are many gaps in the marketplace to be filled. This entrepreneur launched a start-up that runs after-school programs for students interested in STEM (Science, Technology, Engineering, and Mathematics) projects. These children recently competed in a national robotics competition for students in their age group. stockbroker/123rf.com 84    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS TABLE 2.3 Businesses Created to Fill a Gap in the Marketplace Gap in the Marketplace Resulting New Business Opportunity Name of Businesses That Resulted No fitness centers that are open 24-hour fitness centers to accommodate people Anytime Fitness, 24 Hour Fitness, 24 hours a day who work odd hours Snap Fitness Lack of toys and toy stores that Toy stores, toy manufacturers, websites that sell Wonder Workshop, Little Bits, Osmos focus on a child’s intellectual educational toys, and toy and smartphone app Genius Kit, Ubolly development combinations Too few women pursuing For-profit and non-profit organizations that teach Girls Who Code, Engineering for Kids, careers in engineering older girls to code, after-school programs that GoldieBlox, Roominate engage school-age girls in engineering-related projects, interactive books and games that interest young girls in engineering Shortage of clothing stores that Boutiques and retail stores that sell fashionable Casual Male XL, Fashions to Figure, sell fashionable clothing for clothing for hard-to-fit people, including plus- Motherhood Maternity hard-to-fit people sized clothing, maternity clothes, or clothing for tall or short people “plus-sized” clothing that fit. In response to their frustration, they started Boda- cious, a store that sells fun and stylish “plus-size” clothing that fits. Ketler’s and Wilkins’ experience illustrates how compelling a business idea can be when it strikes just the right chord by filling a gap that deeply resonates with a specific clientele. Reflecting on the success of Bodacious, Wilkins said: It’s so rewarding when you take a risk and it pays off for you and people are tell- ing you every single day, “I am so glad you are here.” We’ve had people cry in our store. It happens a lot. They’re crying because they’re so happy (that they’re find- ing clothes that fit). One woman put on a pair of jeans that fit her, and she called me an hour later and said, “They still look good, even at home!” Sometimes people have a body change that happens, whether they have been ill or had a baby, and there’s lots of emotion involved in it. If you can go and buy clothes that fit, that helps people feel good about themselves.16 Sometimes gaps in the marketplace are noticed via serendipity or chance, similar to the way that problems that need to be solved are spotted. An ­example is the creation of Simple Gum Natural Chewing Gum. In 2012, Caron ­Proschan had just finished lunch of green juice and salad with a friend when she reached into her pocket for a stick of gum. When she looked at the gum, she realized it was a stark contrast to the healthy meal she had just eaten. She started looking for a healthy gum, but couldn’t find one. Not to be deterred, she decided to create one. She tried to find an appropriate recipe and some- one to manufacture a “healthy gum” for her, but struck out on both counts. She struck out on her own and eventually developed a gum that satisfied her. A year later, Simply Gum was born. It is now in approximately 1,200 stores across the country and is consistently a top seller in the chewing-gum category on Amazon.com.17 One thing entrepreneurs must remain mindful of in pursuing business opportunities, regardless of whether the opportunity results from changing envi- ronmental trends, solving a problem, or finding gaps in the marketplace, is that the opportunity must ultimately be fashioned into a successful business. The nearby “What Went Wrong?” feature focuses on Everpix, a company that resulted from its founders’ frustration regarding the lack of a good service to store and organize photos. Regrettably, the founders spent too much time focused on the opportunity at the expense of the business, as you’ll see in the feature.  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    85 WHAT WENT WRONG? Why a Company That Solved a Problem with a Great Product Went Out of Business I n 2009, Pierre-Olivier Latour spent some time traveling through Asia with a friend. He became frustrated with how difficult it was to store and organize all the photos he was taking. When he returned to the United States, he discussed his frustration with Kevin Quennesson, a fellow of self-­serving design choice that the team prided itself in avoiding. It also spent almost nothing on advertising or promotions. It had spent the $1.8 million it raised on building the service. So at the time when other photo apps were attracting millions of users, Everpix had fewer than French engineer. Quennesson had a different frustration 19,000 sign-ups. with photos, noting that the more photos he took, the In the weeks prior to closing, Everpix’s founders less likely he was to go back and look at them. Quen- scrambled to raise additional funding. Because they were nesson saw this likelihood as a paradox. The more he well-connected in the angel investing and venture capital documented his life, the less likely he was to enjoy what world, they got a number of meetings. They were con- he had created. sistently praised on the quality of their product and the Latour and Quennesson saw the combination of their quality of the team they had assembled, but the business frustrations as a problem. There wasn’t a good solution on was the problem. Investors were getting spooked, in part, the market to store and organize photos in a manner that by the sheer number of apps that were being created and would encourage people to go back and look at them. the ease with which consumers could switch between The two decided to start a business and build a prototype them. In addition, a number of Everpix’s competitors were of a photo storing and organizing service that potentially giving their services away for free, while Everpix’s busi- solved the problem. In June 2011, they met Wayne Fan, ness model relied on paid subscriptions. One by one, the who was working at a San Francisco firm doing interac- investors turned them down. Several overtures were made tion and visual design and brought him in as a cofounder. to potential acquirers, but none panned out. Eventually, The three spent the next several months building a pro- Everpix ran out of money and didn’t have the capacity to totype of their service, which they named Everpix. The continue. service seamlessly found and uploaded photos from your desktop and from online services, then organized them to highlight the best ones. The service was fast, the design was clean, and it was simple to use. Questions for Critical Thinking Everpix raised a total of $1.8 million from angel inves- 1. In the context of this chapter, make a list of three tors and continued to work on the product. The first ver- “takeaways” from this feature that you can learn from sion of Everpix 1.0 rolled out in March 2013. A free option and try to avoid if you set out to solve a problem by let you see all your photos from the past year or longer launching a business. if you connected to Everpix’s app. For $4.99 a month or 2. To what degree is there a difference between pursuing $49 a year, the service would let you store an unlimited an opportunity to solve a problem and building a busi- number of photos. One cool feature, called Flashbacks, ness? In what ways did Everpix fail to do both? sent users daily e-mail messages of their photos from 3. According to the feature, Everpix spent almost nothing the same day in prior years. The overall service got rave on advertising and promotions. How large of a role do reviews, and its users seemed to love it. The Everpix app you think that decision played in Everpix’s failure? had a 4.5-star average rating (on a scale of 1–5) out of 4. Venture capitalists are often accused of swinging for more than 1,000 reviews. It seemed as though the found- the fences—in other words, they don’t invest in firms ers were solving the problem they had set out to solve that are hitting singles, doubles, or triples. They want with an attractive and solid product. Then, in the summer home runs. In hindsight, do you think Everpix was of 2013, Everpix closed. What went wrong? building a business that had the potential to hit singles, In a nutshell, Everpix’s founders spent too much doubles, or triples, or a business that had the potential time and energy perfecting their service at the expense to be a home run? Explain your answer. of building a business. The service wasn’t viral, mean- ing it wasn’t easy for Everpix subscribers to share pho- Sources: C. Newton, “Out of the Picture: Why the World’s Best tos with friends and encourage them to become Everpix Photo Startup is Going Out of Business.” The Verge, available at https://www.theverge.com/2013/11/5/5039216/everpix-life-and- members. The Everpix team realized this was a problem death-inside-the-worlds-best-photo-startup (posted November 5, and kicked around ways to make the service more viral. 2013, accessed March 19, 2014); The Sublog, “Everpix, Snapchat, One idea was to require a subscriber’s friends to create and The Startup Life,” November 7, 2013, available at http://subim- an account to download any photos that the subscriber age.com/blog/2013/11/07/everpix-snapchat-and-the-startup-lie/#. shared with them, but the idea was killed as just the type Uym15qMo670 (posted November 7, 2013, accessed March 19, 2014). 86    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS Personal Characteristics of the Entrepreneur LEARNING OBJECTIVE How did Michael Dell come up with the idea of a “build it yourself” computer 3. Discuss the personal company? How did Dave Roberts, the founder of PopCap Games, figure out that characteristics of entre- there is a large and growing market for “casual” electronic games? preneurs that contribute Researchers have identified several characteristics that tend to make some to their ­ability to recognize people better at recognizing opportunities than others. We’ve already defined ­business opportunities. an opportunity as a favorable set of circumstances that create the need for a new product, service, or business; the term opportunity recognition refers to the process of perceiving the possibility of a profitable new business or a new product or service. That is, an opportunity cannot be pursued until it’s recog- nized. Now let’s look at some specific characteristics shared by those who excel at recognizing an opportunity. Prior Industry Experience Several studies show that prior experience in an industry helps entrepreneurs recognize business opportunities. For example, entrepreneur and teacher Michael Glauser says that experience is one of five criteria a start-up must satisfy if it is to succeed (a genuine need, adequate resources, buying customers, and a sound business model are the other four). Of course, working in an industry is the most significant way to gain insights about a particular industry’s char- acteristics. Specifically, Glauser says the following about industry experience: Knowing the products, services, and problems in an industry not only helps you avoid the pitfalls of trial-and-error learning, but it also gives interested parties the confidence that you’re the right person to build this business. Your experience and credibility are very important to potential team members, investors, customers, suppliers, and strategic partners. If you don’t have the skills and experience to build your business, you’ll be fighting an uphill battle.18 There are several explanations for the importance of industry experience for start-up success. By working in an industry, an individual may spot a market niche that is underserved. It is also possible that while working in a particular area, an individual builds a network of social contacts in that industry that may provide insights that lead to opportunities.19 Although prior experience is important in an industry in most instances, it is also important to say that there is anecdotal evidence suggesting that people outside an industry can sometimes enter it with a new set of eyes, and as a result innovate in ways that people with prior experience might find difficult. This sentiment was expressed by Richard Branson, the founder of the Virgin Group. In a blog post, Branson was asked whether an entrepreneur needs prior knowledge of an industry to start a business in it. Branson replied: Please don’t get hung up on this question of whether you need to have experience in an industry before you launch your startup. Instead, think about changes you’d like to see as a customer—even if you’ve just noticed little details that need tweaking. Branson went on to talk about the beginnings of Virgin Music, the Virgin Group’s highly successful music label and chain of retail stores: We went from running a small record shop to starting up a record label with record- ing studios and then added our large music megastores to our portfolio. Though we were music fans, we knew little about any of those businesses. But what we learned was that this wasn’t necessarily a drawback. We were young and stubborn, and we liked to do things our own way; paradoxically, our enterprises thrived as a result. 20  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    87 There are other examples of people who started successful firms without prior industry experience. For example, Travis Kalanick, Garrett Camp, and Oscar Salazar, the founders of Uber, had no prior experience in the transporta- tion industry. Similarly, Elon Musk, the founder of Tesla, had no prior expe- rience in the automobile industry. The takeaway is that while prior industry experience may be preferable, it is not always necessary for start-up success. In fact, in some cases it may actually work against an entrepreneur by fixing his or her mind on the “traditional” ways of doing things in an industry. Cognitive Factors Opportunity recognition may be an innate skill or a cognitive process.21 There are some who think that entrepreneurs have a “sixth sense” that allows them to see opportunities that others miss. This sixth sense is called ­entrepreneurial alertness, which is formally defined as the ability to notice things without engaging in deliberate search.22 Most entrepreneurs see themselves in this light, believing they are more “alert” than others. Alertness is largely a learned skill, and people who have more knowledge of an area tend to be more alert to opportunities in that area than others. A computer engineer, for example, could be expected to be more alert to needs and opportunities within the computer industry than a lawyer would be. The research findings on entrepreneurial alertness are mixed. Some researchers conclude that alertness goes beyond noticing things and involves a more purposeful effort. For example, one scholar believes that the crucial difference between opportunity finders (i.e., entrepreneurs) and nonfinders is their relative assessments of the marketplace.23 In other words, entrepreneurs may be better than others at sizing up the marketplace and inferring the likely implications. Social Networks The extent and depth of an individual’s social network affects opportunity recog- nition.24 People who build a substantial network of social and professional con- tacts will be exposed to more opportunities and ideas than people with sparse networks. This exposure can lead to new business starts. Research results over time consistently suggest that somewhere between 40 percent and 50 percent of those who start businesses got their ideas through social contacts.25 In a related study, the differences between solo entrepreneurs (those who identi- fied their business ideas on their own) and network entrepreneurs (those who identified their ideas through social contacts) were examined. The researchers found that network entrepreneurs identified significantly more opportunities than solo entrepreneurs, but were less likely to describe themselves as being particularly alert or creative.26 A concept that sheds light on the importance of social networks to oppor- tunity recognition is the differential impact of strong-tie versus weak-tie rela- tionships. Relationships with other people are called “ties.” We all have ties. Strong-tie relationships are characterized by frequent interaction, such as ties between coworkers, friends, and spouses. Weak-tie relationships are characterized by infrequent interaction, such as ties between casual acquain- tances. According to research in this area, it is more likely that an entrepreneur will get a new business idea through a weak-tie than a strong-tie relationship, because strong-tie relationships —which typically form between like-minded individuals —tend to reinforce insights and ideas the individuals already have.27 Weak-tie relationships, on the other hand, which form between casual acquain- tances, are not as apt to be between like-minded individuals, so one person may say something to another that sparks a completely new idea. An example might 88    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS be an electrician explaining to a restaurant owner how he solved a business problem. After hearing the solution, the restaurant owner might say, “I would never have heard that solution from someone in my company or industry. That insight is completely new to me and just might help me solve my problem.” Creativity Creativity is the process of generating a novel or useful idea. Opportunity rec- ognition may be, at least in part, a creative process. On an anecdotal basis, it is easy to see the creativity involved in forming many products, services, and businesses. Increasingly, teams of entrepreneurs working within a company are sources of creativity for their firm.28 For an individual, the creative process can be broken into five stages, as shown in Figure 2.4.29 Let’s examine how these stages relate to the opportunity recognition process. In the figure, the horizontal arrows that point from box to box suggest that the creative process progresses through five stages. The verti- cal arrows suggest that if at any stage an individual (such as an entrepreneur) gets “stuck” or doesn’t have enough information or insight to continue, the best choice is to return to the preparation stage—to obtain more knowledge or expe- rience before continuing to move forward. Preparation. Preparation is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process. Just as an ath- lete must practice to excel, an entrepreneur needs experience to spot opportuni- ties. Over time, the results of research suggest that as much as 50 to 90 percent of start-up ideas emerge from a person’s prior work experience. Incubation. Incubation is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase. Some- times incubation is a conscious activity, and sometimes it is unconscious and occurs while a person is engaged in another activity. One writer characterized this phenomenon by saying that “ideas churn around below the threshold of consciousness.” Insight. Insight is the flash of recognition when the solution to a problem is seen or an idea is born. It is sometimes called the “eureka” experience. In a business context, this is the moment an entrepreneur recognizes an opportu- nity. Sometimes this experience pushes the process forward, and sometimes it prompts an individual to return to the preparation stage. For example, an entrepreneur may recognize the potential for an opportunity, but may feel that more knowledge and thought is required before pursuing it. Evaluation. Evaluation is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. Many entrepreneurs mistakenly skip this step and try to implement an idea before they’ve made sure it is viable. Evaluation is a particularly challenging stage of the creative process because it requires an entrepreneur to take a candid look at the viability of an idea. We discuss how to evaluate the feasibility of new business ideas in Chapter 3. FIGURE 2.4 Insight Five Steps to Preparation Incubation Eureka! Evaluation Elaboration Generating Creative Business idea conceived Ideas Problem solved  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    89 Elaboration. Elaboration is the stage during which the creative idea is put into a final form: The details are worked out and the idea is transformed into something of value, such as a new product, service, or business concept. In the case of a new business, this is the point at which a business plan is written. Figure 2.5 illustrates the opportunity recognition process. As shown in the figure, there is a connection between an awareness of environmental trends and the personal characteristics of the entrepreneur because the two facets of opportunity recognition are interdependent. For example, an entrepreneur with a well-established social network may be in a better position to recognize emerg- ing technological trends than an entrepreneur with a poorly established social network. Or the awareness of an emerging technology trend, such as digitiza- tion, may prompt an entrepreneur to attend conferences or workshops to learn more about the topic, expanding the social network. Techniques for Generating Ideas In general, entrepreneurs identify more ideas than opportunities because many LEARNING OBJECTIVE ideas are typically generated to find the best way to capitalize on an opportu- 4. Identify and describe nity.30 Several techniques are used to stimulate and facilitate the generation techiques entrepreneurs of new ideas for products, services, and businesses. Let’s take a look at several use to generate ideas. of them. Brainstorming A common way to generate new business ideas is through brainstorming. In general, brainstorming is simply the process of generating several ideas about a specific topic. The approaches range from a person sitting down with a yellow legal pad and jotting down interesting business ideas to formal “brainstorming sessions” led by moderators that involve a group of people. In a formal brainstorming session, the leader of the group asks the partici- pants to share their ideas. One person shares an idea, another person reacts to it, another person reacts to the reaction, and so on. A flip chart or an electronic whiteboard is typically used to record all the ideas. A productive session is free- wheeling and lively. The session is not used for analysis or decision making—the ideas generated during a brainstorming session need to be filtered and analyzed, but this is done later. FIGURE 2.5 The Opportunity Environmental Trends Recognition Process Economic factors Social factors Technological advances Political and regulatory changes Business, Product, or New Business, Service Opportunity Gap Product, and Difference between what’s Service available and what’s possible Ideas Personal Characteristics of an Entrepreneur Prior experience Cognitive factors Social networks Creativity 90    PART 2 | DEVELOPING SUCCESSFUL BUSINESS IDEAS Organizations vary in terms of how they brainstorm and generate new ideas. This start-up uses Post-it notes on a designated wall in its office suite. ESB Professional/Shutterstock We show the four strict rules for conducting a formal brainstorming session in Table 2.4. As you’ll see, the number one rule for a brainstorming session is that no criticism is allowed, including chuckles, raised eyebrows, or facial expressions that express skepticism or doubt. Criticism stymies creativity and inhibits the free flow of ideas. Brainstorming sessions dedicated to generating new business ideas are often less formal. For example, while creating Proactiv, a popular acne treatment product, Dr. Katie Rodan, one of the company’s founders, hosted dinner parties at her house and conducted brainstorming sessions with guests. The guests included business executives, market researchers, marketing consultants, an FDA regulatory attorney, and others. Rodan credits this group with helping her and her cofounder brainstorm a number of ideas that helped shape Proactiv and move the process of starting the company forward.31 As part of the brainstorming process, some people and groups construct mind maps to organize their thoughts. A mind map is a diagram used to visually organize information.32 It is hierarchical and shows the relationships TABLE 2.4 Rules for a Formal Brainstorming Session Rule Explanation 1 No criticism is allowed, including chuckles, raised eyebrows, or facial expressions that express skepticism or doubt. Criticism stymies creativity and inhibits the free flow of ideas. 2 Freewheeling, which is the carefree expression of ideas free from rules or restraints, is encouraged; the more ideas, the better. Even crazy or outlandish ideas may lead to a good idea or a solution to a problem. 3 The session moves quickly, and nothing is permitted to slow down its pace. It is more important to capture the essence of an idea than to take the time to write it down neatly. 4 Leapfrogging is encouraged. This means using one idea as a means of jumping forward quickly to other ideas.  CHAPTER 2 | RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS    91 among pieces of the whole. It is created around a single concept, which is placed at the center of the page. From the center, branches are created, which reflect new and associated ideas that branch out from the central idea. Each branch can then be built on to create sub branches with additional detail. So, imagine if the creators of Coolest (www.coolest.com) had used mind mapping as part of their initial brainstorming process. Coolest makes the Coolest Cooler, which is the world’s first rolling cooler with a built-in blender, Bluetooth speak- ers, tie-down straps (to carry items on top of the cooler), LED lights, oversized tires (great for sandy beaches), built-in USB charger, and built-in storage. In building their mind map, the founders of Coolest would have put “New Inno- vative Cooler” at the center of their mind map, and would have had branches that described features to be built into the cooler. Each branch would have had sub-branches further defining the feature. Ultimately, some of the features would be accepted and some would be discar