So You Want to Start a Startup? 5 Places to Start

The world is rife with business opportunity, and nowhere more so than online. I often think of the web as something of a wild west frontier, awaiting anyone intrepid enough to stake out a claim. But to start an online venture you first need to have an idea of what you want to do. For many would-be entrepreneurs ideas are many and easy to come by, but not everyone feels this way.

Some time ago I met a very talented developer who was independent and industrious, more than capable of developing a brilliant web app. Despite wanting to start some sort of online business of his own, he was hamstrung, for he wasn’t sure what exactly to build. I remember being asked how I found so many different business ideas, and my on-the-spot reply went something like “uhm… they like, just pop into my head.” Not exactly a useful reply!

With a bit more thought and contemplation I’ve decided to catalogue some different methodologies for finding a business to get into. The post is split into five parts, each one detailing a different angle. If you know any more, be sure to comment them in.

* Part 1 – Solve a Problem
* Part 2 – Find a Gap in the Market
* Part 3 – Position Yourself for the Future
* Part 4 – Follow the Money
* Part 5 – Imitate and Improve
* What Next?

Part 1 – Solve a Problem

Solving a problem is arguably the underpinning of every successful business. When you a solve a problem people experience you are creating something of value – the solution. If your solution is valuable enough to enough people, you can find a business model and build a business out of it.

So let’s start by breaking down some famous online businesses into Problem / Solution couplings:

YouSendIt.com
Problem: People have trouble sending large files by email.
Solution: Create a service where users upload their file to a server and email a link.

AllRecipes.com
Problem: Using recipe books can be expensive and gives you a very limited number of recipes with no popular opinion.
Solution: Create a website where anyone can add a recipe and others use and review them in a social fashion.

Netvibes.com
Problem: There’s an increasing number of online activities people are involved in, but existing home page services do not provide adequate customization
Solution: Create a completely customizable home page that uses widgets and feeds for total personalization.

You’ll see that you can quite easily express virtually any business in this way. If you have difficulty, think about the typical user and ask yourself why would this person be using the business? What are they trying to accomplish? Why do they not accomplish their task or fill their need in some other way?

It’s also important to realize that it’s possible to solve a problem that does in fact already have a solution, but to do it in a new way. This is in effect reframing the problem to include the drawbacks of the existing solution. So in the example above, one could say the problem for Netvibes was that people need a good homepage, however this doesn’t account for the homepages that were available when they launched and their lack of personalization.

Framing a business idea as a problem and solution coupling is generally a good practice for getting it straight in your head exactly what the business is going to be about. It puts the focus on what matters most and cuts out all the noise and distraction. In a sense the problem/solution pair is a form of elevator pitch, a succinct explanation of what the basic raison d’être of your business is.
Your Own Problems

What problems should you solve? If you aren’t sure, the best place to look is internally, at your own problems. What do you wish could be better? What do you wish you could do that you can’t currently?

Solving your own problems has the great advantage that you will come armed with an in-depth knowledge of the business you want to get into. For the new entrepreneur this is much better than trying to solve someone else’s problem, one you may not fully understand, and consequently may not solve adequately or appropriately.

So let’s say I was setting out to start a new business tomorrow. I would sit down and think about what sorts of problems I have, both offline and on, and how I wish they could be fixed with an online solution. When thinking of solutions, I always ask myself whether I, myself would really use the solution if some other company magically brought it to market right now. It’s important to be honest and realistic with yourself because if you wouldn’t use the thing, chances are neither will others.

For the sake of illustration, I’ve come up with a few examples below of problems I personally feel, and how they might be solved. I haven’t researched them at all, so look at this (and the other examples in this post) solely as an exercise in illustrating the method.
Problems I Have and Related Potential Businesses

Problem: I find it hard to choose new books to read. I know what I’ve enjoyed previously, but not what I will enjoy in the future.
Solution: Build an imdb type site for books where people rate and review them. Use the power of the masses to generate a “If you liked this book then you’ll love … ” recommendation system. Throw in things like the top 100 must read books in every genre, author and character information, movie adaptations and so on. Potentially add in social networking elements like Shelfari, ebook sales like Lulu and referrals on to Amazon.

Problem: The older I get the more I forget events and experiences, what happened and when.
Solution: Build a scrapbooking service that lets you catalog your videos and photos, memories and experiences into a timeline. Create an interface that lets you scroll through years and months and see things in order of when they happened. Build in social features to let friends share events and entries on their timelines to create richer histories to remember. Charge a premium service for longer, richer timelines!

Problem: It’s difficult to find vacation homes without trawling through a lot of rubbish
Solution: Build a professional one-stop service for finding vacation homes around the world that includes good search and directory services and a CMS platform for providers to create new homes.

As you get used to thinking in this way you’ll begin to make mental notes of when you find things annoying or difficult, store them away and dream up solutions. Often they may not be practical, but now and again you’ll stumble on something which could be and should be better and find you’re ideally placed to make it happen!

Part 2 – Find a Gap in the Market

A gap in the market is a potential service or product that existing businesses have missed. The advantage of finding one is that you generally benefit from an existing business model and setup. You can often take the methods and work that has already been done and simply reapply it to the missing application.

So how do you find a gap in the market? Your basic idea is to evaluate an existing business, market and product and look at what might be missing and where the business could have been reused or extended. As is so often the case, an example is the best way to illustrate.

Let’s say you have decided that a good business to get into is project management. You know there are lots of existing tools and products out there, including for example Basecamp, Backpack, ActiveCollab, and GoPlan. So you ask yourself, what have these people missed? What business have they overlooked (purposefully or not)? I’ve written a series of three questions to help you think through the problem:

1. What other possible applications of this type of product or service are there, which aren’t being served?
These current project management tools are pitched squarely at small business. There are also in existence bigger, more traditional tools aimed at the enterprise market (which I’m less familiar with). But what other places could people use project management? How about in education? Students are often working on projects in school and more so in higher education. Project management and collaboration coupled maybe with education and social features could be really popular.
2. What segments of the current target market aren’t being well served?
Not all small businesses are the same, so it’s worth thinking, are there some types who aren’t being accounted for? For example you might look at pricing and ask, is there space for a completely free project management suite, or is there space for a super premium service? You might wonder if there is a market for a product that is paid for just once instead of on a subscription, or that is paid for by the project? Look for ways that the current market might wish to use the products for which there is no current solution.
3. Are there features or functionality that could be added to extend the market somehow?
Is there anything missing from the current products? One example might be in how project management is done in software companies. Tools like Basecamp arguably do not have the support and bug tracking muscle to make them really useful for software projects. As it happens there are other tools out there that do serve this market – Lighthouse, Fogbugz and Trac spring to mind, but they potentially miss some of the aspects of say Basecamp (time tracking and chat for example). Potentially there is a gap for a product that integrates more software tools with general project management.

Finding a gap in the market can mean anything from a slight improvement or twist on an existing product, all the way to massive innovation. Basecamp itself filled what turned out to be a huge gap in the market. As the folk at 37Signals are so fond of saying, before Basecamp, there were only the bloated project management tools that large businesses use. What 37Signals saw was a gap in the market for simpler tools that fit the needs of small to medium business and their success followed.
Counter-Trends: The Opposite of What People Currently Have

A very useful paradigm for finding gaps in the market is to look for the opposite of what people currently have. One of my favourite bloggers is a young Australian named Skellie who writes about blogging. In a recent post Number + Adjective + Contents: What Happens When a Formula Dies?, Skellie puts forward the idea that because blogging is saturated with “Top X” style, list posts, there is a vacuum created for heavier, opinion pieces, she calls this a counter-trend.

When we, at Envato, created Psdtuts+, the leading Photoshop tutorial blog, there was at the time a ton of low-mid quality Photoshop tutorials around. There were (and still are) lots of sites that capitalized on this and displayed huge amounts of aggregated content and gave readers a lot of choice. Sites like GoodTutorials and Pixel2Life provide links to some 10-20 tutorials a day, surely more than anyone could get through no matter how Photoshop-mad they are.

Interestingly this all created a counter-trend for a small volume of very high quality Photoshop tutorials. So when Psdtuts+ launched with just 2-3 great tutorials a week, the response was enormous precisely because people tired of trawling through lower grade content. Today Psdtuts+ is in fact larger than the tutorial aggregators (which aggregate Psdtuts+ content too).

Looking for the opposite of what people currently have is a powerful way of innovating. Remember though it’s still important to question whether it’s a genuine gap in the market, or simply something people don’t want!

Part 3 – Position Yourself for the Future

In one of the Back to the Future movies the bad guy steals an almanac of all sporting results of the previous two decades. He then hijacks the time machine and travels back in time so that he can profit from his knowledge of the future and make life hard for our hero, Marty McFly. While we may not have a Delorean to help us learn what the future holds, we do have our experience and judgment to help make an educated guess.

If you can figure out where things are going in a particular industry or market, then you can build a business that positions yourself there. When the world catches up, you’ll be the expert company ready to dominate that space and profit.

A great example of positioning for the future comes from that giant of the internet, Google. For some years now Google has been making a huge, and increasingly successful looking bet that the world of computing is moving into the browser. They have taken the view that it is the browser that is the platform of the future. They have pretty much ignored desktop applications, banking on hosted services and the technologies needed for them to be where things are headed. WhileGoogle Apps or Google Gears or any of their other browser based plans may not be profitable today, they are positioned so that the transition to this way of doing things leaves them ready to pick up converts from more traditional tools.

Predicting future trends isn’t a tool only for grandiose businesses like Google. Let’s say you want to start a blog and are looking for a topic. That same trend of a move towards browser based computing implies that a blog rounding up and reviewing browser apps would only get more and more useful. In fact at Envato we’re planning on adding a blog to our AppStorm site on that very topic, for that very reason!

Browser based computing is not much of a prediction these days, and consequently there’s a lot of competition and business already based on that premise. The further afield your prediction of where things are going, the more chance for both risk and reward there is. Similarly the further in the future your prediction is, the longer you will need to go before you see the fruition (or demise) of your plan. And that’s why positioning for the future is potentially the riskiest and most strategic of all the methodologies listed in this article, so use it with caution – and make sure you have the cash to get you through.

Part 4 – Follow the Money

A really great place to start a business is to help your users make money. There are lots of ways of doing this too: saving them time, making them more efficient, unlocking new opportunities, educating them and so on. In every case if your service has measurable value in helping users make money it is natural that they will pay you for it so long as the net result is positive. Who wouldn’t pay to make money?

In a talk by David Heinemeier Hansson of 37Signals at Startup School in 2008 I came to learn that their team had had far greater financial success with their products aimed at small business than with those aimed at consumers. In particular Basecamp was far more profitable than Backpack. It’s the same team, same great products, same freemium business model. What’s the difference? In one scenario they are targeting people making money and helping them be better at it, and naturally those small businesses are ready to pay for the privilege.

Following the money trail simply means thinking about how you can improve the money making potential of some group of people. It doesn’t need to be small business, it could just as easily be consumers, so long as it’s oriented towards consumers and money. One of the more successful startups I’ve seen in recent years is a site called Mint who help people organise their finances in a variety of ways. Even before the financial crisis they were successful, now I can only suppose they must be booming.

The great advantage of the follow the money method is that finding a business model is generally much easier and flows almost naturally out of basic business premise.

Part 5 – Imitate and Improve

The easiest methodology for finding a business however is the most obvious of them all, simply copy someone else’s! Find something someone else is already doing and do it slightly better or in a slightly different way. Yes, it’s very difficult to beat the original business using this strategy but that doesn’t mean there aren’t many viable businesses to be made in the shadow of a success story.

If a blog about lifehacking is successful, then probably another blog on the same topic will also attract readers. If a site to get good deals on hotels is profitable, then no doubt another site to get good deals on hotels has a good chance at being profitable. Wherever you look you’ll find plenty of hard to differentiate competitors and in many cases they are all profiting, albeit to different extents.

If you’re going to take this course it’s worth looking for a business that experiences success despite a lot of flaws, as this gives you plenty of space to improve on. You should also spending the time to find ways to differentiate as much as possible. Finally keep in mind that imitation rarely leads to overshadowing success without a strong dose of innovation to mix things up.

What Next?

Once you have a potential idea, or better yet a few of them, what do you do next? It’s time to evaluate the idea to see:

* Is it feasible?Can you actually build and design the solution? Do you have the resources to do it effectively?
* How will you make money?If you are fulfilling a real need there should be a way to monetize. Think carefully about where you could charge and for what?
* Who else is in this area and what are they doing?No matter what business you choose you WILL have competitors. It’s important to identify them early on. Look for obvious competitors but also companies that solve the problem in a different way. It’s useful to analyse competitors and determine how large and established they are, as well as potential strategies for challenging them.

If you find the idea is feasible, have a good plan for making money and even after seeing the competition feel you have a good shot, then the next step to take is to write out a business plan. Writing a plan will help you flesh out the idea more, make sure there aren’t any glaring holes and that you’ve really given it some serious thought.

Not sure how to write a business plan? Try these books and resources:

* PlanHQ – Web Based Business Planning Software
* Amazon’s Catalog of Business Planning Books
* BPlans.com – Samples, articles and a lot of other stuff to do with business plans

After that? Then you take over the world!