Industry Condition

Our idea is to serve everybody, including people with little money. Ingvar Kamprad, Founder of IKEA.

     After examining entrepreneurial mindset, motivation, and behavior, the next step is exploring entrepreneurial opportunities is evaluating industry condition. We can examine the rules of competition within an industry. This helps entrepreneurs to decide what industries that they do choose to enter, entrepreneurs can better anticipate the opportunities and challenges there in.

     Understanding the knowledge conditions and demand conditions, the two core segments of industry condition, provides insights into the attractiveness of an industry for new entrants. With this understanding, aspiring entrepreneurs can determine if, and how, to compete effectively within their chosen industry.

Retrieved from: The Opportunity Analysis Canvas- Edition 2.0

What impact do knowledge conditions have in your industry?

     Knowledge conditions influence the success of entrepreneurs within their chosen industries. What we mean by knowledge conditions is the quantity as well as the quality of knowledge that is required to create and deliver the industry's products or services. Within a specific industry, what is the relative influence or importance of human expertise? What's the importance of knowledge within that industry? How does money, location and relationships influence a company's success within that industry, as compared to knowledge?

     Industries that are characterized by night knowledge conditions would be those that are intellectually difficult. They're fundamentally hard to enter and have a high barrier of entry. Industries that have low knowledge conditions would be those that perhaps anyone could enter if they had sufficient money, a viable location, or the right relationships.

     By example, we can examine Squarespace once again. Anthony Casalena knew that, "I have a concept. I have a computer science degree, or at least am in a major to earn my degree, but I'm also teaching myself a lot of new things along the way. I'm teaching myself about marketing. I'm teaching myself about sales. I'm teaching myself about finance and accounting." As a one-person company, he was able to build the product and sell the product, and bring it to market, and generate income off of that version one. That gave him the opportunity to build a version two to generate more income. And that fueled the marketing for version three, which he built, brought to market, and so forth. 

     In its beginning, Squarespace was a blog building site. It had a fairly simple feature set, but it was still competitive versus its blog building competitors. It evolved into an expanded feature set. Anthony was always very effective at figuring out where the market was going, and what was important to his user base.

     It's rare that one person can bring the technology skills and the business skills together to grow a company. It enabled him to eventually raise capital. He operated for approximately six years without any outside capital. He grew the product to over $1 million in revenue before he hired his first employee.

     When he did eventually raise money in his sixth year of operations, he was able to retain majority ownership of his company due to his demonstrated success. He was able to retain over 60% ownership of his company even tough he raised $38 million. He later raised another $40 million on path to an initial public offering (IPO).

     When we think about where venture capitalists invest, the bulk of it is in high-tech, and industries that are very knowledge intensive. Software, biotech, media, entertainment, IT, industry, medical services, consumer products-all are things that require deep expertise and are very knowledge-based. Money, location, and relationships alone do not result in success in high knowledge industries. Success is largely attributable to the founding team and the expanded team, and it takes a lot of knowledge to develop winning ideas into commercial successes.

How do you build knowledge within your startup?

     By illustration, if you're a technologist, starting a tech company is a viable opportunity if you have the software skills, or the engineering skills, to build your product or service.

     However, if you're interested in doing a tech startup and you're not a technologist, the path is much more challenging. Teaching yourself to write software or engineer products takes time. Your idea will also be difficult to secure funding for if you don't have the right team. The absence of a technologist on a tech team is a gap that investors have a hard time accepting.

     If you're interested in starting a tech company, but lack the technical expertise, I strongly encourage you to seek a co-founder with the appropiate technical skills. Perhaps a colleague, or a former co-worker or classmate, is a fit.

     There are even online communities to find co-founders. CoFoundersLab is one of the more popular ones, where if you have a concept, but you need to build a team, you can post your opportunity. You can keep the idea as vague as you wish, if you're concerned about sharing your idea with an unknown audience. Conversely, if you'd like to join a startup team, you can find people who are searching for people with your skill set. If you want to be an adviser, you can find opportunities to advise startups here as well.

     If you don't have a technical co-founder, or need to supplement their technical skills, you can hire technical employees. You'll also likely hire later to build your startup's knowledge and expertise in finance, marketing, sales, and the other functions of the company.

     You may also partner or joint venture to build the collective knowledge of your startup. A number of my students have created successful technology companies by partnership. They've had the vision. They've had the market insight. They've had the relationships in the industry. But they may not have had the programming talent, so they've been able to find other small companies that do product development and software development to partner with and form partnerships or joint ventures.

     Outsourcing is a type of partnership that is typically short-term and project-based. For example, an entrepreneur may hire a small company or an individual that can do technical projects and tasks. Or it may be managed via an online community like Elance or oDesk. They offer an online network of individuals who are experts in various areas. You can post your project information there; they bid on that project. You select your winner, and you manage your project from there.

     In summary, we need to understand the dynamics of industries that we may enter, what it takes to succed within different industries, and the rules of competition. As entrepreneurs, our best positioning is within industries with high levels of knowledge conditions. Consider how to leverage yor knowledge, or acquire new knowledge. Knowledge can be learned. It can be realized via a co-founder. It can be employed. It can be outsourced. It can be partnered. There are a variety of ways that you can build that knowledge and expertise for your new venture.

Are the demand conditions in your industry favorable?

     As we explore the demand conditions within industries, we'll examine what these mean in the context of industry conditions and assess the influence of demand conditions on your success as an entrepreneur.

     With demand conditions, we're addressing the size of the market, the rate of growth of that market, and the consistency of that market. To create a successful venture, we need to satisfy customer needs in a better way, and we need to do it in a profitable way. 

     A problem well stated is a problem half solved. We need to understand the customer's problems and to solve those known problems. We need to understand not only the current needs and wants in the market, but where the market's moving and how we're going to be competitive now and later. Critical to this understanding is customer discovery-that is, actually getting out of your building and examining prospective customers. What are the real customer needs and wants? Can these needs and wants be segmented into different types of customers? What is the relative importance of each individual need and want, and what are customers willing to pay for our solution?

     For example, eLearning presents a complex set of demand conditions. As background:

• The global education expenditure is $4.4 trillion. There are 1.4 billion students, 62 million educators, and billions of parents who are influential in purchasing decisions.
• As a subset of the education market, eLearning is sizable as well, at $91 billion. It has a growth rate in the near term of 23% per year.
• For the "e" in eLearning, there are over 2.4 billion Internet users globally.
• The cost of higher education in the U.S. is up 84% since 2000.
• College students'loan debt in the U.S. exceeds $1 trillion, an all-time high.

     Beyond the numbers, I need to understand the sentiment for eLearning. There is a lot of hype. There is a lot of expectation. There is a belief by many that eLearning is going to be a cure-all for education. I need to be aware of these sentiments. I need to be aware of these trends and desires and expectations, the hype and the facts.

     There are new federal and regional regulations emerging in the eLearning space that I need to understand if I'm considering starting a new venture in this area.

     There's also the rapid rise of massive open online courses (MOOCs), open education, and free content.

     When we consider eLearning and the demand in the marketplace, we see there's a variety of conditions to examine regarding the magnitude of the market, the rate of growth, the homogeneity of it, as well as the other factors that are influencing demand. Affordability of education, web access, computer and tablet ownership, and industry standards all play a role. These expenses incurred by the various types of education and technology suppliers is an important element to consider as well. Of course, I need to know who my customers are and who's influencing their buying decision.

     My entrepreneurial opportunity analysis may include ocnsidering one of four education markets to enter with my new venture: K-12, undergraduate college students, graduate college students, or corporate and government employee training.

     Through my research, I know that 50% of total education spending in the U.S. is done in the K-12 market. Not surprising, based on that being the bulk of the population. There are many more schools, and many more students, in K-12 than there are in colleges. 

     I need to recognize how the education industry is structured and how is it segmented.

     Content is an area that's influenced by regulatory and curriculum matters, and the types of businesses that would fall into this category are the content pusblishers-curriculum designers within schools, textbook publishers, etc.

     There are also management systems-software platforms, the tools, the smart technologies, the learning management systems, the analytics, etc.-that are part of the education and eLearning systems.

     A third element is distribution. Arguably the most popular of late, this includes online access to courses and resources, free or paid. Types of businesses include immersive learning that strives to make face-to-face learning, or hybrid learning more experiential and more customized. It's other learning portals.

     All three of these elements-content publishers, management systems, and distribution-will play a role in serving customers.

     As I explore demand, I am curious of my prospective competitors in their market and their success in raising investment capital. Are companies getting funding from venture capitalists and other types of investors? With research, I see that they are, even though it's on a modest decline. It rose steadily into 2010, but with the U.S. and the global economic slowdown, investment began to level off in eLearning startups. It's not surprising, recognizing that many of the K-12 and college institutions are publickly funded, meaning they're reliant on tax revenues and government spending. If government spending declines, there's often a negative impact on the companies reliant on schools and colleges as customers. In 2014, there were approximately 100 eLearning companies funded by venture capitalists.

     We also need to understand the merger and acquisition activity in the space, and what's going on there. There is a lot of consolidation via acquisitions, with the total values of these deals approaching $10 billion. eLearning companies accounted from 75% of the education companies that were merged or acquired.

     We can also see who's raising money, from whom, in what target sector, and at what transaction value. We see notable investors that include venture capitalists like Andreessen Horowitz, as well as foundations, like the Bill and Melinda Gates Foundation, placing money into eLearning. With research, we can see the target sectors and we can see transaction values-a few million dollars here, $10 or %15 million there.

     When we examine demand conditions, there are variety of databases that we have access to, both free and paid. There are many research databases, such as BizStats, the U.S. Census Bureau, and SBDCs in the U.S., and Eurostat in the European Union.

     To capitalize on these demand conditions, the magnitude of the demand is important. But when you're exploring an early stage industry, the magnitude may not necessarily be high today. We're more interested in the rate of growth of future demand. If it's a small market today, that's okay; but if it's growing at 20%, or 30%, or 40% a year, we want to be on that curve as entrepreneurs. We want to ride that growth. The idea is that a rising tide will raise many of the companies that are in that space.

     We're also interested in the consistency of demand across the customer segments. For our eLearning example, I see that half of the market spend is K through 12, which is a fairly homogeneous market. Ther are probably a similar set of needs and wants across that broad segment. Now, that doesn't mean that I necessarily want to try and build a product that's going to serve everyone. The needs of a kindergarten class and the needs of a high school class are very different. The sophistication of the students is very different. What a six-year-old and an eighteen-year-old can do is very different. It's not all the same or a one-size-fits-all-situation, but at least it brings me into a common category of needs and wants. There's a grading system, and assigments and homework that's common. There's a teacher-student relationship, and a parent or guardian relationship to the schools. The administrators in the K through 12 area will play a role, and there may be various regulations regarding student privacy that are common.

     If we're interested in corporate training, or the training of employees within the government, by the government, it's a different set of factors and concerns. That's what we mean by consistency of demand or the pockets of demand where there's a large grouping of K through 12, a large grouping of the post-secondary, a large grouping of corporate and government, where if we were to develop a solution we could tackle one of those large areas with our solution and not have to build an entirely new solution if we wanted to compete within that area.

     This raises the question of once you have recognized an industry and began to dissect the demand, what do you do from there? For me, I ask where is there an unrealized opportunity.

     If everyone that I'm seeing, particularly those who are raisng venture capital, are in the distribution part of eLearning, then I, as a startup, may not want to compete there. I do not want to chase what everyone else is chasing. I want to do something different. In distribution, there are a lot of players and a lot of funding.

     On the content side, perhaps I can be a content generator. My expectancy, however, is that the colleges and the schools may already have the content, or may have the expertise to develop that content, or even the responsability, philosophically, to develop their own content.

     I may want to start a company in the management system part of eLearning, and focus on new management tools that can be of value. Maybe I don't want to compete as a provider of all tools; perhaps I can especialize in only mobile tools-tablets, smartphones, etc. And I may not want to develop all of the mobile tools; I could start with analytics, within mobile, as a part of the management system.

     This is the scope of demand-side thinking that you can do to determine where you want to compete. Think about where the opportunity lies. Where is there sufficient magnitude, an attractive rate of growth, and relative homogeneity where you can build a sustainable startup? Can you identify a sizeable market that is growing, that has similar needs and wants, to which you can deliver something of value? An can you do it in an area where perhaps there's a niche that for you is attractive. You may find that there are opportunities to pursue, opportunities that are too small to attract large companies, but very worthwhile for you as a startup. For me, a $1 million opportunity would be very attractive. At Microsoft or Google, they wouldn't answer the phone for a $1 million opportunity. They wouldn't take a meeting to discuss a $1 million opportunity. It would be too small for companies at that scale.

     When you're thinking about demand, segmentation provides an opportunity to specialize and to build your reputation and brand for doing one thing well, which you can leverage into new things later. It gives you discipline, and allows to focus on specific needs and wants of a specific customer.

     In summary, when we consider demand conditions, recognize this as a critical piece of the industry that we need to understand. As we look to bring new products to market, we want to recognize the influence that magnitude, rate of growth, and homogeneity play in our venture's success.

Entrepreneur Spotlight on Jeff Raider, Co-Founder and Co-CEO of Harry's

     When exploring high-demand opportunities, the shaving razor and blade is among the most popular product categories worldwide. The knowledge needed to design and engineer a new, competitive product in this very established market is a challenge, as is the know-how to brand, market, and distribute the product successfully.

     Jeff Raider shares that the idea for Harry's started when a friend complained of poor customer service and a high bill when buying a razor blades and shaving cream at a drugstore. that friend, Andy Katz-Mayfield, became his co-founder and co-CEO at their shaving company, Harry's, which they launched in February 2013.

    They have focused on designing ergonomic, aesthetetically pleasing, and durable razor handles and blades. They also developed a moisturizer-laden shaving cream.

     When asked about the competition, Jeff responds, "It's a big market, it's dominated by a couple of companies, they make huge products and they charge lots and lots of money for products that are difficult to make." Jeff believes that Harry's can make and sell better products for less money than the competition.

     Their strategy includes direct selling to customers via their online store. "We felt like we had to take a new approach in established markets to build our differentiated brands," says Jeff. "Big name brands at times don't communicate directly with customers, and we've found customers like brands that care about them and exist to try to deliver a great experience.

Ideas in Action: Industry Condition

• What knowledge do you possess that can contribute to serving a market need?
• What are the demand conditions in the market?