10 ways to choose the right idea for your first startup

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The following is an edited excerpt from Go It Alone!: The Secret to Building a Successful Business on Your Own by Bruce Judson. The excerpt is provided by HarperBusiness Publishing. You can buy a copy here.

Solve your own problems

Look at the problems you face in your own life, see how you solve them, and then consider whether this might be the basis for a business.

Here’s one technique for finding the business ideas in your own experience. For one month, make a note every time you are confronted with a problem that seems ridiculous, either because it is frustrating, or it is wasting your time, or your intuition tells you that there has to be an easier way. If you solve one of these problems for yourself, you may also have invented your next career.

Import solutions

There are several other sources of business ideas that are particularly appropriate for go-it-alone initiatives. In Why Not?: How to Use Everyday Ingenuity to Solve Problems Big and Small, Barry Nalebuff, a professor at the Yale School of Management, and Ian Ayres, a professor at the Yale Law School, create a framework for developing innovative ideas. One component is the notion that in many cases there are solutions waiting for problems. Here, the business founder takes a concept or technology that works in one arena and finds other areas where it can be applied successfully.

Business models that are successful in one industry may also inspire successful innovations in other industries. The now familiar Internet-based mortgage lending model, where multiple lenders compete for each consumer’s business, has been applied to a variety of consumer and business-to-business comparison shopping arenas, including life insurance, car buying, phone services, broadband, and health insurance.

Where can unbundling occur?

As discussed earlier, the unbundling of specialized activities from larger companies is one inevitable consequence of the growth of the Internet. These activities may be functions performed today in large corporations, or they may be services that have been bundled into the activities of professional service firms. Look for particular functions that today are undertaken as part of a larger or bundled activity that can be broken into the needs of a specific market segment.

Most new products or services are, in reality, incremental improvements on existing ones. In considering this option, there are two important questions to keep in mind: First, put yourself in the place of your target customers. Is your potential new product or service sufficiently better, either in the features it offers or the cost involved, so that customers will shift to your offering from whatever they are using today?

Second, what happens to your proposed business if existing participants in this arena quickly match your improvement in response to the threat of your offering? It’s a tremendous plus for your business opportunity if you have a valid reason to believe this type of fast competitive response is unlikely, or impossible, in the business area you are assessing.

Focus on a dysfunctional industry

In its 2003 annual ranking of the fastest-growing small public companies, Fortune Small Business magazine concluded that inefficient industries or industries in flux are good places to build a supercharged company. Thomas Cigarran, the co-founder of American Healthways, which ranked number one on the magazine’s list, noted that “health care is a mess, and we’ll just keep focusing on what’s not working.” Cigarran told the magazine that great business opportunities arise in industries that are not functioning properly. “There are just so many opportunities to make this sector more functional,” he says. In a dysfunctional industry, this means finding a very specific, meaningful problem (perhaps one that you or a friend has experienced) and developing a useful solution.

Look for unrecognized value

Start by identifying underused assets, and find a way to bring value to the asset owners on an outsourced basis.

Imagine potential pricing innovations

Many businesses are held back because of the way they set prices. Fees based on hourly rates – which are open-ended – as compared to flat rates often discourage purchases. All types of upfront fees, with no guarantee of results, similarly discourage firms from trying new services. Companies that have figured out how to eliminate the risks for the customer in their pricing systems, while still earning a profit, have proven to be solid innovators. In fact, a particularly useful finding of the research and interviews for this book is the significant extent to which businesses built on extreme outsourcing employed strategies related to pricing innovation. Many such businesses found approaches to pricing that worked for the entrepreneurs and made it incredibly easy for prospective customers to say yes. Businesspeople are always concerned about the potential, unchecked cost of service work that is billed by the hour.

The goal is to create a pricing system that makes sense to the customer and permits a far easier yes than what already exists. Of course, to create a winning business it’s not enough to simply establish a fixed fee. This may be a quick route to losing your shirt. You need to find a way to limit your risk or perform sufficient tests so that you know that you will make money on these fixed-fee activities, at least in the majority of cases.

Opportunities too small for large companies

Most large companies won’t pursue new initiatives unless they have the chance to make a meaningful contribution to the bottom line. As a consequence, billion-dollar firms may identify and choose not to pursue million dollar prospects. How do you find out about these abandoned opportunities? If you have an expertise in a specific industry, a careful reading of the trade press is one likely source of information.

Turning a product into a service

Opportunities to provide outsourcing

Identify your core competency