One of the things that intrigues me is theory that has practical application, especially as it applies to economics and business. My students, I truly believe, dislike this feature about the way I teach. They much prefer to struggle on with no theoretical foundation. One of the questions they struggle with in my entrepreneurship course is how to find the idea upon which to start a new business.
Israel Kirzner, a distinguished, retired professor of microeconomics at NYU, wrote an outstanding book, Competition & Entrepreneurship, in which he criticized traditional supply-demand theory (a corner stone of microeconomics) for its failure to explain entrepreneurs and their effects on markets. Kirzner also postulated several interesting conclusions on market opportunity and basically defined entrepreneurs as having an "asymetry of information". Entrepreneurs have a unique, in depth understanding of an opportunity--an insight. (Hint: Kirzner thinks of entrepreneurs on a large scale (think Google), not the neighborhood dry cleaner.)
Marc Andreessen has an interesting post about the work of James Austin, a philosopher and neurologist, which puts forth a theory very similar to Kirzner's but coming at it from a completely different discipline. Austin writes about "chance" or "luck" in the vernacular. Austin defines four types of chance and at least two relate directly to entrepreneurship. Type II luck arises when when one dedicates themselves to a problem steadfastly and eventually comes across a solution (Eureka!). Type III luck involves spotting an opportunity because you are the one person uniquely qualified to realize its significance. Type III luck looks amazingly similar to Kirzner's "asymetry of information".
[As a side note, Austin is a serious student of Zen Buddhism and Kirzner is a Talmudic scholar of some distinction. With no wish to start a debate on religion, it is interesting to me that both men were life long students of rigorous philosophical systems and came to very similar conclusions about "insight". Did I mention my undergraduate degree in Philosophy? :)] Now, back to new business ideas.
So far we have learned that by working on a problem steadfastly we will eventually have the "luck" to find the solution or become so knowledgeable about a subject matter that we will be the unique person to have the insight. Hard work and luck! Not sure how helpful that is, but it sounds about right.
Now to improve your chances let's direct all that effort. Few of us are going to discover calculus, prove the earth revolves around the sun or discover the transistor. We probably need a simpler approach than a breakthrough scientific discovery to launch our new business. Many of the greatest entrepreneurial fortunes have been based on two simple approaches:
- Do something better
- Do something in a new way
Do something better is exemplified by Google. Google did not invent Internet search and was not the market leader in the early days of the Internet. Yet Google managed to create the largest market cap Internet company to date by simply doing search better. I am not trying to take anything away from Google and their incredible success but merely trying to illustrate how the simple notion of doing something better can build a successful new business.
An example of doing something in a new way (with no scientific breakthroughs) involves a private company called Digicel. Digicel, based in Kingston, Jamaica, is the largest cellular carrier in the Caribbean. When Digicel commenced operations in 2001, Cable & Wireless (an international telecom conglomerate) was the market leader throughout the Caribbean for both fixed and wireless telecom. Digicel overcame Cable & Wireless' dominant position by providing islandwide network coverage in every new market and by providing world class customer service to prepaid customers. Not earth shattering ideas, but very new approaches for the Caribbean market. With over 4 million subscribers, Digicel's market cap today would probably be in excess of $1 billion if it listed.
Google and Digicel both built large, very successful companies very quickly. One of the great advantages of these the two approaches outlined above is that the market already exists. New entrants, if successful, can succeed quickly because they are not investing to create a market. Of course, many Japanese companies dramatically proved this point in the 1970s and 1980s when they improved upon market leading products and took huge market share away from American manufacturers.
So, if you are looking to start a new business and need an idea....work hard, wait for the insight and study ways to do something better or in a new way. Practical theory--a wonderful thing!