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Recognizing Opportunities and Generating Ideas ICRACKED Solving a Problem and Building a Business in an Exploding Industry

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n mid-2009, AJ Forsythe had a problem. While a student at California-Poly San Luis Obispo, he broke his iPhone twice within two days. The first time occurred when he was exiting his car. He dropped his iPhone and cracked the screen. That accident cost him $200 and an hour’s trip to the Apple store. A few days later the same phone broke again, when his roommate casually tossed it LEARNING OBJECTIVES to him and it hit a ceiling fan. Determined to fix the phone himself this time, Forsythe got help from some engineering students and used a small screwdriver and dental pick to replace the phone’s shattered screen. Incredibly, shortly after these two incidents, Forsythe’s roomnities and ideas. mate broke his iPhone. At that point, Forsythe realized that repairing 2. Describe the three general approaches iPhones was a promising idea for pursuing a business opportunity. entrepreneurs use to identify To start, Forsythe gave a friend $20 to design a flyer, and began opportunities. putting the flyers up around campus. Within two weeks, he had his 3. Discuss the personal characteristics of entrepreneurs that contribute first customer. Forsythe set up a Facebook page and a Twitter account to their ability to recognize business to generate additional awareness and sales, and the business—which opportunities. he named iCracked—started to take shape. Profit margins were good. 4. Identify and describe techniques At $75 a phone, Forsythe was making about $40 for less than an entrepreneurs use to generate ideas. hour’s work. 5. Discuss actions to take to encourage From the outset, Forsythe saw iCracked as a business that could continuous development of new ideas inentrepreneurial firms. be replicated on other college campuses. He spent the summer of 2010 in Dallas, his hometown, pitching the idea to local campuses. Forsythe brought on a partner in the fall of 2010, Anthony Martin. The two met through a mutual friend. Martin’s best friend in high school was Forsythe’s best friend in college. At the time, Martin was running a textbook exchange platform at UC Santa Barbara. Martin and Forsythe were both college entrepreneurs and enjoyed talking to each other about business. Martin liked the opportunity Forsythe was pursuing, particularly given Apple’s growing market share in the smartphone industry. Martin put the first investment into iCracked to buy inventory and set up a website. The two began putting job listings on college campuses across the United States. Within 30 days, they had their first website up and 23 repair technicians on college campuses across the country. They called their repair technicians “iTechs.” In the nearby photo, Anthony Martin appears on the left while AJ Forsythe is on the right. 41

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Since that time, iCracked has continued to expand, and the company now has over 500 iTechs spread over most of the United States and eight foreign countries. Initially, a customer would be put in touch with an iTech technician, and they agree on a place to meet. Starting in late 2013, the service improved, and the iTechs now travel directly to the customer. They repair broken screens, LCDs, bad batteries and all other small parts problems, as well as water damage for Apple iPhone, iPad, and iPod models. As long as the logic board is intact, which it usually is, the repair can be made. The repairs typically take between 10 and 30 minutes and cost between $70 and $170. They also purchase used iPhone, iPad, and iPod devices. The iTechs aren’t full-time employees of iCracked. The firm makes money by selling parts to the iTechs and connecting them to customers. iCracked is extremely diligent about who becomes an iTech. Every applicant is subject to a five-step interview process and a background check. Thousands apply, but only 2 percent of applicants are accepted. The firm adds 50-70 new iTechs each month. Over time, iCracked technicians have seen all manner of iPhone catastrophes, from pet pigs stomping on them, to iPhones being run over by trucks, to phones falling out of the hands of skydivers. Often badly damaged, the phones can usually be repaired and restored. Offering insurance on iPhones is a new product line iCracked is considering. The insurance is expected to cost around $6 a month, with a $20 deductible. For people in areas where iTech technicians aren’t yet available, iCracked offers the option of sending the broken phone to the company’s headquarters, where it will be fixed and sent back the same day. iCracked also continues to sell its do-it-yourself iPhone Screen Repair Kit. iCracked believes it is just getting started. The company had sales of around $2million in 2012 and $10 million in 2013. It sees additional opportunities in its core business and in other areas. In regard to its core business, it’s estimated that within the next five years, there will be five billion smartphones in the world. About 30 percent of smartphones are damaged and at some point need repairs. iCracked has already positioned itself as the world’s largest and most efficient iPhone repair and buyback service. It plans to soon extend its service to Android-equipped phones. As a result, iCracked is positioned to dramatically increase its revenue in smartphone repairs, buybacks, and additional services. Its smartphone insurance service is also expected to significantly add to the firm’s sales revenue. In regard to other areas, in early 2012, Forsythe and Martin were admitted to Y Combinator, based on the strength of their company’s early traction. Y Combinator is a business accelerator that provides seed money, mentoring and connections to promising technology startups. The three-month Y Combinator experience challenged Forsythe and Martin to see iCracked in a new light and as a much bigger potential opportunity. Forsythe and Martin believe their network of iTech technicians is the company’s most valuable asset. They foresee the technicians eventually providing repairs, installations, and additional service across a variety of industries for a wide range of clientele.

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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 business opportunities.

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The Differences Between Opportunities and Ideas Essentially, entrepreneurs recognize an opportunity and turn it into a success- LEARNING OBJECTIVE ful business.1 An opportunity is a favorable set of circumstances that creates 1. Explain the difference a need for a new product, service, or business. Most entrepreneurial ventures between opportunities and ideas. 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 recognizes 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 opportunity and launch an e-commerce company. Other firms are internally stimulated, like iCracked. An entrepreneur recognizes a problem or an opportunity gap and creates a business to address the problem or fill the identified gap. Regardless of which of these two ways an entrepreneur starts a new business, 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 opportunity 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 entrepreneur 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 market 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

Attractive

Timely

Opportunity (rather than just an idea)

Durable

Anchored in a product, service, or business that creates or adds value for its buyer or end user

FIGURE 2.1 Four Essential Qualities of an Opportunity

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advantages over already established competitors or targeted a niche market in an exemplary manner. Bing, Microsoft’s search engine, is gaining ground with approximately 18 percent market share (compared to 67 percent for Google), but only after Microsoft has exerted an enormous amount of effort in head-tohead competition with Google.2 It is important to understand that there is a difference between an opportunity 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 opportunity to begin with. Before getting excited about a business idea, it is crucial to understand whether the idea fills a need and meets the criteria for an opportunity.

Three Ways to Identify Opportunities LEARNING OBJECTIVE 2. Describe the three general approaches entrepreneurs use to identify opportunities.

There are three approaches entrepreneurs use to identify an opportunity their new venture can choose to pursue (see Figure 2.2). Once an entrepreneur understands the importance of each approach, s/he will be much more likely to look for opportunities and ideas that fit each profile. We discuss the three 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’s 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.3

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 simultaneously 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 FIGURE 2.2 Three Ways to Identify an Opportunity

Observing Trends

Solving a Problem

Finding Gaps in the Marketplace

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Rick gomez/Comet/Corbis

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, specialty wines, insurance, and travel.

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 environmental 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. Economic Forces Understanding economic trends is helpful in determining areas that are ripe for new business ideas, as well as areas to avoid.4 When

FIGURE 2.3 Environmental Trends Suggesting Business or Product Opportunity gaps

Economic Forces State of the economy Level of disposable income Consumer spending patterns

Social Forces Social and cultural trends Demographic changes What people think is ”in“

Technological Advances New technologies Emerging technologies New uses of old technologies

Political and Regulatory Changes New changes in political arena New laws and regulations

Business, Product, or Service Opportunity Gap Difference between what’s available and what’s possible

New Business, Product, and Service Ideas

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the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives. In contrast, when the economy is weak, not only do people have less money to spend, they are typically more reluctant to spend the money they have, fearing the economy may become even worse, and that in turn, they might lose their jobs because of a weakening economy. Paradoxically, a weak economy provides business opportunities for start-ups that help consumers and businesses save money. Examples include GasBuddy and GasPriceWatch.com, two companies started to help consumers save money on gasoline. A similar example is WaterSmart Software, a 2009 start-up. WaterSmart Software sells software to water utilities that makes it easier for their customers to save water and money. When studying how economic forces affect business opportunities, it is important to evaluate 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 responsible 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 boomers are another potential 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. 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 previous generations. For example, baby boomers tend to take pride in their homes and lawns. Recent data indicates that baby boomers who own homes are 21 percent more likely than all American adults to have spent $10,000 or more on home improvements.5 Other areas that baby boomers spend heavily on include health care, travel, and consumer packaged goods. The high cost of energy, coupled with a desire to be socially responsible, has also spawned a growing number of startups that are developing products and services that help business and consumers become more energy efficient. An example is Nest Labs (www.nest.com), a 2010 startup. Nest Labs—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.6 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 public schools was not a wise one during the recent economic downturn. In the United States—and other countries, as well—public schools have been hit hard by budget cuts from governmental funding agencies. The cuts have significantly reduced the ability of schools to purchase new products and services. Social Forces 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 of the fact that people are busy and often don’t have time to cook their own meals. Similarly, social networking sites like Facebook, Twitter, 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

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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 workforce ■ ■ ■ ■

Increased participation in social networks 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 ...