Discovering and Creating Opportunities
Do small business entrepreneurs discover opportunities that already exist or do they create them?
I recently talked to a Canadian entrepreneur who was pitching a crypto service for bookkeeping and accounting firms. He told me that he and his partner, experienced traders with a deep understanding of the industry, were chasing an enormous opportunity at the intersection of crypto and tax. This was a large and apparently untapped market that their startup, the first of its kind in Canada, was uniquely positioned to serve. He was well-spoken and enthusiastic but, in the end, not convincing — though that was likely my fault. I couldn’t quite ground the buzzwords and concepts he kept spinning in the air. When it comes to crypto, as per the lyrics to the Drake song, I’m sitting on the bench, I don’t really play. I told him I’d discuss his service with our CPA team and follow up if they saw a need.
Our CPA team didn’t see the need. From where they stood, the present state wasn’t in need of fixing. Clients already provided the information they needed to file returns without much fuss. No fuss, no pain, no benefit. So we were a no. But that’s just life at the start, isn’t it? Door knocking, cold calling, promoting… rejection. And especially when it comes to starting and selling something new. For each yes, there's going to be a lot of nos. Ross Perot was famously “denied bids for contracts 77 times before receiving his first contract” for EDS. And Airbnb was rejected by seven investors who could have had 10 percent of the company for $150,000 in 2008. Very, very few new businesses grow and succeed; and vanishingly few grow and succeed like EDS and Airbnb. Most can’t get past the “not interested” and “so what exactly do you do again and why should I care” hurdles they face out of the gate. Nobody just opens the gate and marches right in.
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So, yeah, our firm wasn’t convinced, but so what? We don’t decide. Like King Charles, we’re just some guys. The crypto entrepreneurs have to take what they can from the interaction, log the rep, and keep going. It takes patience and conviction to innovate (if that’s what they’re in fact doing — again, I don’t know that it is).
In his 1837 speech, The American Scholar, Emerson had some encouragement for anyone attempting to gain acceptance for an uncommon or new idea: “… if the single man plant himself indomitably on his instincts, and there abide, the huge world will come round to him.” Trust your instincts and never give up is a loose translation; both familiar, if unhelpful, pieces of advice we hear often in the modern world. What’s more helpful is how Emerson described this “indomitable” man’s work as “the study and the communication of principles, the making those instincts prevalent, the conversion of the world” — a nice definition of marketing and sales, from a man who knew nothing of marketing and didn’t care much for sales.
In fact, Emerson thought the principles by which business operated in early America hindered and discouraged men from pursuing more meaningful, more significant lives. Even if the target was unintended, I think his words apply to some real business concerns. The “conversion of the world” is a wonderfully evocative phrase to describe the work facing an entrepreneur, a new business owner, anyone launching a new product or service. Well, maybe not the conversion of the entire “huge world” but some sizeable part of it, if there’s going to be a whiff of profit and success.
Darren and I have tried this on. Our first business, an online-offline social network, was an adventure in dreaming up an idea, planting ourselves in our instincts and attempting to make “those instincts prevalent.” It didn’t go well. Not even two busloads of the whole world came around. Eventually, like rational, out of cash small business people who are getting no traction, we gave up.
But thankfully for our bruised souls and entrepreneurial careers, there was another option, an alternative to the idea of the entrepreneur as a creative, world-changing hero. In this alternative, the entrepreneur is more a careful observer and informed risk-taker, someone who discovers and seizes opportunities rather than someone who creates and champions them. This more direct and deliberate view is summed up in one of Buffett’s letters to his shareholders: “If you want to get a reputation as a good businessman, be sure to get into a good business.”That is, it’s not all about you, the entrepreneur, your talents and your reality-distorting powers. There’s this important prior question of which field you decide to apply those talents and powers to in the first place.
Buffett elaborates on why choosing the right opportunity matters: “My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
Spotting and choosing the right boat or building a boat that no one’s ever seen the likes of and convincing others to get in: these are shorthand for two research perspectives (described in chapter 2 of Entrepreneurship, A Very Short Introduction) on where opportunities to make profits come from in business. Do entrepreneurs discover opportunities or do they create them? Or is it a bit of both?
The discover camp says opportunities are already “out there” and entrepreneurs are special, alert people who are able to find them. These opportunities are often gaps in market supply and demand: products or services that the market wants (or would want) but that aren’t being provided, at all or at an appropriate price. Entrepreneurs are special not because of their creative or persuasive talents but because they notice these overlooked gaps and needs better than most. And that’s because they’re constantly looking for them first of all. But also because they’re good at processing and combining the stream of information and signals they’re getting from social and business networks, the media, the Internet, and the economy; and sorting out and understanding the patterns that point out a profitable opportunity. From the discover perspective, entrepreneurs spot and select good boats.
Examples from the Entrepreneurship book include Austin Reed, who at the turn of the 20th century, “noticed that growing numbers of white-collar workers descending on the City of London wanted to dress as smartly as their masters, at affordable prices.”He “opened his first men’s tailoring store in 1900” and went on to “play a key role in crafting British men’s formal fashions, particularly for generations of middle managers.” (The firm proved durable yet mortal; after 116 years, it went into administration in 2016 and was bought out by another retailer.) Or Xiaoyan Shi, who “spotted the huge potential for the domestic furniture market in China and, with her husband, established a small furniture factory that produced low-cost Western-style furniture, which generated instant customer recognition.” She grew this factory into a business that made her a billionaire (according to the information in the book; I couldn’t verify this through other sources). And, finally, Peggy Yu, co-founder of Dangdang.com, who “noticed the success of online bookstore Amazon.com and realized there was a gap in the market for a similar service in China” and “she perceived” that this gap was a “vast lucrative potential market.”
The common theme is that opportunities were “noticed,” “spotted,” “perceived” by these entrepreneurs. Opportunities are out there, like pieces of a puzzle; someone has to see the pieces and put them together. There’s more work involved, naturally, before getting the necessary resources together and taking action, work in testing the opportunity to determine its risk and reward: things like market research, competitive analysis, business plans, net present value calculations. Again, information and analysis are crucial in this because the discovery model “assumes that a new firm is sufficiently similar to an existing business so that historical information will inform the decision of the new firm, and the external environment is sufficiently stable so that outcomes from the past will be relevant to the current situation and the future.” Once the decision is made to pursue a discovered opportunity, though, it’s a project with a predetermined end goal: fill the perceived gap, supply the market need. No iterations. And, hopefully, no surprises.
Where the discovery perspective sees entrepreneurs trying to predict the future, the creation perspective sees them trying to control and shape it; because, from the creation perspective, the future is basically unpredictable. “At the start of the opportunity-creation process, entrepreneurs are assumed to have incomplete information. Markets cannot be defined, and consumers are not aware of their future preferences.”In this environment, “entrepreneurs do not recognize opportunities first and then act; rather, they act, wait for a response from their actions — usually from the market — and then they readjust and act again.” This is more nuanced than the “indomitable man” I used to illustrate the creative process earlier. The entrepreneur isn’t fixed on a single idea fighting to bring the world around; instead, he’s playing with ideas and trying variations to see what works. He doesn’t know exactly where he’s headed. He expects to be surprised and not all surprises are bad.
It’s how Jasper Johns describes the creative process with respect to his art. “It’s simple. You just take something and do something to it, and then do something else to it. Keep doing this and pretty soon you’ve got something.” Or how George Saunders describes “the series of instincts, thousands of tiny adjustments, hundreds of drafts … the mysterious process writers go through to get an idea on to the page.”
With opportunity creation, entrepreneurs aren’t working from a systematic plan; they’re making moves and adjustments that feel right (given what they’ve seen so far) trying to find a product that a large enough and lucrative enough market will flip out for. Rather than trying to precisely predict what the market needs or what they can expect to gain, entrepreneurs enter into this process with a sense of what they have (resources, skills) and what they can afford to lose in terms of time and money — their affordable loss. Then they keep iterating until their loss limit is reached — well, they stop in theory, just not always in practice — or they find a product-market fit.
(Product-market fit is a big deal in the tech, startup, and VC world. Too big of an idea to introduce here, but, if you’re interested, I’ve found these resources helpful in learning the thinking behind it: Disciplined Entrepreneurship, The Lean Startup, The Pmarca Guide to Startups.)
Some examples of creating opportunities through trial and experimentation include James Dyson (“Through the long and costly process of developing his new technology, which included borrowing £600,000 to set up his company and developing some 5,000 prototypes, Dyson had to make the judgement that his idea would eventually work and that there would be a market for it.”), S. Truett Cathy (“Serving a breaded, boneless chicken breast between two buttered buns is a seemingly simple idea — but it was a novelty for its time. Truett Cathy experimented for years at the Dwarf Grill in Hapeville, GA when in 1964, he finally arrived at the perfect recipe.”), and a long line of tech startups (Airbnb, Slack, Segment, etc.) that kept iterating on ideas until they had profitable, high-growth business models.
Opportunity for small service businesses
A lot of small businesses are service businesses, and they start not because someone discovers or creates an amazing opportunity but because someone decides to work for themselves. Like employees, these folks exchange their skills and knowledge for a living, but more on their own terms. If their skills are unique and in demand — if they can consistently solve problems for clients who want those problems solved —then they can command high rates and do quite well. Usually, though, their skills aren’t unique. But, hopefully, there’s enough demand to go around — there’s rarely upfront effort to confirm whether that’s actually the case. If they’re capable, persistent, and lucky, they find a few customers and get money coming in. If they’re really capable, persistent, and lucky, they find a few more customers, and a few more, and they keep going until they’re at their personal capacity. At this point, many will feel they’ve reached their goal. The new goal then becomes maintain what they have and keep taking home a comfortable wage.
Some others may push further; they hire employees to take on more work than they can personally handle. This opens up the problems of management and finance, a new set of challenges they’re not prepared for or comfortable handling. So they’re careful to set the limit of their ambition very close to the limit of their management and financial comfort zone. The opportunity in these businesses is for their owners to take what they know and what they’re good at and use it to create a life or lifestyle outside of the employment model. That’s the goal. If and once they’ve reached it, they’re very hesitant to take on more risk.
Our small business context
Looking back on the businesses I’ve started with Darren (and later with Kris and Ashley) in the past decade and a half, I think we’ve always leaned toward a hybrid model: we’d discover (what we perceived to be) a gap in the market, and then we’d attempt to create a product-market fit by trying a solution and tweaking it to see if we could make it work. We’d keep going until the money or interest ran out. The closest we came to having a clear plan of the business we wanted to build when we started building it was Origami, our most successful venture to date. But the plan was never formal and there was a lot of improvising to get Origami up and running. I think this is the typical experience for small business owners, because the majority of small business owners are novice entrepreneurs who pursue one opportunity that they part discover and part create.
There’s a scene in Succession in which Lukas Matsson, tech billionaire, tells Roman Roy, possibly a media billionaire, that “Success doesn’t interest me anymore. It’s too easy. Analysis plus capital plus execution… Anyone can do that.” So easy and anyone can do it! And maybe anyone can once they already have obscene amounts of capital. It’s the principle of success to the successful. There’s a certain amount of “getting it” that comes with success. This improves future odds. And, because of earlier success, the opportunities may start looking for the successful, like fat pitches that get thrown Warren Buffett’s way. And the successful are just going to be better players after wins: better at analysis, better at capital, better at execution.
We’re more careful about starting businesses now. Common sense dictates that we should give most, if not all, of our attention to improving the results of our working business — the opportunity we’ve managed to convert — instead of diverting that attention to the unknown and untried opportunities we’ve yet to discover or create. No one’s serving up fat pitches our way. But we still pay attention; we search for gaps and ways to innovate. The requirement we have now, though, is that if either of us wants to pursue an opportunity, we have to formally convince the other, and if the other can’t be convinced to pursue it, then we don’t. Because it’s a new requirement, there’s no formal template for making a pitch. I’ve been thinking about trying a couple of things in the business. Before, we’d just fire away and commit time and money without testing the opportunity in any way. Now I have to come up with a template for my first pitch to Darren. It’s a small step and a big leap. We’re still exploring opportunities but in a more grown up way.
The Anxieties of Business Change — The Essays of Warren Buffett: Lessons for Corporate America.
Ch. 2, p. 30, Ibid.
Ch. 2, p. 34, Ibid.
Alvarez, S.A., & Barney, J.B. (2007), Discovery and creation: Alternative theories of entrepreneurial action. As quoted in Are opportunities discovered or created in social entrepreneurship?