• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL

Chapter 1. Selecting the Right Industry > Looking at the Evidence

Looking at the Evidence

If you are thinking of starting a new technology company, you can and should examine how favorable different industries are to new firms. A former PhD student of mine, Jon Eckhardt, who is now on the faculty at the University of Wisconsin, compared the proportion of start-ups in different industries that made the Inc 500, the magazine’s list of the fastest growing young private companies. Looking from 1982 to 2000, Jon found very high levels of variation in this measure (see Table 1.1).[3] For instance, Jon’s data show that the odds of starting a biotechnology company that made the Inc 500 were 265 times higher than the odds of starting a restaurant that made the Inc 500 and that the odds of starting a computer software company that made the list was 823 times higher than the odds of starting a hotel that made the list. In short, an average entrepreneur starting an average new firm will be more likely to create a high-growth private company or a newly public company in some industries than in others.

Table 1.1. Percent of New Firms in Selected Industries That Have Become Inc 500 Firms.
IndustryPercent of Start-ups
Pulp mills18.2
Computer and office equipment4.2
Guided missiles, space vehicles, parts3.3
Nonferrous rolling and drawing2.4
Railroad car rental2.2
Measuring and controlling devices2.0
Paper mills2.0
Search and navigation equipment1.9
Communications equipment1.9
Medical instruments and supplies1.8
Footwear, except rubber1.5
Security and commodity exchanges1.4
Steam and air-conditioning supply1.2
General industrial machinery1.2
Photographic equipment and supplies1.1
Manifold business forms1.1
Household appliances1.0
Electrical industrial apparatus1.0
Legal services0.008
Eating and drinking places0.007
Carpentry and floor work contractors0.006
Real estate operators0.006
Hotels and motels0.005
Painting and paper hanging contractors0.005
Retail bakeries0.005
Grocery stores0.005
Used merchandise stores0.004
Automotive repair shops0.004
Beauty shops0.004
Residential care0.004
Video tape rental0.004

Stop! Don’t Do It!

  1. Don’t start a business without investigating how favorable the industry is to new firms.

  2. Don’t fight the odds. Don’t start a business in an industry that is unfavorable to start-ups.

So how do we explain these data patterns? Unless most of the talented entrepreneurs are drawn to some industries (e.g., biotechnology) and not others (e.g., hotels), some industries are just better for starting new firms than others. This, of course, means that you need to understand the characteristics of industries that make some of them better for starting firms than others if you want to increase your chances of success. Research has shown that four different dimensions matter: knowledge conditions, demand conditions, industry life cycles, and industry structure.

  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint