Don’t choose an industry based on trends, statistics or some list of hot startups. Look in the mirror, focus on your strengths and weaknesses, your experience, whom you want to be and what you like to do–and start a business that reflects who you are and who you want to be.
I hate to disagree with Scott Shane because I like him, I like his books, and I like the way he thinks. But I do disagree with at least some of the underlying implications of his two-post reflection on failure rates by industry. Particularly the matrix he produces as a conclusion:
To bring you up to speed, this starts with Shane’s May 28 post on Small Business Trends, about how small business survival rates vary.
The data show that the four-year survival rate in the information sector is only 38 percent, but is 55 percent in the education and health services sector. That is, the average startup in [the] education and health sector is 50 percent more likely than the average startup in the information sector to live four years. That’s a huge difference.
Moreover, most of the sector trajectories don’t cross; the sectors that have lower initial survival rates generally tend to continue with these lower survival rates every year.
Then he followed up with an even more interesting post late last week, prompted by the obvious follow-up question, which is in one of the comments:
“Good point about selecting an industry with high survival rates for a startup . . . but does not an entrepreneur have to stick to the industry he or she knows? Perhaps the information is valuable for angel investors but I think entrepreneurs cannot change their spots, stick with your strengths.”
Exactly. I’ve posted several times on this blog my general orientation toward starting your business in the area that you know. For example, my previous posts: “Where to Start, What to Start” and “Mirror, Mirror, on the Wall, What Startup?” My general position is that you don’t choose an industry; you stay with the givens, meaning your interest, your experience and, in most cases, your location.
Shane has a pretty good answer to this question:
Entrepreneurs won’t be successful if they try to start businesses in industries they don’t know. We have a lot of data that show that various dimensions of startup performance–survival, sales growth, employment growth and profitability–all increase with the number of years of experience that an entrepreneur has in the industry in which he or she is starting a business.
But Joe and many other people are missing an important part of the success story, operating in a favorable industry. I can tell from the comments on my posts about picking a good industry that people are frustrated by this point because it creates a problem for many people. The dilemma is that if your experience lies in an industry–like autos or steel or retail–that isn’t favorable to startups, you’re disadvantaged relative to your friends in computer software. Their 15 years of experience in software positions them well to start a business; your 15 years of experience in autos or steel or retail does not. The frustrating part is that you can’t change your history.
But this dilemma doesn’t change the facts. Success as an entrepreneur is enhanced by being experienced in a favorable industry; being inexperienced or operating in an unfavorable industry puts you at a disadvantage. Even if you want to fight the odds, it’s an uphill battle because investors, customers and suppliers understand the situation.
. . . which brings Shane to the matrix above.
And my problem with Shane’s conclusion is that I don’t agree with the premise that your odds in a business you don’t know are ever better than your odds in a business you do know.
Statistics are dangerous. Generalities don’t work well. You aren’t just in autos or steel or retail, for example; you’re in your specific auto-related business or your specific retail business. The real odds are about the match between you, your business offering, your target market and your strategic focus. That’s my opinion, though; I might be wrong.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
