The more technology-oriented an industry is, the better it is for start-ups.

Every company was a start-up at one point. McDonald’s was originally a single location in San Bernadino, Calif., started by two brothers. Henry Ford borrowed $28,000 from investors to start his auto company. Two teachers and a writer opened the first Starbucks Coffee location in 1970. A dream and a plan are often the only things an entrepreneur starts with, and for them the road can be a dangerous one.

For example, consider the fictional case of Bill Williams, a dog walker who works for a large, national dog-walking firm. Bill enjoys his job, but sees himself as more than another hourly worker – he wants to be the boss someday. Bill wants to lead, rather than be led around by a herd of dachshunds. One night, while cleaning off his shoes, he decides to go into business for himself.

Dr. Scott Shane teaches a class on entrepreneurship at Case Western Reserve University and has written a book on the subject. He says many entrepreneurs fail before they officially open their doors. “The first big challenge is coming up with a viable business idea,” he says. “It turns out that a pretty large number of people start new businesses that probably shouldn’t have been started because there’s no need for that product or service.”

Know Your Market
In Bill’s case, his idea couldn’t be simpler – his own dog-walking company. Shane says Bill is hardly alone among entrepreneurs, as 60 percent of them start their businesses in the same industry as their former employers. However, that isn’t the best company to be in. “The typical person is working in an area where the prospects for a new business are pretty poor,” Shane says. Bill’s former employer is one of several dog-walking options in his hometown, which makes his idea practically a non-starter – he realizes he’ll be crowded out of the market almost immediately.

“In terms of what you need to look for, you need to look for things that are uncommon,” Shane says. Robin Richards, chairman and CEO of mass-notification provider NTI Group, says that’s exactly how he hit on his first entrepreneurial endeavor in the early 1980s.

“I did not have the wherewithal to go to law school without working,” he says. “I had to be making money while I was sleeping.” While racking his brain for moneymaking ideas, he also racked up a lot of time playing video games in arcades. From that, he got the idea to set up video games in convenience stores and restaurants. It was the first time arcade games were taken out of arcades.

The reason most successful start-ups gain a hold in the market is because the skill sets necessary for them are much rarer, making competition scarcer and the start-up more unique. Twenty-five percent of INC.’s fastest-growing companies from 1982 to 2002 were software firms, Shane points out, and a software start-up is 800 times more likely to be on that list than a retail start-up.

“The more technology-oriented an industry is, the better it is for start-ups,” Shane says. Bill still has a typewriter on his desk, so that possibility never enters his mind.

Capital Ideas
Dejected that his initial idea flopped, Bill watches a movie to cheer up. Unfortunately, he’s unable to find his favorite DVD, but it’s this frustration that gives him his next idea – a DVD alphabetizing service. He gets a small business loan of $25,000 from his bank, converts his laundry room into an office and within a few days DVD A-Z ASAP Inc. is born (Bill’s not the best at naming things). Shane says getting a bank loan rather than seeking the help of venture capitalists or business angels is a smart move for Bill.

“Usually, when people look for money, they look in the wrong places because they believe in the hype about where people get money,” Shane says.

What’s more important than how much initial capital entrepreneurs receive is whether or not it’s the right kind of financing for their companies. Most start-ups don’t grow fast enough for external investors’ liking, he notes, and they accrue too much debt in the first few years.

Barry Thomsen, founder of plastic card manufacturer Colorado Cards and Magnets, suggests that entrepreneurs keep an additional 50 to 100 percent of their companies’ capital in reserve, possibly through credit lines. Bill is able to establish a $15,000 line of credit for DVD A-Z ASAP in case of emergencies.

Hanging Tough
The first several years are tough, Richards says, and for Bill to keep his employees motivated to serve customers, he needs to set achievable psychological rewards for them. Such goals, like serving the 1,000th customer, are tangible results that don’t require the company to be necessarily solvent to reach. “You invent your milestones that you’re relatively certain aren’t easy to hit, but you can hit them,” Richards says.

New entrepreneurs need to do a lot of marketing to reach customers, Thomsen says. Marketing includes not only advertising and direct mail, but also intangibles like how the entrepreneur presents himself or herself to potential customers. “I always say the owner’s attitude is a big chunk of how your customers are going to view you,” Thomsen says.

Catherine Lee founded corporate training firm CDL & Associates after a career in politics and as a stay-at-home mother. She says many entrepreneurs overvalue or undervalue the services or products they provide, resulting in either a lack of customers or a lack of respect from customers.

“Oftentimes we don’t put the value that we have on ourselves as entrepreneurs, so you end up working for a buck-ten an hour for a project because you need it,” she says. “That takes research.”  

Resiliency is key, Shane says, because the odds are definitely stacked against Bill and others like him. “The typical entrepreneur is actually a failure, and by that I mean statistically, the typical person who starts a business fails within five years,” he says.

As Bill closes down his office for another day, the future is, as always, uncertain. But, provided he’s prepared himself properly and keeps his chin up, in several years we could be living in a world where we won’t know what we ever did without DVD alphabetizing services.