Where entrepreneurial ideas and opportunities come from?

Mojca Svetek | 20 January 2024

To be entrepreneurs people need to identify (and exploit) opportunities. However, not everyone has the same knack for identifying entrepreneurial opportunities. Luckily, researchers have nailed down a few factors that are tied to being good at opportunity recognition. And the good news is that most of them can be nurtured.

Not every idea is entrepreneurial opportunity

In the sphere of entrepreneurship, ideas are necessary, but not sufficient condition, for entrepreneurial opportunities to emerge. In entrepreneurship an idea could be understood as the initial perception of a potential opportunity. It is the process of exploration and testing of the idea, where the initial idea is reshaped and refined. In this learning process, the entrepreneur molds insights into an emerging business concept they believe could be profitable. A business idea becomes a business opportunity only if it fulfills three criteria: it’s desirable (meaning a market need exists), feasible (indicating that a product to satisfy this need can be developed), and viable (suggesting that a profitable business model can be created). Sometimes, a fourth criterion is added: adaptability (referring to the capability to compete and manage macro-environmental threats).

Not all opportunities are created equal

Opportunities differ in how uncertain they are. And this uncertainty has two sources: market demand and the product (market supply) on which the success of a new venture depends. The first type of opportunity is characterized by a low level of uncertainty, since both a product and a demand for that product are fairly obvious. The opportunity to bring them together just needs to be “recognized” and exploited. An example of such an opportunity would be the opening of a franchise of a popular fast food chain. In developed economies, about 85% of entrepreneurial activity is a result of such opportunity recognition. The second type of opportunity is characterized by an obvious demand and an unknown product that could satisfy that demand or vice versa. The non-existent side must first be “discovered” before such an opportunity can be exploited. An example of such an opportunity would be the discovery of a cure for a disease (the demand is obvious, but a product has yet to be discovered). The third type of opportunity is characterized by complete uncertainty, as both the product and the market are unknown. Therefore, this type of opportunity must be “created“. This is done through product innovation and the creation of previously non-existent markets, the so-called blue oceans.

Entrepreneurs shape opportunities

Given that entrepreneurial opportunities arise from how humans perceive and make sense of new information, using prior knowledge and cognitive capacity to value that information, it is safe to say that entrepreneurial opportunities aren’t external to entrepreneurs – something that entrepreneurs just happen to stumble upon. Instead, they are better understood as something entrepreneurs incubate or develop. To illustrate, two people might receive identical information, but one could identify an opportunity while the other might not or they might identify entirely different opportunities despite receiving the exact same information. This arises from differences in their know-how, experience, cognitive capacity, characteristics, and resources which affect their ability to evaluate the provided information.

Environmental conditions matter

This isn’t to suggest that environmental conditions do not matter. In fact, opportunities arise from changes in the environment in which an individual operates. Changes in technology, regulations, social norms, and demographics create sets of information, which serve as input to entrepreneurial opportunity recognition. Disposable income, geographic location, policies, availability of capital, and other factors are considered when evaluating business ideas.

Paying attention to the environment is key

That being said, it would be wrong to assume that (most) entrepreneurs get new ideas by systematically searching for information (about trends, competitors or recent research breakthroughs) to find new ideas. It would be even more misguided to claim that entrepreneurs generate their ideas using methods such as brainstorming, brainwriting, problem logs or other ideation methods. Most entrepreneurs get ideas and notice opportunities by being alert and not systematically searching for them. The problem with alertness (at least from an educational perspective) is that while it describes how many entrepreneurs find opportunities, it offers aspiring entrepreneurs virtually no guidance on how to recognize opportunities other than the advice to be alert. To be alert means to pay attention, it means to observe. So, to become alert, one needs to keep their eyes and ears open to the things that are happening around them and adopt a curious and inquisitive attitude towards the things they notice. Research has shown that serial entrepreneurs are much more likely to identify entrepreneurial opportunities compared to others. This is at least partly because they simply enjoy thinking about and looking for new business opportunities, even when they have no need or time to start a new venture. In other words, alertness is just a way they approach their daily lives.

The most valuable source of ideas is experience

Alertness works particularly well in combination with rich prior information about markets and high intelligence. Alert people are able to spot opportunities because they have both the right information, which includes prior knowledge, and cognitive capacity that enables them to value this information appropriately. This prior knowledge usually comes from education and accumulated experience, both personal and professional. By far the most valuable source of business ideas is professional experience. This is because it provides insight not only into the problems of customers, but also into the practices and players in the industry. These insights can then trigger ideas for new or better ways of serving customers. But experience also has its downsides. Extensive experience in an industry has been shown to lock people into certain ways of thinking, making them less inclined to innovate and differentiate themselves from incumbents.

Networks are a valuable source of knowledge

Not all knowledge exists within the individual. Networks are a valuable source of external knowledge. Those who maintain an extensive network of social and professional contacts open themselves up to a wealth of ideas and opportunities. Research suggests that not all networks are equal. The most valuable social network for identifying opportunities may be one that includes entrepreneurs and others in the entrepreneurial ecosystem, as these individuals are more likely to be alert to entrepreneurial opportunities and help others recognize opportunities in their environment.

Some people are just better at spotting opportunities

Part of the ability to identify opportunities may be genetic. The ability to recognize, value and use available current and prior information is closely tied to intelligence. Genetic factors play a major role in traits such as intelligence and account for about 80% of its basis. Traits such as creativity, on the other hand, are primarily influenced by environmental factors. Studies on identical and fraternal twins suggest that 45% of the ability to recognize opportunities is due to genetic factors. There may be something to the argument put forward by several entrepreneurship researchers that a combination of high intelligence and creativity is crucial for recognizing opportunities, especially niche opportunities.

But, for the most part, identifying opportunities can be learned

Budding entrepreneurs can significantly improve their chances of identifying business opportunities in a number of ways. Based on current evidence, three strategies appear to be particularly promising gaining relevant work experience, fostering relationships with entrepreneurs, and cultivating alertness, curiosity, and inquisitiveness. These strategies complement each other well and can significantly increase the likelihood of identifying entrepreneurial opportunities.

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