Last week, I gave a talk at NYU SCPS for a class called “From Idea to Empire.”  There were a number of aspiring entrepreneurs in attendance, and they were interested in how to identify new opportunities.  I realized that a lot had been written on how to execute on an idea but very few people devote attention to how to come up with an idea to begin with.  I think there are four primary ways of identifying a potential venture:

-          Applying new techniques to an old practice/behavior

This is perhaps the riskiest way to come up with an idea but also could have the most potential.  It can be a “category-maker” (I am claiming credit for this phrase!).  You are seeing what sort of analogs exist that can be converted into a new form.  For example, Yelp came about as a new way for customers to rate and share their experiences online.  This can be seen as a digital version of the Zagat consumer survey analog.

At PaperG, we saw students at Yale posting flyers on bulletin boards and also putting them up on Facebook.  We realized that the Flyerboard could be an effective online ad platform for locals to post and share what’s going on around town.  This was a gamble, but over time we proved that it could work.

Across the hall, YouRenew.com basically took the idea of the pawn shop and brought it online for mobile consumer gadgets.  People have always tried to sell their used goods on classifieds or to a market-maker like a pawn shop.  Now, YouRenew will offer a price for your goods, purchase them, and then resell them on the secondary market.

-          Running into a problem and not finding a solution

I think this method is less risky since you already know there is some pent up demand.  You either spontaneously run into a frustrating problem that you can’t find any viable solution or you can even just draw up a “bug list” of all the problems in the world that are causing the world not to function properly.  My co-founder, Roger Lee, made SubProfile when he couldn’t find any way to expand his AIM profile.  At its peak, they had a few million users so clearly there was demand for his solution.

-          Finding pricing inefficiencies in an existing process

This method tends to be the least risky if information is properly gathered.  There is also less upside and tends to be less defensible.  You would essentially figure out better ways to manage cash.  At its core, if you can make something in demand significantly cheaper, then people will do business with you.  Ultimately, competing on price isn’t an attractive business though.

However, there still are ways to innovate in this area.  For example, some of co-workers at Elmseed and I conceived of a not-for-profit called Mangrove Partners which would be an investment vehicle for microfinance.  It would raise money to buy microloans cheaper by taking existing donations allocated for some purpose and diverting them in the short-term to buy up loans.  This would allow partner donors to double their publicly stated charitable donations without doing anything more.  With today’s ultra low interest rates, it could also take advantage of the large spread between good-credit financing and microlending rates.

-          Finding market distortions/trust issues and relieving the pain

This method lends itself well particular in the service industry though technology fixes can apply.  Regulations like new accounting laws, payroll taxes, and human resource compliance creates opportunities for people willing to address that specific pain point and handle all the related issues created by these rules.

In addition, you can look for areas where “trust” causes problems.  Consulting firms are a perfect example where their third party position already adds credibility for something that internally you may already know.  Accounting firms, escrow companies, and certifying companies are examples of this.

CO2Stats is a great example of this where they get paid for certifying websites as green so that consumers can know where they want to visit on the web or do business with. This scales very well.

Coming up with a good idea is hard (though not as hard as executing).  I hope this makes it a little easier for some people.