Field of Dreams With capital flowing and deep technological change afoot, it's the best time in years to pitch a new business. Helped by a panel of top VCs, we found nine great business opportunities just waiting for the right entrepreneur.
(Business 2.0) – The vintage vinyl booths at Buck's diner in Woodside, Calif., a few miles from venture capital central along Sand Hill Road, are extra-long, and the wedge of apple pie with vanilla ice cream is extra-colossal. During the boom, many a multimillion-dollar deal was sealed over this little establishment's well-worn tables--though the old place hasn't had that anything's-possible buzz in a long time. Still, on a recent spring afternoon, there's a definite tingle in the air.
Over coffee and dessert, Bill Burnham, a VC at Softbank Capital Partners, listens to a pitch for a company that uses nanotechnology to solve a stubborn problem for biotech researchers. "This is an apple of an idea," he says, as he tucks into a heaping forkful of pie and ice cream. "Who wouldn't want that?" Then he lists what seem like a hundred reasons that he might "run from the room screaming" instead of investing. But he doesn't rule it out. If the physics could be proven and the right team of rock-star scientists and hard-nosed businesspeople could be assembled, Burnham says, he'd be seriously tempted.
Haltingly but unmistakably, VCs are getting their appetites back. Traffic jams in Silicon Valley are getting worse and billboards along Highway 101 are filling up, to cite two informal but much-watched barometers of the Valley's business climate. Encouragement is starting to seep out of more traditional indicators as well: Research from VentureOne/Ernst & Young shows a significant uptick in venture deals funded during last year's fourth quarter, reversing three years of decline. And as a share of the national economy, corporate profits are at a level not seen since the 1960s, while capital spending is no higher than it was during the 1991 recession. Economists say a gap that wide is a strong sign that business investment is about to take off again.
But for anyone with an entrepreneurial itch, easier money may not be the most exciting aspect of this recovery. It is, instead, the wealth of opportunities.
While VCs tightened their purse strings for the past three years, the world didn't stand still. Emerging technologies, new markets, cultural shifts--the natural forces of change in a dynamic economy--quietly fertilized vast green fields of possibility. Broadband, for example, made its way into 21.5 million homes, more than four times as many as in 2000. That opens the door wide to fortune seekers in a host of as-yet-unestablished digital-media enterprises. The VCs certainly want a piece of it: "We are rapidly reaching an inflection point where the digitization of consumers' everyday lives will be the dominant factor for venture funds," says Bill Tai, a general partner at Charles River Ventures. Other financiers have set their sights on potential riches in nanotech, biotech, wireless, e-commerce, and other technologies whose payoff seemed remote three years ago. And it's not only tech: The graying of the population, to name just one massive trend, will create an avalanche of demand for creative health-care delivery, fresh retail concepts, and other services not yet dreamed of.
Journalists normally could participate in this rebirth only by reporting on new enterprises as they open. But this story takes a look ahead, by trying to imagine the hot businesses of the future before they launch. To do that, we canvassed a host of VCs, entrepreneurs, and business visionaries to identify the most fertile ground for startups. We then took the process one reality test further--by pitching hypothetical new businesses to a panel of seasoned Sand Hill Road VCs. Below you'll find the nine most promising of those ideas, with initial capital requirements ranging from $20,000 to $500 million. (We've also distilled what we learned from selling our ideas to the VCs; see "7 Keys to the Perfect Pitch," page 98.)
The encouragement that greeted our pitches should hearten anyone looking to found a business today. We're not suggesting that any of these nine are guaranteed hits--there's no such thing--but the opportunities they address are real. And yes, you're free to take any one of these ideas and run with it yourself. Better yet, let them serve as reference points for your own best idea, and take one resonant piece of advice from Softbank's Burnham on how to court the people to fund your dream. "Appeal to their sense of hope," he says. "That's what keeps Silicon Valley afloat."
1 Digital Artists Agency
ELEVATOR PITCH: Riding the online-music wave, DAA will be a new breed of talent agent for musicians.
INITIAL CAPITAL: $20,000
TARGET MARKET: By 2008 the music download business will be worth an estimated $3 billion annually, according to Forrester Research. Agents take 15 to 20 percent of an artist's sales.
BUSINESS MODEL: DAA will research, market, and develop talent online. It will receive commissions from online sales of music, tickets, and merchandise.
DETAILS: The promise of online music is that more bands can become profitable because the marketing costs are lower. But with so many digital music stores, streaming radio channels, illegal peer-to-peer networks, and other music services coming online, how do you keep up? No one has broken a monster act online--yet.
That's where the agency comes in. Backed by its core research, DAA will help labels and artists understand the online food chain, which starts with a song getting plenty of free play and proceeds to actual music sales. Regarding who's listening to what on which sites, trends are fluid and poorly understood. AOL Music, for instance, has 18 million listeners a month; get in the rotation there and it's a short hop to actually selling your single through iTunes.
DAA will constantly monitor and interpret the data and develop a plan for promoting an act. Either working with the digital music stores or through its own guerrilla marketing efforts, the agency will generate online buzz for its clients by trying to get their album on, say, the iTunes homepage or into the hit rotation at Musicmatch Radio. DAA will make money from the resulting music sales, ticket sales, and new areas of revenue like getting unknown acts preloaded--at the factory--on MP3 players. Combined, iTunes-like services and sales of MP3 players already amount to a $670 million industry.
HURDLES: The window of opportunity could close fast. When traditional Hollywood agents--who already enjoy relationships with established artists--wake up, it'll be hard to compete.
WHAT THE PROS SAY:
BURNHAM: "This is a new model for a broken industry.... It's a service you could launch with sweat equity up front. You wouldn't even need VC money."
LES VADASZ, FORMER HEAD, INTEL CAPITAL: "There's a good opportunity here to start this as a one-man shop."
2 The Broadband Store
ELEVATOR PITCH: As high-speed Internet reaches critical mass, we'll develop a one-stop shop for all things broadband: gear, connections, content, and customer service.
INITIAL CAPITAL: $200,000
TARGET MARKET: Americans will be paying $23 billion for broadband services by 2008, estimates Pyramid Research.
BUSINESS MODEL: The Broadband Store will become the painless path to fat pipes, and the real money will come from high-margin fees for referring customers to broadband providers.
DETAILS: Many people still don't know what DSL is, never mind that there are four competing providers in their neighborhood, plus competition from cable and satellite companies. The Broadband Store will be a 21st-century version of the cell-phone store--a one-stop shop for everything related to broadband services: modems, Wi-Fi routers, digital-media streamers, flat-screen TVs, and so on.
The real payoff will come from signing deals with broadband providers to get a cut of the subscription revenue from every new customer the Broadband Store sends their way, much like the deals cell-phone companies have with their retailers. Similar revenue-sharing agreements could be worked out with voice-over-Internet-protocol phone-service providers like Vonage and Packet8. As more broadband music and video services--such as those offered by RealNetworks--become available, the sales reps could resell them as well.
Finally, the store will offer its own fee-based services, like setting up Wi-Fi networks, connecting TiVos to stereo systems, and configuring Vonage phones. The emphasis will be on taking complexity out of the digital lifestyle.
The plan is to prove this with one store, then roll it out nationwide.
HURDLES: It's expensive to stock hardware that loses value fast, and the payoff from reselling broadband services will depend solely on the volume of business. Plus, RadioShack, Best Buy, and Circuit City are pursuing similar strategies, so you'll have to move fast.
WHAT THE PROS SAY:
TAI: "I think this is a great opportunity to make money short-term. It sounds like a very profitable small business.... One problem I see with this business is, the bigger you get, the more bodies you need."
ELEVATOR PITCH: For the first time, highly individualized ads will be delivered to TV watchers the way they reach Internet users today.
INITIAL CAPITAL: $300,000
TARGET MARKET: With at least 40 million households expected to have digital video recorders or video-on-demand by 2006, this new form of pay-for-performance advertising should quickly surpass the $2.1 billion now spent annually on paid-search Web ads.
BUSINESS MODEL: PerformAds will let advertisers take the pay-for-performance model and adapt it to TV; the company will get paid for every click-through.
DETAILS: Today there is no way to truly measure the effectiveness of a TV spot. And to make matters worse, video-on-demand technologies and digital video recorders like TiVo threaten to make the traditional form of television advertising obsolete. Advertisers will clearly pay for an alternative that gives them measurable results. Overall, direct-marketing initiatives already total $203 billion annually. PerformAds will allow cable and satellite operators to deliver, on the fly, ads that match the interests and buying patterns of viewers. For instance, a new parent who's watching baby shows could see a link to an ad for diapers at the bottom of the screen. Fans watching a Nascar race could get ad links for cars, or even a specific high-performance kit for that Mustang in the garage.
The effectiveness of the PerformAds spots will be measured through the same click-through model that powers paid search on Google, as viewers respond to ads via the television remote. The idea is to make the ads as unobtrusive as the paid-search ads along the side of a search results webpage. They could appear when a viewer hits the "Pause" button, say, or as small icons that temporarily fade into view at the bottom of the screen.
PerformAds will license its software to cable and satellite TV operators. Ideally, PerformAds will get a fee for every box installed with its software and for every transaction initiated by the advertising it inserts in the stream.
HURDLES: TiVo has already begun selling ads on its programming guide (see "When the Network Meets the Net," Titans of Tech, page 107). Also, unlike the Internet, television is still controlled by privately owned and operated cable and satellite systems; they think they can do this themselves without you. Besides, the penetration of DVR and video-on-demand is still low.
WHAT THE PROS SAY:
TAI: "I think this is a wonderful idea.... The question is timing--you don't want to be too early. I would seed something and see how it progresses."
VADASZ: "There is something there, but I would make this as Web-based as possible. It's really a software play."
4 Short & Portly
ELEVATOR PITCH: At last, an off-the-rack clothing store chain for the Danny DeVitos of the world. It will cash in on powerful demographic trends while enjoying tremendous customer loyalty.
INITIAL CAPITAL: $500,000
TARGET MARKET: Men spend $45 billion in the United States annually for clothes, and at least 10 percent of those guys are shaped more like bowling balls than beanpoles.
BUSINESS MODEL: The plan is standard high-end niche retail, with the higher margins that brings.
DETAILS: There are 23 million Asian and Latin American men in this country. Statistics show that many of them are relatively short and round. The average middle-age Latino male in America, for instance, has a 38-inch waist and stands 5 feet 7 inches tall. Obesity among all Americans is increasing. Yet few clothing stores cater to men whose body weights and shapes are considered nonstandard. This men's clothing chain will carry fashionable business and casual attire for this, ahem, growing demographic. The store will aim for inspiring deep-seated loyalty through its convenience and quality, which should allow it to command higher margins than a typical clothing store. For instance, Big & Tall shops have gross margins of 40 to 50 percent, compared with 35 percent for most apparel retailers. Short & Portly will start as one flagship store in a Midwestern urban metropolis like Chicago. Once the concept is proven and profitable, more funding will be required to roll it out nationwide.
HURDLES: It'll be a challenge to secure enough odd-size clothing from brand-name apparel companies, and if the idea catches on, it could get Wal-Marted.
WHAT THE PROS SAY:
VADASZ: "I know the feeling.... It may work."
BURNHAM: "The idea of creating an apparel store focused on the reality that Americans are eating too much is objective investing. Often the best ideas come from realizing the way the world actually is today. But you might want to work on the name."
5 My Medical Consultant
ELEVATOR PITCH: This service will provide the one thing patients desperately need when disease strikes: an informed guide through the health-care labyrinth.
INITIAL CAPITAL: $2 million
TARGET MARKET: Americans spend $212 billion on health care not covered by insurance; if 2 percent of that were just for advice, you'd have a ready-made $4 billion market.
BUSINESS MODEL: Patients will pay for consultation by the hour or receive personalized medical research delivered by phone or e-mail on a subscription basis.
DETAILS: Anyone who's been hit--or had a loved one hit--by disease knows that a near-universal symptom is a desperate craving for information. Forget getting enough of it from your doctor in today's impersonal, stressed health-care system. The Web? Overflowing with complex and conflicting data. My Medical Consultant will be staffed with trained researchers who can demystify everything from the physiology of a specific disease to conventional treatment options to experimental therapies in clinical trials. These consultants will be hired from pools of medical students, nurses, or retired physicians and will work either out of a central call center or from their homes. There'll be a website where customers can learn about diseases, find links to other online resources, and participate in disease-specific chat rooms moderated by one of the consultants. MMC will also be pitched to corporations as an employee perk that could cut a company's health-care costs.
HURDLES: Trial lawyers--protecting against medical liability could be difficult and costly. There are also hordes of potential competitors: Doctors, hospital chains, and HMO help lines could start providing similar services.
WHAT THE PROS SAY:
SANJAY SUBHEDAR, STORM VENTURES: "It's a good idea. A lot of my friends are very intimidated by doctors. It should be educational rather than therapeutic. What if you made it the Friendster of medicine?"
TAI: "There is a great need for this. The issue I have is the liability aspect. If somebody paid you $10 for advice and he died, do you get sued?"
6 The eBay Drop-Off Zone
ELEVATOR PITCH: A way for retailers to generate instant sales gains by tapping into eBay's vast marketplace.
INITIAL CAPITAL: $3 million
TARGET MARKET: eBay's U.S. sales hit $14 billion last year.
BUSINESS MODEL: Aimed more at national retail chains than at the start-from-scratch entrepreneur, the Drop-Off Zone will be a consignment department that sells unwanted stuff on eBay and takes a 30 percent cut.
DETAILS: If there's a single Internet-age winner so far, it's eBay. So, not surprisingly, the auction giant has already spawned many parasites, including startups like AuctionDrop, iSold It, and QuikDrop that are opening consignment shops where people can drop off their junk and pay fat commissions for someone else to deal with the hassles. But none of these startups has a national presence. The Salvation Army or a large retailer like Kmart does: They could clear out a back room and offer the same service. For the Salvation Army, auctioning select items on eBay could dramatically increase store revenue.
The concept will also work for a big retailer that can use its existing distribution system to ship the products to a store near the auction winner's home for pickup. Each item will be auctioned on eBay, but shoppers will also be able to bid from a terminal in the Drop-Off Zone or pay a buy-it-now price and take it home. A retailer will be able to supplement the consignment goods with its own excess merchandise and returns (see "Corporate America's New Outlet Mall," page 43). Making the Drop-Off Zone attractive and fun will also draw more traffic to the full-priced store.
HURDLES: You risk siphoning off revenue from the main store. Other startups are already doing something similar and could beat you to the punch.
WHAT THE PROS SAY:
TAI: "I think the Salvation Army should jump on this in a nanosecond, so they can turn inventory into cash."
BURNHAM: "It has merit. The problem is that you risk being at the back of the herd with that idea. It smells bad back there, and you don't have a good view."
7 Smart Security
ELEVATOR PITCH: In these scary times, we will digitize home security and sell it cheap, by the box.
INITIAL CAPITAL: $5 million
TARGET MARKET: Much of the current home security market, worth an estimated $5.7 billion last year.
BUSINESS MODEL: Smart Security will retail wireless sensor networks that homeowners can install themselves and will partner with established security firms to go nationwide fast.
DETAILS: The home security industry still largely uses 1970s technologies to detect break-ins. That means costly installation, wiring, and follow-up service calls. Smart Security will create modern, networked security systems using inexpensive wireless sensor technology.
Smart Security will play into the post-9/11 zeitgeist of growing fear and uncertainty. And the necessary technology already exists. The commoditization of wireless network technologies has resulted in a proliferation of cheap wireless cameras and other devices that can monitor homes, small businesses, and even warehouses. Durable, low-power sensors will be linked in wireless networks that configure and run themselves. There are even radar-systems-on-a-chip that can discriminate between large (burglar-size) and small (dog-size) moving objects.
Beyond direct-to-consumer sales, 24-hour Web-based monitoring could be included in the broadband bundles offered by cable companies. Through partnerships with established alarm-monitoring companies, this service could quickly go nationwide.
HURDLES: The do-it-yourself approach will have to be idiot-proof to avoid false alarms and installation snafus. Big established security players like ADT and General Electric could decide to bypass you and develop similar systems themselves.
WHAT THE PROS SAY:
TAI: "I sense a huge opportunity here. It is the end of the balkanized security network."
VADASZ: "I am a strong believer in sensor networks and self-configuring networks. This idea requires a total service offering."
8 Nanoprotein Labs
ELEVATOR PITCH: We will harness the power of nanotechnology to help drug companies find their next blockbusters.
INITIAL CAPITAL: $50 million
TARGET MARKET: The embryonic protein-chip business is projected to hit $500 million by 2006 and expand rapidly thereafter.
BUSINESS MODEL: At first, the company's revenues will come almost entirely from sales of its revolutionary lab-on-a-chip, which will give biotech and pharmaceutical firms a quicker, cost-effective way to identify the proteins that cause diseases.
DETAILS: DNA chips have made the decoding of genes fast and automatic, but there's no analogous technology to analyze those genes' products: proteins. Figuring out which proteins each gene produces and how they interact is the real key to fighting disease on the molecular level. But there are at least 300,000 proteins, and the vast majority haven't been identified.
Combining nanotech with traditional chip manufacturing techniques, the company will create a biochip with an array of nanopores (holes that are about 20 nanometers in diameter). Each silicon nanopore will be just large enough to allow individual proteins to pass through. As each protein passes through a nanopore, it will be identified by its unique electrical signature. Researchers thus will be able to determine which proteins are related to diseased cells far more rapidly than is now possible. Basic research for the technology is already under way. Initially the chips will be sold to every biotech and big drug company. As specific protein disease markers are identified, customized diagnostic chips could eventually be developed for use in hospitals and doctors' offices.
HURDLES: It'll cost tens of millions of dollars to commercialize the science project.
WHAT THE PROS SAY:
VADASZ: "Anything like that is a wonderful opportunity if it works. It's going to happen, provided you don't put this into $100,000 hardware."
BURNHAM: "It's buzzword-compliant. But you'd better walk in and lead with the Ph.D.s, and they'd better have lots of acronyms after their names and a fawning coterie of academic sycophants who think that Sir Isaac Newton's not worthy to walk in their shoes."
ELEVATOR PITCH: Our personal jet taxi service will free executives from cattle-car commercial flights, saving them time and perhaps even money.
INITIAL CAPITAL: $500 million
TARGET MARKET: Business travelers spend at least $5 billion annually on first- and business-class air travel.
BUSINESS MODEL: Operating much like an airport limo service, LuxAir will cater to the harried but flush business traveler with on-demand six-seater jets that can be chartered for $1,000 to $4,000 per passenger.
DETAILS: The major airline hub-and-spoke model is broken, and flying is often a miserable experience for the business traveler. LuxAir promises relief. A new class of six-seater jets currently being developed by Cessna, Eclipse Aviation, and others will serve as an airborne taxi fleet operated by LuxAir. The planes will be relatively cheap, at $1 million to $2 million apiece, and their operating costs are projected to be low enough that LuxAir could offer flights to almost anywhere in the United States at prices not much higher than the major airlines' first-class.
Using these jets, which should hit the market in 2006, LuxAir will bypass most congested hubs and fly executives directly to one of the country's 10,000 municipal and private airports. A car service will pick them up right on the tarmac. Because of reduced airport delays and other factors, door-to-door times for many flights will be half what they are on commercial jets, according to a NASA estimate. The combination of far less pain and a competitive price will make LuxAir the go-to airline for the on-the-go executive.
HURDLES: This play is capital-intensive, and security issues could eventually cut into the speed and convenience advantages. The commercial airlines might copy the idea and try to fly an upstart into the ground.
WHAT THE PROS SAY:
VADASZ: "I personally would love to use a service like that. The executive jet market has developed to be pretty huge, which indicates there is a need for more flexible, more private travel."
TAI: "If you offload the up-front cost through a sale-leaseback or debt financing, you could broaden the market with a lower-cost jet. Place the capital requirement on the financial markets, not the consumer."
BURNHAM: "I'd have to know these freakin' planes work. A small but important detail."