The reason is obvious why a lot of entrepreneurs, executives, and venture capitalists choose the hottest markets to start a business. Not only is there a big opportunity for greater profit but also for growth as well. However, a new research revealed that entrepreneurs and investors who enter a market that is not considered hot has more staying power than those who entered hot markets.
In a study called "The Non-Consensus Entrepreneur: Organizational Responses to Vital Events," associate professor of organization and strategy at the University of Chicago Booth School of Business Elizabeth G. Pontikes and Thomas M. Siebel Professor of Business Leadership, Strategy, and Organizations at Stanford Graduate School of Business William P. Barnett explored how the herding mentality greatly affects the software industry.
The herding mentality describes how people's decision are influenced by the behavior and actions of a larger group. In the case of the software industry for example, entrepreneurs have the tendency to flock to the software market after seeing some positive results. While the market is a good indicator where to best invest, the researchers said that it actually cause entrepreneurs to overlook many things.
They said that those who enter hot markets, do so without assessing the market and the situation thoroughly. Because of this, these startups also leave the market later much faster when they encounter bumps along the way.
On the other hand, those who enter a market that many do not consider hot are more careful because they undergo more scrutiny from investors. Thus, they are able to cover most of the bases before they make a move resulting in less mistakes and longer staying power in the market.
With this in mind, Pontikes and Barnett suggest that entrepreneurs should not enter a market without undergoing sufficient scrutiny no matter how hot it is. They added that instead of focusing on the popularity of the market, entrepreneurs should assess whether that particular market is a good fit for their product and company.
