Photo by Samyak Bothra on Unsplash

Looking for a startup idea? Check the grey markets.

I had a call the other day with a friend of mine and we were talking about how grey markets can often be signals of entrepreneurial opportunity.

Probably one of the most famous examples is digital music. In the early 2000’s, college kids were busy sharing “illegal” music downloads, and the record labels were busy suing college kids and forcing Napster into bankruptcy. Steve Jobs saw this as opportunity, created iTunes, and successfully got all the major record labels to agree to signing on for $1/download, turning an underground market into a billion dollar business. iTunes begat Pandora, which begat Spotify. And now here we are.

Grey markets flourish where consumer demand gets ahead of the law. Lots of people rented out bedrooms against local laws; Airbnb came along and turned it into a $4 billion business. Lots of private car companies flouted the oppressive taxi regulations; Uber came along and normalized it to the tune of $12 billion.

Grey markets have always existed in the securities business, especially with regard to tech company employees who hold private stock options and want to sell some. New startups such as EquityZen are working to bring sunlight into this opportunity.

Throughout Latin America, a large informal market existed of people who would run errands for you. Three guys from Colombia founded Rappi to formalize this market. They raised $1 billion from SoftBank and are now one of the fastest-growing companies in all of Latin America.

In my work with Miller Center for Social Entrepreneurship, we’ve graduated several successful microfinance startups, replacing predatory loan sharks in the developing world with normalized financial services.

So as you look for entrepreneurial opportunity, think about grey markets. The ones that are flourishing are often indicators of where consumer demand is ahead of the regulators and incumbents. There’s gold in them there hills.

This piece was adapted from an earlier edition of my newsletter.

I’m a Silicon Valley guy. I teach entrepreneurship at Stanford, coach startup CEO’s at Miller Center, and run the 4thly Startup Accelerator. Also, I love tacos.