1a three types-of_startup.2013.q2

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“Three Types Of Startup”

Iain Verigin

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Agenda• Market Type

– Definitions – Examples – Risks

• Customer Development – Definitions – Market Type effects

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Crossing The Chasm

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Underlying Drivers in Growth Markets

Techies:Just try it!

Pragmatists:Stick with the herd!

Conservatives:Stick with what’s proven!

Skeptics:Just say No!

Visionaries:Get ahead of the herd!

Copyright © Geoffrey A. Moore, 2005, from the book “DEALING WITH DARWIN”

“Technology Adoption Strategies”

People

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Technology Adoption Life Cycle

Chasm

EarlyMarket

Bowling Alley

Tornado

Main Street

Copyright © Geoffrey A. Moore, 2005, from the book “DEALING WITH DARWIN”

! Pragmatist’s Don’t Trust Visionaries !

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? Instant Success ?

In 4th year after launch.( ie 6 years )

This is as fast as it gets.

NB. Apple's fiscal year ends in September. This means that Q1 includes the holiday season, which accounts for jumps in the data. Fiscal Q1 is Oct - Dec of previous year. So Q1 of 2008 is Oct - Dec of 2007, Q2 of 2008 is Jan - Mar of 2008 and so on.

Update 2011

The Startup Curve

The Startup Curve << http://www.avc.com/a_vc/2012/03/the-startup-curve.html

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Market Types

Extension of New Product Adoption Curve, and

“Crossing the Chasm”

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Existing Market “Chasm”

No Chasm

EarlyMarket

Bowling Alley

Tornado

Main Street

Copyright © Geoffrey A. Moore, 2005, from the book “DEALING WITH DARWIN”

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Existing Market = Linear Sales Growth

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Resegmented Market “Chasm”

Chasm

EarlyMarket

Bowling Alley

Tornado

Main Street

Copyright © Geoffrey A. Moore, 2005, from the book “DEALING WITH DARWIN”

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Resegmented Sales

Year 1Year 2

Year 3 Year 4

Year 5

Year 6

Year 7

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New Market “Chasm”

Chasm

EarlyMarket

Bowling Alley

Tornado

Main Street

Copyright © Geoffrey A. Moore, 2005, from the book “DEALING WITH DARWIN”

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New Market Hockey Stick Sales Curve

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:aside: Another WayThe Knowledge Funnel Crossing the chasm is very close to moving through the knowledge funnel.

Some people like the Mystery.

Some people like the “Rule of Thumb” ( ie Heuristic)

Some people like “no frills”

Each of these groups are different and don’t trust each others product/service referrals.

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Market Type

Who Cares ?!Why are those chasm’s getting

bigger?Can’t we just avoid them?

Type of MarketChanges Everything

• Market– Market Size– Cost of Entry– Launch Type– Competitive

Barriers– Positioning

• Sales– Sales Model– Margins– Sales Cycle– Chasm Width

Clone Market

Existing Market Resegmented Market

New Market

• Finance• Ongoing Capital• Time to

Profitability

• Customers• Needs• Adoption

(landscape very different in type)

Definitions: Four Types of Markets

• Clone Market– Copy of a U.S. business model

• Existing Market– Faster/Better = High end

• Resegmented Market– Niche = marketing/branding driven– Cheaper = low end

• New Market– Cheaper/good enough, creates a new class of

product/customer– Innovative/never existed before

Clone Market

Existing Market Resegmented Market

New Market

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Focus on 3 Types

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Definitions

• Existing Market – Faster/Better = High end

• Resegmented Market – Niche = marketing/branding driven – Cheaper = low end

• New Market – Cheaper/good enough can create a new

class of product/customer – Innovative/never existed before

Existing Market Resegmented Market

New Market

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Definition: Existing Market• Are there customers in the current

market who would: – Need the most performance possible?

• Is there a scalable business model at this point?

• Is there a defensible business model?– Are there sufficient barriers to competition

from incumbents?

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Existing Market

CurrentCompanies

OurCompany

Per

form

ance

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Oops, forgot about “Time”P

erfo

rman

ce

Time

CurrentCompanies

OurCompany

Existing Companies Performance

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Existing Market Risks• “Better/Faster” is an engineering driven

axiom • Incumbents will defend high-end, high-margin

businesses • Factor in:

– Network effect of incumbent – Sustaining innovation of incumbent – Industry (or your own) “standards”

• “They’ll never catch up” is not a business strategy

• Established companies almost always win

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“Existing Market”– Knowledge Funnel

Existing markets are “Algorithmic” and/or “Heuristic”

Existing Market

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Definition: Resegmented Market- Low End

• Are there customers at the low end of the market who would: – buy less (but good enough) performance – if they could get it at a lower price?

• Is there a profitable business model at this low-end?

• Are there sufficient barriers to competition from incumbents?

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Low-End Resegmentation“Good Enough”

PerformanceP

erfo

rman

ce

Time

CurrentCompanies

OurCompany

Existing Companies Performance

FutureCompanies

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Definition: Resegmented Market

(2)Niche• Are there customers in the current market who would: – buy the same product if it addressed their

specific needs – if they could get it at the same price?– If it cost more?

• Is there a defensible business model at this point?

• Are there sufficient barriers to competition from incumbents?

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Niche ResegmentationP

erfo

rman

ce

Time

Existing

Niche 1 for NewNiche 2 for New

New Dimension

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Niche Resegmentation

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Resegmented Market Risks

• “Cheaper” is a sales-driven axiom

• Incumbents will abandon low-end, low-margin businesses – Often -- For the right reasons :-(

• Low-end must be coupled with a profitable business model – Up migration

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“Segmented Market”– Knowledge Funnel Creating a new “SEGMENT” introduces “MYSTERY”

Segmenting aMarket

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Definition: New Market• Is there a large customer base who

couldn’t do this before? – Because of cost, availability, skill...?

• Did they have to go to an inconvenient, centralized location?

• Are there sufficient barriers to competition from incumbents?

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New Market( Customers That Don’t Exist

Yet)P

erfo

rman

ce

Time

Existing

New MarketNew

Cus

tomer

New

Mark

ets

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New Market Risks• “New” is a marketing-driven axiom

• New has to be unique enough that: – There is a large customer base who couldn’t do this

before – They want/need/can be convinced– Adoption occurs in your lifetime

• Company manages adoption burn rate – Investors are patient and have deep pockets

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“New Market”– Knowledge Funnel

New Market

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Hybrid Markets• Some products fall into Hybrid Markets • Combine characteristics of both a new

market and low-end resegmentation – SouthWest Airlines – Dell Computers – Cell Phones

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Three Types of MarketsExisting Market

Customers Existing

Customer Needs

Performance

Performance Better/Faster

Competition Existing Incumbents

Risks Existing Incumbents

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Three Types of MarketsExisting Market Resegmented Market

Customers Existing Existing

Customer Needs Performance 1. Cost2. Perceived Need

Performance Better/Faster 1. Good enough at the low end

2. Good enough for new niche

Competition Existing Incumbents Existing Incumbents

Risks Existing Incumbents 1. Existing Incumbents2. Niche strategy fails

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Three Types of MarketsExisting Market Resegmented Market New Market

Customers Existing Existing New & New Usage

Customer Needs Performance 1. Cost2. Perceived Need

Simplicity & Convenience

Performance Better/Faster 1. Good enough at the low end

2. Good enough for new niche

Low in “traditional attributes”, improved by “new” metrics

Competition Existing Incumbents Existing Incumbents Non-consumption & other startups

Risks Existing Incumbents 1. Existing Incumbents2. Niche strategy fails

Market Adoption

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Why Bother With Anything But Existing Market

Model?The others appear risky

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Aaargh :-(• The existing market model is a

dream– It sucks people in like a drug– It works for market leaders like:

“Windows”, Intel Processors, etc• Incumbents “Will Protect an Existing

Mkt”.– If you are not in the market then you have

to expect that it will take “time” to get to know and win customers!!!!!

– If someone tells you different, it’s time to move on.

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Market Entry: Cost SummaryMarket Share Cost of Entry

(vs Leaders Sales/Mktg Budget)

Entry Strategy

Monopoly > 75 % 3x Resegment

Duopoly > 75 % 3x Resegment

Market Leader

> 41 % 3x Resegment

Unstable Market

> 26 % 1.7x Existing/Resegment

Open Market

< 26 % 1.7x Existing/Resegment

New Lanchester Strategy Table 5.2 - page 127 “Four Steps”

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Interesting Reading• Paul Graham – “Startup =

Growth”– http://www.paulgraham.com/

growth.html• Andrew Chen – “Is your market

actually big? Or is it a fake market?”– http://andrewchen.co/2012/10/08/is-

your-market-actually-big-or-is-it-a-fake-market/

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First Mover (dis?) Advantage• GBF (Get Big Fast) Strategies

– VC Mania • Results are in from the Trillion $ science

experiment - Internet bubble of the 90’s. – New Market adoption can not be accelerated – Possibly useful for resegmentation – Heuristics for when to invest in GBF

• Examples– Google was not first in search.

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“First Mover”– Knowledge Funnel

The first mover is “solidly” in the MYSTERY ZONE

There is no money in the mystery zone.

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Model – Reliability Bias

Roger Martin “Design of Business”

During Exploration stage the ratio needs to be skewed towards Intuition.“High Risk, Low Data Decisions”Page 90 “Crossing the Chasm”, G Moore

You can’t analyze Low Data. You’ve got to go get some “real data yourself”

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Model – Radical Change of MeaningsRoberto Verganti’s “Radical Change of Meanings”

! Very Useful for our class !

• Existing Market•User Centered Market Pull

• New Markets• Technology Push• Design Driven

• Adoption not guaranteed• Requires Customer Insight & Training for “Meaning” to become accepted or adopted

• Segmentation Opportunities are in between

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Customer Development

Market Type issues in context of the Full Customer Development Model

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Interactions• Choice of market type impacts each step

of the customer development process – Discovery – Validation – Creation – Scale

CustomerDiscovery

CustomerValidation

CustomerCreation

ScaleCompany

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Market Types Affects Customer Discovery

CustomerDiscovery

CustomerValidation

CustomerCreation

ScaleCompany

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Customer Discovery• Goal is become a “domain expert”

• :idea: This may be hard for some/all of the team to accept

– : think : “I’m already an expert”

• Time Varies depending on market type – Existing market issues are known – New market is a science project – Resegmenting a niche is an art form

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Market Type Affects Customer Validation

CustomerDiscovery

CustomerValidation

CustomerCreation

ScaleCompany

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Customer Validation• Goal is to find a repeatable

and scalable sales process

• Time Varies depending on market type – Existing market sales issues are known – New market goal is to find a tipping point

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Where Market Type Really Matters

• After Customer Validation

• The “Rate” of Scaling that is possible

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Market Type Affects Customer Creation

CustomerDiscovery

CustomerValidation

CustomerCreation

ScaleCompany

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Customer Creation (1)Year 1Objectives

Existing Market

Market Share

Resegmenting an Existing Market

Market reframing & new market share

New Market Market Adoption

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Customer Creation (2)Year 1Objectives Positioning

Existing Market

Market Share •Differentiation & Credibility•Product Differentiation

Resegmenting an Existing Market

Market reframing & new market share •Segmentation & Innovation

•Redefining existing market & product differentiation

New Market Market Adoption •Vision & innovation in new market• Defining the new market, the need & the solution• Early adopters

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Customer Creation (3)Year 1Objectives

Positioning Demand Creation

Existing Market

Market Share •Differentiation & Credibility•Product Differentiation

* Create/drive demand into the sales channel

Resegmenting an Existing Market

Market reframing & new market share

•Segmentation & Innovation•Redefining existing market & product differentiation

•Educate market on the change•Drive demand into channel

New Market Market Adoption •Vision & innovation in new market• Defining the new market, the need & the solution• Early adopters

•Customer Education•Drive early adopters into sales channel•Tipping Point (diffusion of innovation )

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Customer Creation (4)Year 1Objectives

Positioning Demand Creation Launch

Existing Market

Market Share •Differentiation & Credibility•Product Differentiation

* Create/drive demand into the sales channel

•Credibility / delivery•Existing basis of competition

Resegmenting an Existing Market

Market reframing & new market share

•Segmentation & Innovation•Redefining existing market & product differentiation

•Educate market on the change•Drive demand into channel

*Segmentation, delivery and innovation* New basis of competition

New Market Market Adoption •Vision & innovation in new market• Defining the new market, the need & the solution• Early adopters

•Customer Education•Drive early adopters into sales channel•Tipping Point (diffusion of innovation )

*Credibility & Innovation* Market education, standards setting, early adopters

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Summary: Type of Market Changes Everything

• Everything = – Market – Sales – Customers – Finance

• Customer Development Process

Existing Market Resegmented Market

New Market

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ReCap Mkt Type

• Don’t Get Swept Up By “The Dream” – Quick Time-to-Revenue of Existing Market– With “Open Fields” Opportunity of New

Market

– !!! These are mutually exclusive !!!• ! Stop Dreaming! Get Real!

Existing Market Resegmented Market

New Market

:Aside:

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Mkt Type: Why You Care• Locating “Market Entry Points”

• Each Market Type has different points of entry. • Setting investor expectation

– Each Mkt Type has different trajectories for time & money

– Investors are: sweat equity (you & the team), your customers, and your funders

• Success Points…– Setting Expectations & Delivering on time– ! This is “Old School” and will always be relevant !

• Mkt Type provides a means of setting “realistic” expectations.– For market entry and delivery.

• Work to “Know” your Mkt Type and act accordingly.

:Aside:

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What Are We Gonna Do?

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CustomerDiscovery

CustomerValidation

Customer Creation

Year OneObjectives

•Type Of StartupDistribution Model

•Revenue Model•Channel Model

•Launch Model•Sales Model

Positioning •Articulate Problem & Product concept•Understand customers view of the competitors

•Initial company & Product Positioning•Test w/ Early Adopters

•Company/Product Positioning by PR Agency with audit

Launch •Day in the life•Attend Shows/Confs•Estimate Mkt Size

•Company & product launch strategy•Test w/ early adopters

•Launch/Introduce•Launch type depends on “mkt type” of startup

DemandCreation

•Press, Analysts, Influencers List•How do customers make buying decisions?

• How do customers purchase?•Understand analysts/influencers view

•Implement demand creation•Type depends on “mkt type”

Storyline “Depth” & Targets