A startup differs in significant ways from a big company. Be sure you understand the difference.
So one of the things we now know is that a startup isn’t a smaller version of a large company. It took us decades to get down to a simple definition. A startup is a temporary organization designed to search for a repeatable and scaleable business model. Now these couple of sentences are fraught with meaning. A startup is a temporary organization. What does that mean? Well, the goal of a startup is not to be a startup. The goal of a startup is eventually to be a large company.
Designed to search. That means a startup is not just designed to write code or build hardware or even get orders. A startup is actually searching for a set of things. And what are those set of things? Those set of things are repeatable. That means what you did on Monday has to work on Wednesday and has to work next week and next month and next year and also could be taught to other people. And it’s scaleable. Meaning if I put a dollar into your company I want to see multiple dollars coming out. And the word search for something repeatable and scaleable, we’re searching for a repeatable and scaleable business model. I’m searching for what’s the right value proposition. That is; what’s the right product and service offering I have, who are the right customer segments, what’s the right distribution channel, right way to create demand, what’s the right revenue streams, meaning revenue model and pricing, who are the right partners, what kind of resources do I need, what kind of activities, and what are my costs. This is what the search for a startup is all about. And that’s what the definition of a startup is. I’m searching for a repeatable and scaleable business model.
So one of the interesting things about startups is we have only one word to describe startups. That word is a startup. It turns out though there are at least four different types of startups that you as the founder need to think about. One type is you could be a startup in an existing market. What’s an existing market? Well, exactly like it sounds. There are users, there are competitors. The users could tell you the basis of competition, whether it’s price or performance or service or something else. And there’s a channel. And there’s known ways to create demand. And if you want to do customer discovery, you could actually go out and talk to those users. In an existing market life is great. Life is great for customer development. Life is great for you. Your job on day one is to take market share away from the incumbents. And you can actually plot out your revenue plan, the way you do product launches or big bang launches. You want the press or blogosphere to know all about you because you want to create demand and you want to shove it into your sales channel all on day one. The problem is is that’s not the only type of startup there is.
There’s another radically different type of startup called a new market. That is where there are no users, where there are no competitors. In fact, you’ve invented something so new that you have to spend 20 minutes describing the future to someone else. The good news is you might be right, but the bad news is it makes customer discovery harder. While you still want to get outside the building you can no longer ask people direct questions about would you like this feature or this. You need to understand how do they spend their day in their life now and what’s the world going to be like after you change it for them. There’s no channel partners that will grab it out of your hand. You need to understand whether these eventually might be the right partners. And you need to figure out how will you acquire customers overtime. And more importantly, you need to understand that your revenue will be flat for the first couple of years until the market adopts. This is the conical hockey stick graph of what finances look like in a new market. Flat, flat, flat and if you’re lucky there will be some tipping point. Why this is really important to understand the distinctions between these two types of markets is that the cash that you require for an existing market is very different than the cash and the time and investment you need in a new market.
So there are two other types of markets as well. One is a variant on an existing market. It might be in an existing market that there’s an incumbent that’s a dominant player and attacking them head‑on might actually be suicidal. Just because there’s a heuristic that says you need about four times the sales and marketing budget of an incumbent to win over an existing market. So you might decide that you might want to play some other strategies. You might decide that being the low cost provider is providing something like 80% of the features for 20% of the cost by getting the product produced overseas. Your just whittling down the feature set might be an entrant for you in this existing market. Or you might decide you actually know a lot about a segment of those customers in that existing market that the incumbents just aren’t addressing. They might have a generalized platform but you might know something about that niche that’s large enough for you to attack with a dedicated set of features or service or combination.
Finally, if you’re outside the U.S. another market type is to clone an existing U.S. business model. And if you’re in a country that has a population north of 100 million people with regulatory and language barriers you could take a U.S. business model and adapt, adopt and implement it in your country or region.
So four types of markets; existing market, a resegmented market, low cost or niche, a new market or a clone market.