Archives For September 2012

You’ve likely read many times before about the importance of understanding your potential customers and correctly identifying key drivers for converting potential users to active users (most applicable in the case of consumer products).  Common wisdom is that targeting a widespread and diverse consumer base is the surest path to success, as the bigger your target market the more potential users you have.  However, spreading too wide of a net can be a costly mistake for many would-be entrepreneurs.  Many successful startups began with a targeted set of potential users and built a strong network effect before rolling out to broader markets.

A classic example is Facebook (at the time known as The Facebook), which began by targeting college students at Harvard.  Once Facebook hit a tipping point, nearly every student at Harvard was registered and an active user.  At this point, the founders decided to roll The Facebook out to several other Ivy League schools, but limited the target audience to students at these (3 or 4) Universities.  Even once Facebook was a clear hit amongst the college crowd, Facebook for years required a valid college email address to register.  They began with a focused target market and aimed for nearly complete saturation before expanding their crosshairs.  This resulted in several advantages.  First, competitors couldn’t gain a foothold in populations Facebook had already fully penetrated.  Second, Facebook was able to create a network effect (part of Eric Ries’ Lean Startup)within each niche market that they targeted, reinforcing the product and the value to its users.

Another example might be a consumer product that can be accessed via mobile phone in India.  Of India’s nearly 1.3 billion citizens, roughly 380 million live in urban settings spread across ~48 cities.  Nine of these have over 4 million people each and 6 of them – Delhi, Mumbai, Kolkata, Chennai, Bangalore and Pune – are expecting to grow to over 10 million each in the next 15 years.  Instead of trying to target India’s population as a whole (or focus any efforts on the rural population), the startup in this example could focus on dominating one of the key urban centers (where people are much more likely to have mobile phones that can access the web) and begin rolling their solution out to other cities once a tipping point / critical mass is achieved.
Geography doesn’t have to be the basis for determining the initial target customer base.  Often targeting a specific niche within a broader set and growing increasingly general with each customer iteration is a great strategy.  For example, a consumer device that could be useful to anyone that exercises at least a couple of times a month could be initially targeted at hardcore marathon runners and distributed at events catering to ultra-athletes.  Once it has achieved success within that small population, it will have essentially gained endorsement by those at the top and could next be targeted to casual half-marathon and full marathon runners (the next level down from ultra-marathon runners).  Next could be club athletes followed by casual after-work sports organizations.  Eventually the device would travel simply by word of mouth having achieved the endorsement of all serious athletes and the admiration of those that want to be more like the elites.
No matter what strategy you chose, having a specific and identifiable market is essential to your startup’s success.

Many new entrepreneurs, especially those located in Silicon Valley / Bay Area, are drawn to the allure of consumer focused startups.  It’s easier for entrepreneurs (particularly ones with little business experience) to imagine using consumer products and they are typically simpler to design.  In addition, consumer focused Minimum Viable Products (Eric Ries’ The Lean Startup) can be enough to draw widespread attention from target customers and news feeds like TechCrunch or PandoDaily.

Enterprise focused startups are a tremendous opportunity because 1. there are fewer competitors and 2. most enterprise customers are already paying for a legacy product that is likely not web-based (SaaS).  According to Jim Goetz of Sequoia Capital, “Enterprise remains an ‘enormous opportunity’ because companies are spending  about $500 billion a year with legacy enterprise companies and those budgets are  ripe for the plucking.”

Consumer based startups may go from zero users to 100 million users virtually overnight only to fizzle out when interest wanes.  Most never figure out how to make money and have a tough time raising funds.  Enterprise startups, on the other hand, take longer to get going but have a clearer growth trajectory with real revenue.  Most venture capital firms prefer to back enterprise startups because there is a more manageable growth trajectory and usually a more lucrative exit.

Yammer, Workday, Box, Cloudera, Lithium Technologies and Nicira are a few examples of recent enterprise successes.

Jacques Mattheij posted a great article today that orders the complexity of ‘programming’ tasks by least difficult (0) to most difficult (27).  Can see from this list that most people can really only get up to 4, professionals that deal with complex systems every day can typically get up to 8 or 9 and anything past 11 requires intimate knowledge of coding.

What I found particularly interesting in this post is that the author ranked ‘spreadsheets with simple formulas’ as being more difficult than ‘static websites, html & basic css’.  I guess that means all of us business folks really don’t have an excuse for not knowing how to make a basic website.  There are some really great resources available these days to learn the basics of web design from CodecademyTeamTreeHouse, and others.

This blogpost from Shopify gets me super fired up.  It’s an aggregation of TED Talks that have direct relevance for entrepreneurs and startups.  TED, for those that don’t know, is an annual conference that brings together the world’s most interesting minds and challenges them to give the talk of their lives in under 18 minutes.

Over 900 of these talks and performance are available for free to the general public on TED.com and many are relevant for entrepreneurs.  Mark Hayes at Shopify pulled together 12 of the ones he felt were most directly relevant for internet startups.

One of my favorites is a speech given by Simon Sinek about why people make purchasing decisions and how to lead effectively.

Memorable quotes include:

“People don’t buy what you do, they buy why you do it.”

“If you talk about what you believe, you will attract those who believe what you believe.”

“What you do proves what you believe and people will do the things that prove what they believe.”

Simon Sinek: How great leaders inspire action

If you learn to program you’ll have a superior sense of the true cost of software development and will be a much more successful non-technical cofounder.  The most precious resource is time and many non-technical cofounders get tripped up by a false sense of how long things should take to implement.  Learning to code has never been easier and you can check out my earlier post on how to get started.

Business cofounders shouldn’t get lured into thinking that they don’t need technical skills when looking at the CEOs of multi-billion dollar tech companies.  Guys like Zuckerberg, Bezos, Steve Jobs and Bill Gates all started out with a solid foundation of technical knowledge, which contributed to development efficiency.

This article from Rob Spectre over at Fast Company points out that Donald Trump’s success is the result of his knowing the costs associated with real estate development better than any of his competitors.  In the end, running a successful startup is about out competing your competition in the pursuit of limited resources: funding, advice, talented engineers, time, etc.  Having a basic understanding of coding makes entrepreneurs better competitors.