Start-up : Which Market to Focus?
Start-up is a rocket-ship, however in the beginning it looks more like a rikshaw. The three wheels of this rikshaw looking thing are:
1. Team
2. Product
3. Market
These 3 wheels have to work together for the success of a start-up. It’s very rare that these 3 wheels work well together. If they do then suddenly the rikshaw takes off!
It’s common wisdom these-days that among these 3 wheels the front wheel is the market. It has always been confusing for me to understand the what’s a good market and what’s a bad market. I’ve been thinking about this for a long time and recently read an excellent blog on this topic by Anuj Abrol & @eriktorenberg which helped me in clear my thought process.
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.”
— Andy Rachleff, (He discovered & named the concept of Product-Market Fit)
This quote has been paraphrased in various forms by different valley gurus. In Murphy’s world which is where most of the start-ups live the best phrase on the topic is by valley’s favourite guru :
“In a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.” — Marc Andreessen
I had trouble understanding the concept of product-market fit. I kept discussing between our partners on how to “cross the chasm”, which probably is same thing as finding product-market fit (PMF). Later I realized I had trouble understanding PMF because I did not understand the concept of Market.
What is a market?
This is a good time to remember the famous sales-man story. Two sales-men (most probably Americans) working in a shoe company went to an African country to explore the market. One reported that the market is terrible since no-one wears shoes, the other one reported there’s excellent potential since no-one wears shoes.
What’s the moral of this story?
In conventional wisdom, the second sales-man has optimistic sales attitude and we shall all strive for that optimism.
In start-up wisdom, that second guy will spend next 10 years of his life working 80 hours a week trying to sell shoes. If he has a patient investor & super supportive spouse then he will end up creating a million dollar market for his shoes. Meanwhile, the first guy will revisit the African country after 10 years & report back that it’s a hot market. He will then go on to build a billion dollar market for his shoes in a couple of years.
Market or bazaar is a transactional place. Someone is selling, and someone is buying. If a product is selling in large numbers then it’s a large market. Indian spices is a large world-wide market. If a product is being sold in small numbers than it’s a small market. Air Quality Monitors, I suspect, is a small market in India.
The number of sellers, number of buyers and price of the product reach a steady state quickly & it becomes self-sustainable equilibrium. The beauty of Market is that it dynamically adjusts itself to maintain the steady-state.
There are 3 phases of a markets :
1. Mature Market : The number of buyers and sellers is more or less constant. The growth of the market (CAGR) is in single digit. Once a mature market is created then it tends to exist for a long time, like 100's of years. If it only exists for a short time like less than couple of years then its called fad. Example of a fad would be vacuum cleaner market in India, global pokemon -go market
2. Emerging Market: The CAGR is double digit, may be triple digit. Number of buyers and sellers are both growing at fast pace. An emerging market might become a mature market in 4–5 years’ time
3. Declining Market : The CAGR is negative, it could be single digit (Current automobile market in India) or double digit (Nokia after iPhone). There could be opportunities to build a billion dollar business in a declining market too. Example of cirque du soleil as discussed in book Blue Ocean Strategy by Kim Chan is one such example. However its very rare and I will not discuss this in this blog
The emerging markets are most dangerous, it could become a trend or it could become fad or it just might not take off. If you enter too early in to a market thinking that it’s an emerging market, there is chance that you might end up trying to create a new market. Success of such start-up which is trying to create a new market is incredibly rare, even rarer than unicorns. Microsoft created the PC market. Can’t think of anything else substantial.
Jawbone did this for fitness trackers, although they successfully created the market but could not take benefit despite being in the centre of valley ecosystem and raising good amount of funding. Rotimatic is trying to do this since 2008 for food making robots. It is very rare, very hard and almost impossible. It’s kind’a obvious that its not a good choice. We shall be happy if we can be unicorn.
“We are not interested in creating markets. It is too expensive. We are interested in exploiting markets early.” — Don Velentine, Founder of Sequoia (Godfather of start-up community)
Not interested. If godfather is not interested then one thing you can be sure of that no-one will dare to invest in you.
The start-ups in which Godfather is interested are the one that develop a new product which tries to disturb the existing equilibrium in their favour. When an existing equilibrium is successfully disturbed then it’s called disruption of that market. iPhone disrupted the mobile phone market. Google disrupted the web-search market. Jio disrupted Indian telecom market. These are example of complete disruption, such that the original equilibrium became so unsustainable that it got wiped off. There are also milder form of disruption like Oyo & Airbnb disrupted the hotel market. Patanjali disrupted the Indian FMCG market. The new equilibrium emerged which is co-existing with old equilibrium.
A new product can disrupt a market in three ways:
A. Cost : By doing innovation to reduce cost (Jio, Xiaomi Smart Phone, Control 4). The cost reduction shall be at least 3 times less than the existing pricing to create disruption.
B. Feature : Create a new feature which is preferred by a section of buyers (AirBnB, Uber, Patanjali). The feature should be very valuable for those tribe of users.
C. Both : Doing both (Oyo, Grofers, Xiaomi Smart Home, Micromax)
So a start-up can disrupt an existing market with nine combinations.
1A : Mature Market by Cost : Jio, Xiaomi Smart Phone
1B : Mature Market by Feature : Gmail, iPhone, Uber
1C : Mature Market by Both : AirBnB, Xiaomi Smart Home
2A : Emerging Market by Cost : Fitbit
2B : Emerging Market by Feature : Google Search,
2C : Emerging Market by Both : Oakremote ;)
How good the product is and how much value it provides to the consumer also decides on whether an emerging market will become a trend or fad. A good product can also substantially increases the size of the market
1A : Mature Market by Cost : The market size of Indian telecom was 97 Crore subscribers before arrival of Jio and now market size is 120 Crores and Jio’s share is 35 crore subscribers
1B : Mature Market by Feature : The global market size of mobile phone was 6.4 Crore handsets users before arrival of iPhone, the market size is now 150 Cr. Handsets and iPhone’s share is 50 Crore handsets. A truly great product substantially increases the market size.
What is a good market for a start-up?
There might be some ambiguity in the answer of “What is a market”, however there is none in this question. The characteristics of good markets for start-ups are :
1. Fast growing market : Timing is the key.
“No force can stop an idea, whose time has come” — Manmohan Singh as Finance Minister, presenting budget of ‘92.
When asked about his biggest failed investment, Don Valentine says “What didn’t work was the timing of the market…the critical thing is getting a product developed where the timing of the market’s availability and market demand are simultaneous. Otherwise you are spending lots of money on developing a market which people did not tend to spend money on. Invariably, we shut those investments down.”
2. Potential to become very large : Minimum is $1B. Some say minimum is $6B. However now I’m hearing a contradictory view from twitter-world that its not so important since after initial traction a good start-up can always expand in to other related markets and expand its market size. Examples are Uber getting in to Uber Eats, Oyo getting in to long-stays etc. Still it has to be in billions, bigger the better.
These two characteristics are essential in the target market. It is more predictable to find these characteristics in a mature market rather than an emerging or declining market. Hence mature market are more predictable than emerging markets. There is one more nuance with regard to mature markets. A mature steady state market can be a :
1. Monopoly, which has one prominent player which captures like 80% of the market
2. Oligopoly, which has less than 4 prominent players together capturing 90% of the market
3. Fragmented, which has many small un-organized players with no clear market leader
There is a marketing jargon called something like pareto principal (I don’t exactly remember the name of the jargon), which says that to disrupt a market you must spend in marketing — The marketing spent shall be 5 times the leader in monopoly, 3 times the leader in oligopoly and 1.5 times the leader in fragmented market. Hence it is much easier to disrupt a fragmented market than a monopoly or oligopoly. Hence the best market for a start-up in the order of priority are :
1. Mature market which is fragmented
2. Mature market which is Oligopoly
3. Emerging or declining market
4. Mature market which is Monopoly
What is a good product?
First step or the front wheel of the start-up rikshaw is market, once a good target market is identified then the next step is for the team to choose the product. There are only 2 characteristics of the product that are important:
1. It should be able to disrupt that market, which means that a tribe of consumers in that market really want the new product. That tribe of consumers in that market are ready to pay for it again and again. If they misplace the product, they should buy it again. They can not live without it. If it’s a subscription model then they shall keep paying the subscription. This is much harder done than said and is core of any start-up. Most essential gyan in essays by Paul Graham (most amazing being — Do things that don’t scale) is about this topic. Y-combinator’s focus is instilling in the founders, the importance about this topic.
2. It should be hard to copy. Once the steady state is reached and then you will be able to enjoy fruits (read profit) of your hard-work done for 1. You should then be in a good situation to deploy those profits to expand to new markets and disrupt or create new markets with the knowledge and technology you have developed in 1. However, if your product is easy to copy then there is 100% chance that someone will try to disrupt your hard earned market by cost or feature. If somehow you become a monopoly in the market then it will be much harder to disrupt you. Disruption by cost is the easiest to do, and the first obvious thing that comes to mind of anyone who sees you enjoying the fruits of this market. The product can be designed to make it harder to disrupt by cost, while not compromising on the process of 1.
While 1 above is essential for that process, however 2 is optional and its possible to develop moat outside the product in distribution & brand. The product development process till the steady state is increased is what is core of a start-up and that’s what is hard for an established incumbent to do. It requires lot of hunger, perseverance and hard work to develop product while taking care of both the characteristics above.
The beauty about software is that it’s much easier to develop it in iterative manner listening to needs of tribe of your customer (taking care of 1) and at the same time it’s much harder to copy (taking care of 2). The concept’s laid out in the book mythical man-month by Fredrick Brooks together with the fact that 9 ladies can not product a baby in one month is what defends a software for a longer duration. It can still be done but its much harder than copying a new pure hardware technology or distribution innovation. Its easier for software companies to attract capital because the profit margins can be much higher for a much longer time. This is also touched upon in books like Kim Chan’s Blue Ocean Strategy and Peter Theil’s Zero to One. In this respect two type of software companies are even more harder to copy:
1. Those built on network effect. The value of the product inherently increases due to other users using the product. It becomes harder for new entrant to build this critical mass of users.
2. Those built on machine learning based software which requires a lot of data, since the availability of data for any new entrant is almost impossible. Data is the new oil.
There are amazing blogs, books, podcasts etc. available on topic of developing a good product. The reason for that is developing a good product and its distribution channel is the essence of any start-up. However choosing the right market is one-time strategic decision which is equally important and not well understood by many founders.
Me and most of founders I’ve met (mostly tech founders) understand the concepts related to product development however don’t dive deep enough in choosing the target market. Choosing the market is something which experienced investors instinctively understand much better than founders. I’ve had various discussions with our investor Rajul Garg, all his advice for last couple of years has been about getting in to existing market. Aman Gupta from Boat is the only founder I’ve met who I feel understands this concept instinctively. Recently Shalabh Gupta from Akiva joined our company offsite, we exchanged notes & realized that our journey to understand the market have been very similar. Spending time with them helped me understand the concept better. We founders need to understand it better to be able to avoid lot of frustration.
