What I Learned from the Founders of Floodgate and Benchmark (Part 4): Product Power, Disruption & Crossing the Chasm

Prime Movers Wanted

“I like to define a segment as a set of cross-referenceable customers hiring a product to do a job 10x better.” — Mike

Product Power Frameworks
Finding product-market fit can be broken up into three phases: nailing the first-mile, expanding rapidly from your first niche, and blitzscaling once the market shifts into hyper-growth.

As mentioned in the previous post, nailing the initial niche is the phase that catapults the business into existence from “Zero to One.” At this stage of the company, “focus is the asymmetric attack weapon” (according to Mike) and a startup must penetrate the first-mile as fast as possible. This speed builds capably across everything including: morale, PR, fundraising, etc…

The First-Mile Framework

  1. Know your 3–5 most compelling 10x product advantages.
  2. Find the most attractive customer prospects who will have an extraordinary need for these advantages.
  3. Sell your top advantages, to those hot targets at first, wasting zero ergs of energy on anyone else.
  4. Make your customers super happy and successful.
  5. Use these early wins as the basis to rapidly grow and scale.

It seems paradoxical, but the best way for a startup to grow is for it to focus on its core offering. By starting with an extremely narrow focus a startup can deliver a 10x solution for a set of cross-referenceable customers who then help to evangelize the product.

Data Driven Discovery Framework

  1. Map out assumptions in massive detail.
  2. Determine how confident your are in your assumptions.
  3. Determine the threat to your business if you are wrong in your assumptions.
  4. Convert assumptions to facts as efficiently and quickly as possible.
  5. Based on your data, complete the first-mile, pivot, or stop a bad business.

Data driven discovery helps a startup discover product-market fit by uncovering the ideal early market and identifying the customer’s critical pain points. There are two elements to data driven discovery: deliberate strategy (which provides the roadmap and game plan for the startup), and emergent strategy (a.k.a. the positive curveball that comes your way). In business and in life it’s important to have a plan, but to be open to positive surprises that present themselves. As Mike describes it, it is essential to “have mechanisms in place to know you’re on the right track otherwise it’s too easy to spin your wheels.”

Miscellaneous Quotes and Concepts:

  • “How long it takes you to lock in the first-mile market can vary wildly.” — Ann
  • Be different, not better…but explain to customer with “10x better” in terms of the benefits they will receive.
  • “Too many MVP’s are released before the team is clear about what they’re releasing. The team must know the “10x better.”” — Mike
  • “It’s critical to describe the advantage, not the product.” — Ann
  • Become a problem expert before becoming a product expert.
  • “I believe that the life of any startup can be divided into two parts: before product-market fit (call this BPMF) and after product-market fit (APMF).” — Marc Andreessen

Aligning Startups with Their Market

“Experts are irrelevant — they're always wrong in disruptive situations.” — Andy

Disruption Theory 
Disruption is one of the most powerful forces a startup can have. There are two types of disruption: new market disruption (which creates a group of customers) and low cost disruption (which targets customers that are low margin for the incumbent). Both forms of disruption are simpler, cheaper, and more convenient than incumbent offerings. Additionally, both forms of disruption target segments that incumbents are happy to secede because they are uneconomic for incumbents to address. Most startups that succeed with a disruptive business model start with new market disruption and evolve into low cost disruption.

The innovator’s dilemma suggests that every successful disrupter will ultimately be disrupted. This is because once the disruptor becomes an incumbent, they face a catch 22. If they decide to go after the new entrant their economics get killed and their stock price collapses. Alternatively, if they don’t go after the new entrant, the new entrant will capture market share and ultimately overtake the incumbent. From the incumbent perspective it’s a lose-lose. The only favorable solution for the incumbent is to acquire the disruptor or push for regulatory interference if operating in a regulated industry.

Innovative business models make a previously uneconomic segment of the market viable. Innovative business models are enabled by a technology inflection point and the business model in turn enables the disruption. Labeling a technology as disruptive is an incorrect use of the term — the technology isn’t disruptive, but the business model is.

Although disruption is one of the most powerful advantages a startup can have, it’s not always possible to be disruptive. Disruption isn’t necessary to be enormously successful, but it’s really nice to have in your toolkit.

Technology Adoption Cycle and Crossing the Chasm 
Any market can be broken into five segments on the tech adoption curve: innovators, early adopters, early majority, late majority, and laggards. The key for a startup is to gain the support of the early adopters and ultimately bring the offering into the main stream. This difficult task is best described by Geoffrey Moore’s classic piece, Crossing the Chasm.

In order to successfully “cross the chasm” it is imperative for a startup to build critical mass amongst the early adopter segment. Early adaptors are generally not a segment across multiple industries, but are most often a specific vertical that is desperate for a solution. With this in mind, it’s helpful to think of verticals within a horizontal strategy as being a rack of bowling pins. The best way to knock down all the pins is to hit the first which then knocks down adjacent pins.

This strategy often yields the best results because customers across verticals generally do not reference each other, thereby making it difficult to drive exponential organic growth. Moore defines a market as a group of customers who can reference each other. Therefore, it is critical to build the perception of dominance in a singular niche prior to expanding into adjacent verticals.

A complimentary concept is the concept of the “whole product.” The whole product represents the entire functionality necessary to be valuable to the customer. It’s helpful to think of product development overlapping with the technology adoption cycle, whereby early adopters are entirely served by the earliest version of the product (In other words, the MVP is the whole product to the first vertical). Then, as the product matures, it is able to cross the chasm by moving into adjacent verticals.

Miscellaneous Quotes and Concepts:

  • “Changing the color on the website has nothing to do with branding.” — Andy
  • Product-Market Fit + Disruption = Unbeatable Advantage
  • New market disruption often moves up the curve to low end disruption
  • Better tech alone ≠ disruption
  • Always ask “disruptive to whom?”
  • Very important concept: Moore’s definition of a market is, “a group of people who can reference each other.” (Andy said not to forget this.)
  • In order to attract a partner to help deliver your solution, you need to create the perception of dominance in your first market.
  • A partner helps to make the whole product, and the whole product helps you cross the chasm.
  • The most important thing = desperate customer!
  • Better product-market fit = higher prices = higher margins = get further ahead.
  • Companies with the highest margins are the earliest to adopt technology.
  • 100% focus on a 75% solution wins!

Observations / Takeaways:

When starting a startup it is critical to start with a niche, dominate that market, and expand into adjacent markets. Similarly, in the military we learned that it was critical to gain a foothold in enemy territory, then to dominate that battle-space prior to driving deeper into enemy lands. The SEALs have a long history of clearing beachheads prior to the main effort coming ashore—entrepreneurs fulfill a similar function when bringing their product to market.

Disruption theory in startups and special operations mission planning share another key similarity. In both cases, the intent is to attack the incumbent (or enemy) at their most vulnerable point by making their weakness your strength. As SEALs, this was operating at night or in austere conditions; in a startup, this is building a business model for new market disruption.