Tech Bound #45: How to capture a brand new market

5 min read

Hey,

a warm welcome to all the new subscribers! If you live in the US, I hope you had a nice labor day. If you don’t live in the US, well… 

We’ve seen a lot of big names in Tech go public this year: Sonos, Xiaomi, DocuSign, Smartsheet, Spotify, Dropbox… Now, there are two more: Eventbrite and SurveyMonkey.

Hence, I want to dedicated the next two episodes to each of them and give as much insight into their Growth strategy as possible. And we’re not done, yet. A whole slew of other tech players might still go public in 2018, including Lyft, Cloudflare, Stripe,  Warby Parker, Credit Karma, and more #whatatimetobealive!

Speaking of raising money, a startup I worked with (“Mitte”) recently raised 10M. Congratz!

How to capture a brand new market

Most companies build something for a market that already exists.

For example, as Tom Tunguz explained, it would take 1% of Salesforce’ revenue for a company to become a unicorn (article linked below). So, theoretically, a company could create a product for a (1%) market segment that Salesforce doesn’t serve well and become a unicorn. The market already exist, it’s just underserved. That’s a good basis to start a startup.

But what if the market doesn’t exist yet?

Peter Thiel advocates to avoid competition all together in his book “Zero to One” (hope you read that). The book “Blue Ocean Strategy” says pretty much the same: it’s easier to dominate a new market than an existing one. There’s a saying for that: the best entrepreneurs don’t start companies, they invent categories.

Research for the book “Play Bigger” found that “category kings” (companies that created a new category and dominate it) get 76% of the market capitalization. It’s now easier than ever to creating a new market with cloud applications, virality through social networks, and cheap infrastructure (AWS, Stripe, WordPress, etc.). But it’s still a herculean act! I wouldn’t recommend anyone to try to invent a completely new market, unless they have a truly innovative product. The chances to fail with a startup are already high enough.

That being said, which companies actually pulled it off? UBER, Airbnb, Facebook, Salesforce, Netflix, Instagram, VMware, Apple – the usual suspects. There are many more, of course, and they all defined a new category and created a new market.

What does it take to capture a new market?
I’ve seen a couple of startups creating new markets (or trying to) in my work with the GermanAccelerator (and outside of it), so I can share a bit of my experience.

First, define the market. You want to exactly define who the market is, the size, regulatory issues, the value chain, etc. You cannot create a new market without defining it for yourself first.

Second, you need resources. No company that ever created a new market or category did it completely bootstrapped, meaning without investor help. I’m not saying it’s impossible, but it’s much harder to create the perception of a new market without significant funding. To create a perception, you need lots of PR and lots of ads. It’s crucial to be 100% consistent in your messaging and visual strategy to create a picture in people’s minds. If you can find a viral component of your product you’ve struck gold. It helps a lot to spread the word. Think of UBER cars driving through the streets or riders inviting their friends, or how Facebook users invite their friends.

Third, find an overlapping or complementary market. It’s not always there but when it is, it’s a huge help. Airbnb used Craigslist as launchpad when they first started out. Finding a platform to piggyback on or a strong partner in a complementary market makes it much easier to push a new category.

Fourth, constant advocacy of the new category. Wherever you appear, you need to frame the picture of the new market. Whether that’s in a podcast interview or during a presentation – advocate the new category and frame yourself as the leader. Just look at how Elon Musk did that throughout Twitter, in his article series on Wait But Why, or in media interviews.

Fifth, capitalize on your network effects and moats. An attractive market quickly sprouts competition, but being first-to-market means you have data before others. The key is to capitalize on that data to learn faster than your competitors. One example is Netflix, which has been on top of their data very early on to identify user preferences and personalization, which in return improved the product, which made it more attractive to new users, etc. You get the point.

Of course, you need to have strong product/market fit to get a new category going. It’s already hard enough with a good product, but without one it’s hopeless.

Good luck ;-).



More material:

Your weekly dose of awesome content

Tom Tunguz: “1% of Salesforce’s Revenue Makes a Unicorn
There is a saying “Some small animals live off of the food the big ones drop” (not sure where it’s from; could be German). That’s exactly the point Tomasz is proposing: if you build something for a 1% customer segment from a big incumbent you can still a company that achieves unicorn status.
Also see: http://tomtunguz.com/valuing-saas-companies/

Youtube: “Solving the Chicken or Egg Problem
19 ways to build a marketplace.

Contently: “Are Chat Stories the Future of Native Advertising?
Exciting idea: product placement in stories told by text messages. Value + exposure in a creative way.

Google Data Sciene: “Crawling the internet: data science within a large engineering system
Very interesting article of the Google data science team that confirms Google uses PageRank to determine crawl budget.

The Guardian: “The web can be weaponised – and we can’t count on big tech to stop it

Bonus
A Conversation with Paul Graham.