Creating Your Start-up – Part 2

In the last post, we talked of the need to have the right kind of people in your startup, what positions to focus on and what to look for in the key people and hires. Having done that, the startup now needs to focus externally. Namely, on markets and customers the two most important aspects after people.

So, in this post, let’s talk about evaluating markets and customers.

If you have missed our last post read it here: Creating Your Start-up, Part 1

The fundamental thing to keep in mind here is that it is advisable to first evaluate a market and customers and then tailor a solution to serve the needs of the market-customers rather than to develop a solution and search for markets-customers. If you are determined to only make a hammer, you will necessarily see all the world as nails. Not a good idea.

Markets and customers are inextricably linked. You cannot serve one without the other. The usual business model strategy for a startup suggests that you focus on a niche, dominate it and then rapidly build concentric circles around it by way of expanded sales, support, distribution etc. while creating barriers to entry. The first task then is to identify a market niche in which your startup’s technology and product can play. And to do that, requires that you now your markets and customers.

You must have a sense of who your first customers will be. It is naivete to say that everyone will be your customer. You can’t be all things to all people. Markets are specialized and customers want solutions that provide the exact benefits that they seek, else they will go to somebody else who will. You must have a realistic specific target audience – a niche.

Talk to these potential customers (“Who are my customers?”) and listen to what they have to say. Will our solution be useful to you? If so, why? If not, why not? How much do you think this solution should cost? How much do you think you can pay for this? When do you need delivery? What are your concerns? What are the alternatives if you don’t buy our product? This is the classical market research style to evaluating.

This still holds true in most industries. In the internet age, market research is done in real time and on the fly – by putting up a site with about 50% of the validation done and then doing the remaining validation through customer feedback in real time: The Netscape model where the browser was downloadable from the site and multiple versions of the browser were released incorporating customer feedback. Whichever way, you choose to do it, assumptions need to be validated and corrective steps taken. You need to answer the question: Will customers buy my solution? In VC speak: Will the dog eat the dog food?

Next you need to look at markets in terms of their growth and characteristics. The market segment you choose must be a high growth one for it to be attractive to VCs. Who are the competitors and what are their characteristics? You signal poor analysis when you say “I have no competition”. There will always be competition. How do you stack up against them? What are the competitive advantages of your solution? Are there entrenched 800 pound gorillas in the business? (VCs are unlikely to fund startups that want to go in direct competition with Microsoft and Intel). What are the risks?

Learn to distinguish between marketing and sales. Sales deals directly with customers while marketing deals with what products to sell to whom, at what price and how, in the midst of competition. Develop a marketing strategy that answers questions like:

What are the market gaps that are not being serviced by anyone?

How will the product be priced, discounted and sold?

How should the product be advertised? How will leads be generated? “Build it and they will come” is not an acceptable answer.

How will you attract, maintain and expand markets? What will be the geographical expansion?

The following grid could be useful in arriving at market positioning:
New Market    A
Market Driven (new use for existing product)    B
Missionary approach technology push
Existing Market    C
Entrenched competition: not a good place for a startup    D
Safest place for startup
Existing Product    New Product

In quadrant A, the startup needs to have superior sales and marketing to create a new demand for an existing product. Web based email is an example. Email technology and email products were around for a long time but a new market of web based users was defined by this category.

Quadrant B, is the classic and yet very difficult path taken by pioneering technology driven entrepreneurs. WebTV would be a good example here. Deep pockets are required to be the pioneer and educate the market about the wonders of the technology and the different uses/markets it can serve.

Quadrant C is not recommended for a startup. An example would be to create another portal! Clearly a bad idea for a startup. Not necessarily a bad idea for an entrenched player.
Quadrant D is the safest place for a startup. Here, technology can be leveraged to produce an advanced new product/service delivering more benefits at a lower cost to customers in a market that is receptive to the new development. Application Service Providers fall into this segment.

If you have missed our last post read it here: Creating Your Start-up, Part 1

This article was originally published in VentureKatalyst, India’s first e-zine aimed at entrepreneurs, started by Sanjay Anandaram.



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