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Shrinking Markets: Earning a Dollar by Taking Five from your Competitors

Product-Market fit is the primary element in the success of a startup. Software legend Marc Andreessen defined the product-market fit concept in his great blog post: “The only thing that matters” on which he states that creating a product that can fit into a great market is often more critical than creating a great product or assembling a great team for a market that is not necessarily ready.

From the different types of product-market fit models one of my favorites are companies that have the ability of “shrinking the market”. In basic terms, these are products that earn a dollar by taking five from their competitors. Market shrinking products have the capability of disrupting established market segments established by other vendors. We see it all the time with companies like Salesforce.com, Dropbox or Spotify which have started as incumbents in well-established large markets and have been able to become the dominant players by shrinking-first and then expanding the market.

The beautiful thing about product that have the ability of shrinking the market is not only that they automatically achieve product-market fit but also that they growth comes at the expense of their competitors. In the initial days, every revenue dollar earned by Salesforce.com didn’t go to the established expensive players such as SAP, Siebel, Oracle or PeopleSoft. By shrinking the market, disruptive products are able to force the bigger players in the space to compete in a smaller market that is typically more favorable to the new players. Similarly, if  a product or company is able to shrink the market and shift it in their favor, they will have the potential of capturing a bigger portion of the smaller market compared to their competitors.

Let’s illustrate this concept with an example.

Suppose that a startup is building a product competing in a well-established $20B market. The size of that market has been established by a set of vendors that charge a significant price for their solutions. Let’s say that the average deal in the space is typically X dollars. Our startup offers a simpler and technologically superior alternative to the competitors which, priced at X-M dollars, becomes accessible to companies that couldn’t afford the previous solution. Looking at those factors, we can initially think that our startup can capture $500M of the $20B market. However, if the technical superiority and pricing model of the product causes the market to shrink to let’s say $10B, our startup has the potential of earning 20% ($2B) of that market.

The interesting thing is that while a disruptive product can initially shrink the overall market size is will also expand the space based on the number of users or customers which can translate into a market expansion after certain point. The following figure illustrates this concept.

Bottom line, as a startup, if you are playing in a well-established market with a well-defined set of vendors and technologies, carefully evaluate whether your product has the potential of shrinking the market. If it does, you can be on your way to disrupt an entire industry segment.

 
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Posted by on July 9, 2012 in Uncategorized

 

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The Importance of Product Vision and Mission: The Story of the Annoying Girl I Met Last Night

For privacy reasons, I decided to not mention official company names in this post

Last night I was having dinner with a few friends that work in private equity technology investments. Every few weeks, we enjoyed getting together and just chatting about the technology market, recent funding rounds, exciting new companies or technologies etc. While enjoying dinner I recognized somebody in the table right next to us as a business development executive from one of the NOSQL databases companies that recently raised a new financial round, for the privacy of the story let’s call the company DreamDB ;). I am personally a big fan of DreamDB and Tellago Studios’ is not only a paying customer but we use their technology as one of the foundational components of our upcoming enterprise mobility platform. I know some of DreamDB’s founders and have an immense respect for the company.

Considering those facts and the coincidence that, just minutes before, we had been talking about DreamDB’s latest funding round, I thought it would a good idea to invite that person to join us for a little bit. I waited until an opportune moment to introduce myself and congratulate her on the financial round. After thanking me her immediate response was a loud, “ohhh I know your company” which was very surprising considering we have not been very public about our use of DreamDB.

After a few introductions she quickly move closer to our table on which my friends asked her a few questions about DreamDB. Remember, these are guys that make a living investing on tech companies; they’ve heard tens of thousands of pitches and don’t easily get impressed ;). To my surprise, the girl answered the question listing DreamDB’s main investors and biggest clients. A little surprised by the answer, my friends asked more directly the problem DreamDB solves, the market, etc. Again, the response was an incoherent explanation of how DreamDB is backed by these VCs or used by these companies. Trying to present the question from another angle, my friends asked about the company mission, origins, etc and again our girl just gave us a description of DreamDB’s latest financial round. A little bit confused by her answers, we thanked her and wish her luck in her job at DreamDB.

Thinking about this story on the way home, I couldn’t avoid feeling shocked about how this girl could only describe a great product based on the story of their financial rounds or their clients. As far as I know, companies rarely embrace a product because is backed by a specific VC firm or because is used by some big name.

As an entrepreneur, it’s important to understand that the vision behind your products and the mission of your company are foundational to everything you do and completely independent of the current stage of your company or your existing customer base. Clearly stating the mission of your company and the vision behind a specific product will make your team drive together towards accomplishing those goals while staying loyal to your core values. Here is a simple sequence you can use when asked about your product or company:

  • Who are the founders (team) and the mission as the company (vision)
  • What problem do you solve? (problem)
  • What is your current product and the vision behind it? (execution)
  • What’s your customer audience, target market? (market potential)
  • How is your product different from the competition? (competitive advantage)
  • Optionally, list some of our current clients and best stories (execution )
  • Only if it makes sense, talk about the financial composition of your company.

If nothing else, annoying situations like last night’s, are a clear reminder of the importance of clearly detailing the vision of a product and the mission and values of a company. Everything else: customers, funding rounds, partnerships are just part of the execution of your vision and goals.

 
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Posted by on May 31, 2012 in Uncategorized

 

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