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Josiah Humphrey / July 17

Hungry Markets, Not Fancy Ideas, Create Successful Start-Ups

Novice entrepreneurs, especially millennials now reaching maturity, seem to hold a variety of mistaken beliefs about what it takes to build a successful start-up. One of the most persistent misunderstandings is the notion that companies that grow, scale, and generate huge earnings are fundamentally based on revolutionary, never-before-seen ideas. The fact is, however, that a healthy market—i.e., one that is 1) large, and/or rapidly increasing, in size 2) home to monetizable customer pains and 3) receptive of new potential solutions—is the most essential factor contributing to start-up success. In this article I’ll discuss several strategies you can use to investigate the right market for your new company.

On the one hand, the reinvigorated entrepreneurial spirit of today’s age is a much-welcomed development in the business world.

Highly motivated, passionate, and often unorthodox in their approaches, today’s start-up founders are creating massively successful companies that challenge traditional business wisdom and practices whilst effectively changing the ways we interact with technology and with each other.

On the other hand, the “hustler” attitude that resides at the heart of this movement seems to be leading at least some novice entrepreneurs astray.

Overly zealous millennials (and 30-somethings) sometimes seem a little too eager to buy into sensationalized media stories depicting college-aged kids who dream up brilliant ideas (often in their “dorm rooms”) and then go on to change the world simply by refusing to give up on their miracle insights.

As I recently discussed in detail, strong product ideas are only one factor contributing to start-up success:

“A determined entrepreneur working on a solid idea with the intention of developing an effective product that solves a real market problem—these are definitely crucial to the success of a start-up.

However, a new company requires far more than mere commitment and smart ideas in order to generate revenue, become profitable, and scale.

There are countless stories of determined entrepreneurs pursuing seemingly bright ideas who nevertheless close[d] up shot and abandon[ed] their start-ups.

In fact…[only a] few of [today’s biggest companies] actually beg[a]n with a ‘great’ idea. …

[What most] hugely successful start-ups ha[ve] [i]s not necessarily a game-changing idea but rather a) the existence of strong markets hungry for new solutions [combined with] b) well-executed products”.

As an entrepreneur, your most basic goal should be to create, develop, and expand a profitable business—not rack your brain trying to discover the next “big thing”.

And fundamental to launching a profitable business is locating, and learning as much as possible about, a market that’s hungry for innovative solutions to pressing problems.

Marc Andreessen, co-founder and partner at Andreessen-Horowitz, ranks market above team and product in terms of the key dynamics underlying start-up success:

[M]arket is the most important factor in a startup’s success or failure. Why? In a great market—a market with lots of real potential customers—the market pulls product out of the startup. The market needs to be fulfilled and [it] will be fulfilled…by the first viable product that comes along. The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product”.

So, how do you go about locating a market (or a specific niche) that’s eager to pull product out of your start-up?

How do you ensure that a significant, monetizable customer pain exists in the space in which you intend to launch?

How, in other words, can you find plenty of customers willing and able to pay for a solution to their problem?

Let’s take a look at a few strategies to help you do just that.

1. Talk (Often) to (Lots Of) Your Potential Customers

(image source)

Before you can begin intelligently researching the potential market(s) in which you’d like to launch and grow your start-up, you first must draw on your professional and/or consumer experiences in order to narrow down a list of possibly attractive markets.

Take it upon yourself to examine your own interests, passions, skills, and experiences in order to hone in on, let’s say, 5 or 6 possible markets in which you believe you stand a realistic chance of creating a successful company. 

Whilst different markets (and niches) will appeal to, and be more appropriate for, different kinds of people, there are some basic guidelines that you should keep in mind when trying to figure out the core focus of your company.

In a previous post, I outlined my thoughts on the proper balance between skills, passions, and economic incentives that new entrepreneurs should embrace.

I encourage you to read that article if you’re looking for a bit of perspective on how to discover what the key focus of your company should be.

After you have completed this preliminary stage, the first thing you need to do is actively engage with your potential customers.

You must go out into the market and actually talk to the people you hope to convince to buy your product.

Why? 

Because, as co-founder and CEO of Box, Aaron Levie, put it:

aaron-levie-quote

The simple yet crucial fact is that one of the very best ways to gain valuable insights into the size, shape, and demands of the market in which you intend to setup shop is to spend significant amounts of time interacting with real people in the real world.

There’s no better method to finding out what people (do and do not) want than asking them directly. 

As I discussed in a recent blog post, when researching your market your goal is to attain truthful and authentic—not sugarcoated or manufactured—feedback from your future users:

“In order to gain as much valid insight [about the market] as possible, you need to acquire brutal honesty from your [potential customers].

This means that rather than enthusiastically pitching [people] your ideas and trying to sell them your specific pain hypothesis you ask open-ended questions designed to let the respondents speak freely …

You might ask questions such as:

  • What is the hardest part about x [i.e., some given problem]?
  • Tell me more about x. What happened the last time x occurred?
  • Why was that experience so difficult? …
  • What solutions, if any, are you currently using? What do you find unsatisfactory about them? How do they need to be changed?”

So, the objective at this stage of investigating the market is to learn from—not sell toyour customers: you need to figure out the specific problems with which they’re dealing and the particular kinds of solutions they want but are not getting.

Now, what about the all-important question of how to find these potential customers? 

Here at Appster we regularly post articles about different strategies for locating and connecting with your future users. 

One of our recent articles explains that, as a the founder of a new start-up, you must:

“Use all the resources available to you! Try your existing email lists, online forums/message boards, social networking and micro-networking sites, Reddit, Linkedin, Quora, Meetup.com or even go to Starbucks and offer a free coffee in return for an opinion”.

The Starbucks method is actually one of 7 specific techniques that my co-founder, Mark McDonald, discusses in one of his posts on low-cost ways to assess the validity of your product idea by gathering real-world feedback.

Amongst other approaches, Mark also describes how to use online surveys, beta promotion sites and start-up directories, and in-person meet-ups and events to learn from real people in their natural settings.

In essence, do whatever it takes (whilst remaining ethical and transparent) in order to get the “face time”, both actual and virtual, that you need to build up a thorough understanding of the market you plan to target with your company.

2. Create an “Idea Maze”

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Balaji Srinivasan, a lecturer at Stanford and a board partner at Andreessen-Horowitz, insists that successful start-up founders develop comprehensive understandings of the features, histories, and possibilities of what he calls “idea mazes”: 

“[A] good founder doesn’t just have an idea, s/he has a bird’s eye view of the [entire] idea maze. Most of the time, end-users only see the solid path through the maze taken by one company. They don’t see the paths not taken by that company, and certainly don’t think much about all the dead companies that fell into various pits before reaching the customer.

The maze is a reasonably good analogy. Sometimes there are pits you just can’t cross. Sometimes you can get past [them]…but only after you’ve gained treasure in another area of the maze (Google going after email after it made money in search). … [And] [s]ometimes there are pits that are uncrossable for you, but are crossable by another (Webvan failed, but Amazon [and] Walmart…have the distribution muscle to succeed).

A good founder is thus capable of anticipating which turns lead to treasure and which lead to certain death. A bad founder is just running to the entrance of (say) the…“photosharing” maze without any sense for the history of the industry, the players in the maze, the casualties of the past, and the technologies that are likely to move walls and change assumptions”. 

Constructing an idea maze for your market is crucial for at least three reasons:

  1. It helps you better understand the amount and types of competitors working in the same space as you, thus giving you a more thorough grasping of the competitive landscape (as co-founder of Oracle Corporation, Larry Ellison, once said: “Choose your competitors carefully, as you will become a lot like them”).
  2. It makes it possible to map out opportunities and discover new possibilities by visualizing “openings” where other companies are not operating (or not operating well); and
  3. Planning out and executing how to navigate your way through the maze is ultimately how you monetize your idea and build your business.

The Idea Maze

(image source

 3. Understand and Develop Economies of Scale

(image source)

As Paul Graham, venture capitalist and co-founder of Y Combinator, notes: “A startup is a company designed to grow fast. … Everything else we associate with startups [fundamentally] follows from growth”.

As a founder, your ability to grow quickly and sustainably depends on understanding and developing “economies of scale”.

The market upon which you build your new company must be able to support economies of scale—otherwise your start-up will fail.

Investopedia defines economies of scale in the following way: 

“Economies of scale [refer to] the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and [the] per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost [insofar as] these costs are spread out over a larger number of goods”. 

In other words, as more and more customers buy your products, your cost to produce such products becomes less and less expensive.

In addition, and as I recently pointed out

“One of the most attractive features of running a software start-up is the fact that there are virtually no reproduction costs holding you back from achieving massive economies of scale (e.g., it costs the same to “reproduce” 100 copies of your new app as it does 100,000).

This is [one] reason why technology start-ups tend to have high upfront costs, which they manage to recuperate later as it becomes possible to capitalize on growth”.

We can see that this is true from the following illustrative graph:  

economies-of-scale

The ability of your start-up to scale depends, for one, on the sustainability and accuracy of your pricing

For example, if it costs you $50,000 to build a mobile app then in order to break even you will need either:

  • 500 users who pay $100 per download; or
  • 50,000 users who pay $1 per download.

Alongside determining the proper market-based pricing for your product, you will also need to establish a number of other key market-dependent factors, such as customer acquisition costs and the quality of the product-market fit for your minimum viable product.

4. Calculate the Size of Your Market

jonathan-tieh-43195

Calculating the size of your market is essential to determining not only the demand for your product but also the kinds of earnings you can expect to make once you launch.

I’ve recently published two articles detailing techniques for estimating market size.

In this post, I point out that assessing market size requires distinguishing between the total available market (TAM), the serviceable available market (SAM), and the target market (TM):

market

“Market size”, thus, encompasses 3 components: the size of the entire market in which your specific niche is based (TAM), the number of people you can expect to reach through marketing (SAM), and the number of people most likely to purchase your product (TM).

If the TM is too small then your start-up will never become profitable.

So, how do you determine the different aspects of your market?

In this post, I list the following strategies:

  • Research press coverage on the market: try to look for articles quoting authoritative market research agencies such as Gartner or IBIS; read SEC filings and Wikipedia (be sure to validate the authenticity of sources used); Google Books can also be quite helpful.
  • Create a back-of-the-envelope basic estimate of market size, collecting relevant statistics and figures (e.g., via Google search) as necessary.
  • Further validate the estimate using modern analytics tools, including Google Trends, Google’s Keyword Planner and Facebook’s Advertiser Tools. Utilizing these applications will give you the ability to determine how strong the demand is for your proposed solution. 

An example of using analytics (Facebook research) to determine market properties:

facebook-market-research

Summary

In the end, hungry markets—not revolutionary ideas—support the growth of successful start-ups.

Whilst it’s undoubtedly true that high growth start-ups create and sell high quality products, even the most game-changing product in the world won’t allow your company to scale and generate profit if there’s no customer demand for it.

It’s essential, therefore, that you do your due diligence as a new founder in order to figure out the size and shape of the market(s) in which you plan to operate.

Get to know your market, your customer base, as intimately as you can: it’ll prove extremely advantageous to your start-up as you get closer and closer to launching!

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