Start-Up Key: Sell to Educated Customers

Tom Tunguz of Redpoint Ventures has a WordPress blog I follow, Ex Post Facto. While many of the posts are over my head in terms of technology terms, his posts on carving out a market advantage always catch my attention. Today’s post, “How to Pick Your Start-Up’s Market,” makes the point that the Goldilocks Principle is key–picking a market that is right-sized; neither too big nor too small.

Tunguz credits the Blake Masters blogs, and Peter Thiel’s summary classes in particular, with illustrating what others have learned through expensive market plays. In “The Last Mover Advantage” class, Thiel argues that:

Too small a market means no customers, which is a problem. This was the problem with PayPal’s original idea of beaming money on palm pilots. No one else was doing it, which was good. But no one really needed it done, which was bad.

Markets that are too big are bad for all the reasons discussed above; it’s hard to get a handle on them and they are usually too competitive to make money.

Tunguz attempts to explain major internet successes by combining Goldilocks with Last Mover:

  • Google – last mover in search and search ads. The search market was roughly half of the $8B market– not too big, not too small.
  • Facebook – last mover (at least for now) in social media. Social media ad market was less than $1B when the company started.
  • Dropbox – near last mover in consumer storage. The industry was considered unprofitable by investors given Mozy and Carbonite’s trajectories and was at most $2B at the time the company started.
  • Apple – near last mover in portable music players and computers. What a turnaround we’ve seen.

Common across all these examples is significant market growth driven by one company who brought much better product design, strategic management and effective sales processes. It’s easy to point to the product differentiation – later founders used previous product generations and built something significantly better. But it’s also easy to overlook the importance that sales had on most of these companies.

  • Google had a team which mechanized closing and on-boarding large search partners growing the revenue base dramatically.
  • Dropbox focused significant fractions of their engineering team on optimizing conversion-to-paid funnels. And they maxed out the refer-a-friend program.
  • Apple built the best retail experiences which today drive a huge, but undisclosed fraction of sales.

Significantly, Tunguz goes on to say that each of the example successes were selling to a market that someone else had educated. It is important that the target customers already knew both the Problem and the Solution the product(s) were created to address. In each case, others had been first-to-market, but were not offering premium products. With a premium product and an educated consumer, the start-up enjoys favorable pricing and better selling scenarios. Who wouldn’t want those factors in their favor, right?

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