Deliver for a Market You Can Win
Many of you have probably come across the fairy tales about start-ups that launched products, hit a wall, pivoted, and became billion-dollar companies. Twitter began life as Odeo, a podcasting platform but was outcompeted by iTunes from Apple. At that point, Jack Dorsey had the idea of creating a platform for people to share their status – what they think, feel, etc, turned it into Twitter which is now currently valued at $60 billion USD. Airbnb was started to target conference attendees but it was too reliant on conference activities and the business model becomes unsustainable. They pivoted and opened the concept to travelers looking for value accommodation. Airbnb is currently worth about $75 billion USD.
These fairy tales are inspiring but when it comes down to facts, many start-ups run out of money and fold before they can pivot successfully. This is especially true in hardware start-ups which require millions of dollars to build products and launch them to market.
Some of the early decisions of start-up founders make up their destiny, to become either successes or failures. In this blog, I will discuss more in-depth about one of those decisions: the decision to pick an initial market/beachhead market for a product.
Beachhead is a military term that advocates a strategy to focus all your resources on winning a small border, that becomes a stronghold area, from which to advance into enemy territory. Most successful start-ups use this strategy of picking one initial market that would give them the highest chance to succeed and dominate. They then can leverage this early success to expand into the mainstream market. One example is Facebook which was launched first at Harvard University and expanded to all universities and eventually to everyone. Amazon initially chose to sell only books and has then expanded its market to include almost everything.
"Most successful start-ups use this strategy of picking one initial market that would give them the highest chance to succeed and dominate"
Following are a few key criteria to pick the right beachhead market:
1. The beachhead market has to be large enough, but not too large. For VC-backed start-ups, a beachhead market that is less than $80 - $100 million is usually considered to be too small. A beachhead market that is worth more than $1B might be too big. A larger market often has much stronger competition and therefore is hard to gain domination, which should be the main aim of a start-up at this point.
2. The beachhead market is not the end goal. A good beachhead market paves the way for start-ups to enter the mainstream market which is many times larger. Users from U.S universities paved the way for Facebook, online books for Amazon, the expensive Tesla Roadster paved the way for the affordable Model 3 which targets a much bigger market.
3. Customers in the beachhead market are the early adopters who love the products and are willing to pay for them. They don’t mind the risk of buying a product that is unproven in quality and don’t mind the risk that the start-up would go bankrupt in the future and stop maintaining warranties, repair & maintenance, and customer service. It means that the beachhead market needs to include a group of customers who realise the benefits of the product and think that these benefits will outweigh the risk. These customers are also willing to use a product that might present some technical issues but still like the products so much they will introduce them to their friends and families.
4. Sales cycle to these customers are often the shortest among all group of customers in the start-up’s total addressable market. If the product price is low and the sales cycle is 1-2 years, it almost never works because the cost to make the sales would be much higher than revenue. Customers in a beachhead market are even willing to engage earlier in the prototyping/development phase and help to define specs needed for an MVP product.
5. Start-ups should be able to outcompete the incumbents in the beachhead market. They should also be significantly ahead of the race to bring a solution to market against other likely new entrants in the near term. The market will give start-ups a good chance to become No.1 in only a few years.
6. It is easy and cost-efficient to reach the customers in this market and deliver the product/service and customer support. It means that there is at least some level of existing distribution network and infrastructure that the start-up can leverage. Not many start-ups can build a distribution network like Tesla’s, which is able to raise billions of dollars, by themselves. At the same time, easy access to customers allows start-ups to provide the required support and get feedback in a timely manner in the early days.
Picking the right beachhead market requires a lot of research and effort to reach out to users, talk to them, and collect the right data. This is often easier said than done and founders don’t often find it enjoyable to do. This may mean they rarely allocate the right amount of time and effort to get it done properly.
At WNT Ventures, we support founders to take the time to get the data before making this crucial decision.
Do you have a technology or company that needs funding and support? We are looking for innovative, pre-revenue companies with strong intellectual property and global potential.