Should you join an accelerator? It depends

accelerator

I’ve posted previously about how accelerators don’t have a lot of value for serial entrepreneurs. But for newbies, that’s a different story.

Shourjya Sanyal‘s article in Forbes, 5 Reasons Why Your Startup Should Join An Accelerator does a good job of outlining the benefits. As usual I’ll annotate his points.

1. Provides an ecosystem of support

This is generally true, but entrepreneurial ecosystems are to be found around the country from Silicon Valley, to Austin, to New York and Boston and places in between. However, the support can certainly help first time founders. Other startups and mentors may well be willing to give your product an off-Broadway tryout before you try to take it to the Great White Way. And new founders, don’t underestimate the time an effort saved by providing infrastructure, though new co-working spaces like WeWork do an even better job than accelerators. In fact they can be co-working spaces can be a good alternative to an accelerator, which are often quite selective. Where accelerators can really add value is when they are designed to focus on a particular industry like  Dreamit HealthLuminateRebelBio.

2. Develop skills for the founding team

The one skill I do believe accelerators develop in founders is how to pitch, as most accelerators culminate in a demo day. But otherwise it’s BYOS – Bring Your Own Skills. If you don’t have engineering or sales chops you won’t develop them in the three to six months you spend in an accelerator. What you will find out is what skills and experience are lacking in your management team and how to recruit to find those necessary complementary pieces for the startup puzzle. And don’t underestimate learning how to pitch. Most people are terrible at it. Founders need to pitch from day zero to an exit, be to a potential acquirer or to bankers on the IPO roadshow.

4. De-risks future investors

In my experience in the startup world, no one likes to go first. By gaining a modest investment from an accelerator your venture gains more than money, it gains credibility. The accelerator goes first, even if that first investment is only in 5 figures. Angels and early stage VCs may follow on, depending on how your demo day pitch goes. There’s a reason VCs like founders who went to Stanford, Harvard, MIT or other elite schools. It’s a stamp on the founder’s startup passport that they have been chosen by a highly selective institution. And VCs are highly selective.

5. Funding

Not only do accelerators invest actual cash for a small amount of equity, they provide non-cash value by providing office space, discounts on cloud platforms and software tools, and other amenities – all saving founders not just money, but also the time it takes to spin up necessary tools and infrastructure for a new venture. According to the author accelerators can also help with grants. MIT does this with its I-Corp program, a program of the National Science Foundation.

In addition to pitching to traditional VC firms, accelerators often mentor founders on how to apply for government grants (Such as Small Business Innovation Research grants in U.S. and Horizon2020 in EU). Such grants are often the seed round of funding for technology or social startups. In-fact business accelerators and incubators based out of universities are particularly designed in helping startups to secure these grants.

Way back before anyone but Bill Gross of Idealab had heard of the concept of an accelerator or incubator I was running one with my friend Kevin Donahue, called HyperVest. We even had VC money from Morningside, the venture arm of Chinese billionaire Gerald Chen, an acquaintance of Kevin’s. The .com bust busted us, but I did learn a bit about accelerators, including that our idea of finding CEOs to run with Kevin’s startup ideas was not a good model. Founders generally want to found and follow their own vision, not follow someone else’s vision.

Are you ready to ride a rocket?

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The New York Times has a very long, detailed article by  Erin Griffith on the sins of venture capital entitled More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost.

Neither the writer nor the many founders quoted seems to realize that venture capital is for the very, very, very few – about .1% according to a post on Quora. As I was told by a veteran vc investor in one of my companies years ago, “Venture capital is the most expensive capital you can get as a founder.” VCs are focused on two things: growth and exits. Venture capital is rocket fuel: go for it only you are prepared to ride a rocket, which will either reach escape velocity or crash back to earth – in other words go public/get acquired or go bust – don’t even consider it.

Frankly I consider most of the article to unrealistic whining. As Josh Kopelman, a venture investor at First Round Capital, an early backer of Uber, Warby Parker and Ring, said,  “I sell jet fuel,” he said, “and some people don’t want to build a jet.”

Some companies that have raised vc money have realized they want to step off the jet.

Wistia, a video software company, used debt to buy out its investors last summer, declaring a desire to pursue sustainable, profitable growth. Buffer, a social media-focused software company, used its profits to do the same in August. Afterward, Joel Gascoigne, its co-founder and chief executive, received more than 100 emails from other founders who were inspired — or jealous.

“The V.C. path forces you into this binary outcome of acquisition or I.P.O., or pretty much bust,” Mr. Gascoigne said. “People are starting to question that.”

For those of you wise enough to avoid the vc grow fast or die rocket ride in the first place there is some information on new ways to fund startups or ways to undo vc funding.

In September, Tyler Tringas, a 33-year-old entrepreneur based in Rio, announced plans to offer a different kind of start-up financing, in the form of equity investments that companies can repay as a percent of their profits. Mr. Tringas said his firm, Earnest Capital, will have $6 million to invest in 10 to 12 companies per year.

Earnest Capital joins a growing list of firms, including Lighter Capital, Purpose Ventures, TinySeed, Village Capital, Sheeo, XXcelerate Fund and Indie.vc, that offer founders different ways to obtain money. Many use variations of revenue- or profit-based loans. Those loans, though, are often available only to companies that already have a product to sell and an incoming cash stream.

But the reality is that these new ways to obtain startup funding are a drop in the bucket. Founders who can’t finance their companies through customer revenue must look to friends and family, angels, angel groups, bank loans or maxing out their credit cards if they want to avoid vcs.

The reality is that vcs and other investors have realized they can make more money pouring investment into later stage unicorns like Uber than they can by investing in raw startups, which is making life more difficult for the early stage companies I mentor.

But the laws of investment are much like the laws of physics, you might be able to bend them, but they can’t be broken. Create real value and someone – customers or friends and family, angels, whomever – may pay for or invest in that value creation engine. Too many founders I see are focused on raising money, not value creation. It’s a bit like a pro football team focused on the Super Bowl before they have even won a game.

If you want to build a company it will take a team

team

Business Insider has a typical teaser headline: The best advice billionaire AOL cofounder and investor Steve Case gives entrepreneurs is a truth about long-term success. I don’t  believe in teaser headlines but I do recommend the article. .

In an episode of Business Insider’s podcast “This Is Success,” Case said the best advice he can give to entrepreneurs is that building a productive team of people with complementary skill sets is of utmost importance.

It’s got some pithy quotes from Mr. Case, including: the common saying, “If you want to go quickly, you can go alone. If you want to go far, you must go together,” This sums up the cost – need for shared decision making, and the benefit – more brainpower and experience – of partnerships.

Case considers the best advice he gives as, “It ultimately comes down to people and teams, that entrepreneurship is a team sport, it’s not about any one person.” He warns against the ego boost that can come from external expectations of the founder. “The founding CEO tends to get most of the attention, but it really is a team effort,” he said.

CEOs remind me of quarterbacks in football. When the team wins they get all the credit; when the team loses they get all the blame. Well there are 22 players in modern football, 11 on offense and 11 on defense, no to speak of another 11 on special teams, so it’s way off the mark to give the quarterback so much credit or so much blame. And of course pro football teams have squad of about about 53 players plus another dozen on the practice squad. And companies range from dozens, to hundreds to thousands of employees. Here’s another great quote from Case on teams:

If you get the people right, almost anything is possible,” he said. “If you don’t get the people right, I’d argue nothing is possible.

These quotes all come from the This is Success podcast.

I virtually never see a full management team at my mentoring sessions because most of my mentees are at the zero stage and it’s usually just one or two founders. But what I also don’t see is a hiring plan to bring on the balance of the management team and even director level and individual level staff below that. I started my first company with a detailed spreadsheet listing position, hiring date, and projected salary for the first dozen or so hires beyond the management team, so I’m amazed that most of the founders I see have barely thought beyond hiring another engineer!

There are multiple reasons to have a team:

  • Startups are a lot of work. Spreading work amongst a group means the company is not totally dependent on a single individual, which is very risky.
  • No single person will have the engineering, marketing, sales, and support skills and experience to fill all those roles.
  • All founders have strengths and weaknesses. I was taught long ago by successful entrepreneur Bill Warner not to try to strengthen my weaknesses but rather to hire staff with complementary skills to mine and to leverage my strengths.
  • All teams needs a variety of perspective, which only comes from a diversity of teams. Research has shown that diverse teams – men and women, whites and people of color – make better decisions than homogenous teams.
  • You can’t be two places at once! Successful companies are usually national in scope if not international. No matter how smart you are you can’t be negotiating deals in New York, Austin, Beijing, and Silicon Valley simultaneously.
  • Managers only have so much reach, meaning they can only direct so many staffers before they hit overreach. That number varies with the individual, but all individuals no matter how talented and experienced have a limit. The buspeak term is “span of control.” Even if it’s as high as 20, that’s a drop in the bucket in a company of 1,000.

Personally, lacking any individual skills aside from being good at recruiting talent, I love working in a small team. The best ideas always get better, the bad ideas get killed off. And it’s much more fun. That’s a term rarely used in the startup world, but if you aren’t having fun you will burn out. Have some, it’s free.

Unfortunately Steve Case does not go on to provide advice on how to build a team. However, I have a post based on an interview with Julie Larson-Green of Microsoft. There you will find some actionable tips on how to build a team. Another post I can recommend to you is Talent Tracking, which you need to start now, if you haven’t already.

If  you want to build a product you can do that by yourself or with another engineer or two. But if you want to build a company that will take a team. This requires you to know thyself, the absolutely necessary first step for any would-be founder.

Raising capital for a not-for-profit company

newmanitarianwebsiteheaderI’ve worked with and for a number of not-for-proft companies in my career, but I’ve never been responsible for raising the capital for their operating costs. Aside from writing several successful grant applications for the Watertown Free Public Library, I’ve not raised a significant amount of capital for a non-profit. But I am familiar with the various approaches which I’ll recap here as they may be helpful to those few startups that choose the non-profit route. We see very, very few non-profits at MIT VMS, though many of the startups are focused on social impact.

One major difference between for profits and non-profits when it comes to raising capital is that non-profits have no stock to sell. So that eliminates investment and no return on capital – period. No vcs, no angels, no convertible debt. So how do you raise money?

The most important thing to keep in mind is that non-profits must get a 501 (c) (3) designation from the IRS. In short this enables donors to deduct their donations from their income taxes. It is very hard to raise capital for a non-profit without a 501 (c) 3 classification from the IRS. Unfortunately in my experience it can take 6 months or more to get the charitable designation from the IRS. There is a workaround as founders can route donations through another 501 (c) (3) corporation. Startups in Massachusetts affiliated with MassChallenge are able to use MassChallenge in this manner. However, it is just a short term fix. It appears that the current partial government shut down may affect the IRS and slow down 501 (c) (3) applications or halt them completely until the federal government fully reopens.

So where does a 501 (c) (3) corporation go for funding?

Friends and Family

This tried and true method of fund raising has been used by for-profit companies forever. While friends and family may feel better investing in a charitable organization those funds are not really an investment as there is no mechanism for a return, it’s really a charitable donation.

Foundations

Foundations like the Bill and Melinda Gates Foundation grant billions of dollars every year to non-profits. However, there are at least two problems with foundation grants. One, many of these grants are one-time grants. It is difficult to get multi-year grants. So that leaves non-profts in the position of having to constantly raise money. The other issue is that typically foundations work by the calendar: applications must be submitted by fixed date each year, applications may then take months to be reviewed and more months may go by before a check is cut to the “winning” grant applicants. Many foundations have terms and conditions around their grants and may also require periodic reports on how the grant money is spent.  Preparing and administering foundation grants requires a lot of work on the part of founders. Understand the opportunity cost before embarking on a quest for foundation grants.

Government grants

The best known grants in the tech world are SBIR grants. These Small Business Innovation Research grants can provide valuable support for a startup. I even knew one entrepreneur who had financed his entire company with multiple SBIR grants. I would encourage every startup, not just non-profits, to consider filing for an SBIR grant. Government granting agencies can move even slower than the IRS and require more detailed applications. I would encourage every non-profit to hire someone with deep experience applying for and administering foundation and government grants. They should be able to more than pay for themselves, especially if they are working on a part-time, project basis.

Donations

Wealthy people typically have their own foundations or what is called a family office. I would encourage founders to study up on family offices as many invest in startups and/or make donations to non-profits. Large corporations may set aside a portion of their profits for charitable donations. They key is finding these offices and if possible getting a warm introduction to their administrators.  Again, your non-profit must have a 501 (c) (3) designation to work with a family office.

Work for hire

Just because you are a non-profit it doesn’t mean that you can charge for products or services. It just means that any excess capital beyond your operating costs has to get plowed back into the organization – which could even be salary increases for your staff.  If your non-profit possesses a particular skill such as training teachers, you can run training workshops and charge their parent organizations a fee for the workshops.  You could even develop a product, such as a portable water purifier, which you could sell and use the proceeds to support your organization. Grant making organizations and individual donors tend to look favorably on startup that generate revenue, as donor organizations do not want to be the sole source of support for a non-profit. Similarly they don’t like be the first money it. Thus generating some revenue can be the first money in and encourage foundations to look more favorably on your grant application.

Products

Their is nothing to prevent a non-profit from making and selling products. In fact my absolute favorite charitable organization is the Newman’s Own Foundation, set up by the late actor and run by his daughter. Not only do they give grants they also have created an entire product line of excellent food products – we especially like Newman’s Own salad dressing and frozen pizzas. They have reached a milestone of $535 million in donations!

Non-profts should act like for-profit startups in that they need founders, a fleshed out management team, a great business plan, traction, a customer acquisition plan, etc. One nice thing about non-profits is that while they do compete for grant money, in general they may well be more collaborative and cooperative with other non-profits.

This post would be incomplete without mentioning the Social Innovation Forum, They are a greater Boston organization that helps startups raise capital and increase their social impact. I’ve had the privilege of working with them on founders’ presentations and SIF is an excellent organization which I highly recommend to Boston area non-profts.

My last word on non-profits is that you should acquire and use a .org domain name. .com signals a for-profit company, .org signals a non-profit. Since web and social media are so important in today’s marketing you want to make sure you are viewed as a non-profit from the get-go.

 

 

 

The rise of services startups

service

Back in the Pleistocene era of startups, in 1989 when we raised my first round, venture capitalists wouldn’t touch a service business even if you paid them to do so. “No economies of scale, no IP, no barriers to entry.” Well here we are thirty years later and three of the biggest venture-backed companies in the U.S. are service companies: Uber, AirBnB, and WeWork!

And the number one product company in the world, Apple, is struggling as the market for premium-priced smartphones is saturated and low price competitors are attacking Apple’s literally gross margins, the standard playbook for going up against entrenched competitors who have gotten too fat and happy.

Even Apple is dipping at least five toes into the services business with Apple Music, iCloud, Apple pay, iTunes Store, etc. and proudly touts the growth in this part of their business as they simultaneously hide the actual unit shipment of their products.

What the heck has happened over the past thirty years! Two things: the digitization of everything and the gig and entrepreneurial economy.

Let’s face it, Uber and AirBnb would be nothing without their smartphone apps – what they are doing would have been impossible in 1989 even though the services they are delivering, ride sharing and home sharing, have been around in other forms for decades. Similarly, WeWork is a new play on what were called “executive office suites” back when I was starting companies and lacked the cash to rent a full size office. Regus and others would provide entrepreneurs like me a small office and a set of basic business services: reception, copying, coffee, a mailing address and a conference room. Basically Regus was the grandfather of WeWork. And they are still around today, but valued as commercial real estate not as a high tech company, as WeWork is. Smartphone apps tied into cloud computing have enabled Uber, AirBnb and dozens of other companies providing services to today’s time poor, cash rich millennials and their cohorts. Food delivery, like Uber Eats, DoorDash, Instacart et al is an entire service category where VCs have poured hundreds of millions of dollars.

The other driving force behind the rise of services is the sharing economy or the gig economy or whatever you want to call it. This new economy relies on contractor labor, whether it’s drivers, delivery people or owners who rent out their apartments or houses (landlords) all to make a buck in ways the weren’t either possible or profitable decades ago. The rise of startups has also driven the need for office space with amenities, thus WeWork. Contractors are much cheaper than employees as they get no benefits: no healthcare, no vacation or sick leave, no unemployment insurance, and can be hired and fired at will.

So should founders target services business today to hop on the VC gravy train? As usual, it depends. The most important criteria are the same as they were 30 years ago: you need a large market, one capable of sustaining a billion dollar market cap company. A market that is growing, not shrinking. And it helps if the incumbents are asleep at the switch. You still need a great team and some kind of secret sauce that gives you an unfair advantage. But building products, whether they are hardware or software, can be very time-consuming, expensive and risky. May be better to add a layer of services driven by software to an existing business model, as Uber has done with ride hailing, aka taxi and black car services.

Or you may want to hedge your bets by combining services and software. Data is the new oil and how to you drill for oil when Google and Facebook own most of the oil fields? Crack that nut and you may have a successful startup.

But if you do aim for a startup keep in mind why investors historically have shied away from services companies: you need to be able to scale, you must keep your employee count low, keep overhead low by using contractors, and attack a sleepy market, as Harry’s did with shaving.

There’s a ton of opportunity out there for a smart team to solve customer problems by combining digitization with the gig-based workforce to leave the dinosaur companies in the dust.  But the fundamentals of a startup must be adhered to: great team, large market opportunity, and the secret sauce.  And keep in mind that if you succeed you will have a thousand imitators, so plan out how you will stay ahead of the competition, not just disrupt the incumbents. And don’t be afraid to go after VC money, because unlike the last century, they will now greet top gun teams building a service business with open arms.

Barrier to entry or sustainable competitive advantage?

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If you spend any time amongst investors you will no doubt hear the phrase “barrier to entry” quite often. Investors fixate on their companies building a barrier to entry. But what is a barrier to entry and how can you build it?

I think we all understand the concept of a barrier: a circumstance or obstacle that keeps people or things apart. It’s “entry” that seems unclear. Entry to what? The concept is that you have dominated a market niche and you want and need to keep other companies out of your market. Investors love monopolies! As one VC told me, We are always seeking an unfair advantage. There’s at least one problem with this concept. It assumes you have created a greenfield market, one that didn’t exist before like vaping, dominated by Juul. But often you will have a new and better idea for an established market, such as the MIT startup that invented a much better car shock absorber. There were already many companies in that market. So how can you create a barrier?

The other question you may also hear is how will you create sustainable competitive advantage. I find this a preferable way to think. A startup needs some kind of competitive advantage to get market traction in the first place. It may be the typical FCB – Faster, Cheaper, Better – or more to my liking, different. So let’s assume you built that better car shock absorber. How do you maintain your competitive advantage?

I tell startups that for every good idea there may be another half dozen or more companies working on the same idea at the same time. They need to worry less about the competition and more about their customer. It’s when a startup becomes successful that these hidden competitors come out of the woodwork. Failure is an orphan, success has a thousand imitators.  Investors worry that either another, better funded startup will copy your idea and overtake you with better marketing or sales or that an established company will decide to copy your idea and compete with you. The best known example of the latter is SnapChat. What originally differentiated SnapChat was its disappearing messages and photos. But Snap kept on innovating and developed stories, an easy way for users to link together images to tell a story about their life. This feature became a big hit. So what happened next? Instagram, owned by Facebook which has a history of attempting to copy startup features without success, added stories to Instagram. Whammo! Instagram took off and SnapChat was wounded seriously, though not fatally.

So how do you build a barrier to entry? How do you sustain a competitive advantage?

  1. IP – investors love patents, as a successful patent can ensure a monopoly, which they love even more. But filing patents can be expensive, it can take years to win a patent, and in the meantime the patent process forces you to disclose how you implement your idea. Then you may have the cost in time and energy of defending your patent! Patents seem to be more valuable in biotech than in the media, internet, publishing, and software fields where I mentor. Copyrights can be help in protecting you product name or other aspects of your business, but they are far less helpful in building a barrier. There are always workaround for competitors. And you don’t want to spend time in court suing over “copyright infringement.”
  2. Customers – there is a lot of debate over the so-called “first mover advantage“, means whichever company gets to market first with their idea will win. But there is no arguing with building up a large customer base. However, the old advertising phrase, I’d rather fight than switch! Should be your goal. Gaining customers is not enough, you need loyal customers. And it helps if you make switching to another product a non-trivial task.
  3. Strategic relationships – The most common reason to develop a strategic relationship is for distribution. At Course Technology not only did we have NACS – the National Association of College Stores – as our exclusive distributor, their parent company, NACSCORP was also an investor. This relationship helped us compete with much larger, better known, and entrenched competitors.  While the prime function of strategic relationships needs be creating value in your venture, the second function should be gaining that unfair advantage investors salivate over. While many big companies will tell you they can’t be your exclusive partner I would tell them the same thing. But that I believe in performance exclusivity. As long as you perform really well and deliver value to your partner they are unlikely to want to enter into a similar relationship with one of your competitors.
  4. Brand equity – brand equates to trust. If you can succeed in building your brand it will become a competitive advantage. Thus much advertising is not for products but to help establish brand awareness. But advice is save your money. Spend it on media relations. Stories about your company are far more credible and more valuable than ads. Too few founders have a PR plan as part of their go to market strategy. They just seem to think having the standard set of social media accounts is sufficient. Twitter, Facebook, Pinterest, etc. may be necessary, but they aren’t sufficient. Ignore the established media – print, radio, TV, direct mail – at your peril.
  5. Constant innovation – as a successful startup you will have a target on your back. Make that a moving target for competitors. The key is to constantly innovate. We saw this for years in the iPhone market. But the smartphone market has stagnated, basically because yesterday’s phone is just as good as today’s for all practical purposes. Recently there have been no innovations powerful enough to get users to upgrade their phones. Develop a product roadmap and observe your customers closely. Make sure the brilliant engineers who invented your first product have the company equity and resources they need to keep your competitive edge. I’ve seen too many startups become dominated by marketing and sales and their innovation dies on the vine.
  6. Capital – it is hard to raise money and it is time consuming. I was taught by VCs that the best time to raise money is when you don’t need it. When your product is hot and you have ample cash in the bank, raise more money. Capital can become a competitive weapon, whether in the war for talent or in funding new product development. We’ve seen this playbook with many high profile internet companies like Airbnb and Uber. Don’t worry about equity dilution, worry about creating a more valuable company. Capital is the accelerant for growth.
  7. Constant learning – I’ve written elsewhere that I consider startups to be learning machines. Don’t rest on your laurels if your product is a hit. The great football coaches criticize their teams more after a win than a loss. Keep in mind it’s harder to stay on top than to get on top. Constant learning will feed constant innovation – innovation not only in product but in business models, marketing methods, and even in sales and support. Learning and innovation should not be reserved for the engineering team.

A single company may not be able to deploy all of these techniques to stay ahead of its competitors. While individuals at companies I worked for held patents, none of my companies ever earned one. But we were masters of strategic relationships. Find where your venture can exercise the most leverage and focus your energy there.

Occasionally I’d get into a disagreement over barriers to entry, usually with an angel, rarely with a VC. Then I’d ask them, “Tell me, what is Bruce Springsteen’s barrier to entry? What about George Lucas?” If a potential investor is fixated on barriers to entry he or she may not be the investor for you. They should be fixated on exactly how they will help you grow the company and trust that once you reach the top you’ll have learned how you can stay there.

 

Find a niche and dominate it!

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I see about two new ventures a week in my mentoring role. A significant number of those ventures every year haven’t defined a target market. This is especially true of B2C companies. When I ask them who is their customer their answer is “Everyone!” But that I preach to my mentees just the opposite. I believe in the maxim that if you are trying to be everything to everyone you will end up being nothing to anyone. Startups differ from large established companies in several ways:

  • Resources are constrained – that means people, equipment, tools and cash – are limited and have to be deployed very carefully for maximum payback. That’s the art of the startup – doing a lot more with less.
  • Lack of credibility – most people are risk averse. It is only the small minority who are innovators or early adopters. The first thing most consumers look for is a name brand – that means a safe choice. A substitute for this can be a startup with buzz, but rare are the companies that can achieve this.
  • Resiliency – a mistake in a big company might cause a bruise or even a wound, but they are rarely fatal. The same magnitude mistake – like launching a product with a deal breaker bug – can kill a startup. Big companies can easily recover from mistakes that will fatally wound or kill a startup.
  • Existing customers –  not only do existing customers provide cash flow – and cash is king in startups – but the best way to grow is to sell new products to old customers. What startups must do is sell new products to new customers, exponentially more difficult.
  • Market education not needed – the more differentiated your product, the more new and different it is, the more you will need to educate the market on its features and benefits. That can be time-consuming and expensive. Startups lack the long runway of established companies. But the more like existing products the more likely it is that consumers will go with the safe, name brand. This is the paradox of product differentiation.

So with all these disadvantages how does a startup get off the ground given its short runway? Very, very few companies can be a helicopter and take off straight up. So the advice I give is to find a niche and dominate it. What is a niche? It’s a group of customers that share a significant number of attributes. Those may be age, demographic location, life style, use of another product, or stage in life. But those attributes must be easily identifiable and the cost in time and effort to communicate with that cluster of customers can not be excessive. Best is a group that talks with each other, as word of mouth will help your product gain new customers without a high customer acquisition cost.

Ok, enough with abstract generalities. How about an example? The best example and one I usually use is Microsoft. Bill Gates and Paul Allen were top flight programmers. And beyond that they were very smart entrepreneurs. They realized that the purchasers of the early microcomputers lacked the skills and even patience and attention to detail those machines required – they had to be programmed by turning on and off a series of switches on their front panels! There was no programing language built in. Equally brilliant, Gates and Allen realized that there was an easy to learn, easy to use programming language in the public domain, BASIC, developed by John Kemeny at Dartmouth College as the ideal language for novice programmers. And in yet another smart move, their company, then called Micro-soft, contracted with the largest microcomputer company, the tiny Altair, to develop a version of BASIC for its microcomputer. Long story short, Microsoft’s target market was programmers and its product line was programming languages – the must-have tools for programmers. By targeting this niche Microsoft established its brand, learned a tremendous amount not only about its customers and their needs, but about the bundling of software and hardware, and the market dynamics of the personal computer industry. Many can say they were just lucky when IBM called on them to create the operating system for its first personal computer. But luck is a confluence of timing, ability, and preparation. Microsoft had all three. Microsoft leveraged its dominance in programming languages to a dominance in operating systems to launching Microsoft Office, which has dominated business software for decades.

Obviously not every startup will become a Microsoft no matter how closely it follows its playbook of finding a niche market that it knows well from its founders experience, can learn from, dominate and then leverage to what are called market adjacencies. These are similar markets to your niche market that don’t require a huge leap of faith nor leaps of product development and marketing costs to reach. Microsoft’s first customers were programmers and Altair. It’s next became computer manufacturers who purchased MS-DOs – which became a must-have purchase for every microcomputer company.

It doesn’t matter if you are a B2B company or a B2C company, your goal during the all important customer discovery phase is to find not just a customer, but a cluster of customers, a niche, that has an unfilled need for your product and that you can reach economically.  Finding the elusive product/market fit is much easier when your market is small and homogenous, a niche than a very large and heterogeneous market.

May founders get anxious when I preach this strategy to them. “But what if a competitor comes along who will address everyone, not the tiny market you are telling us to target, won’t they end up winning?” No. Your goal should be building barriers to entry to your niche, not worrying about the rest of the world. That’s trying to boil the ocean, as they say. Making sure you have a growth strategy and have identified adjacent markets to move into on the backs of your niche customers will also protect you against competitors.

Yes it is possible to have a product for everyone in a market. VisiCalc, the first electronic spreadsheet and its progeny, Lotus 1-2-3 and Microsoft Excel, were used by virtually every business person, though financial professionals – accountants – were the first adopters and features became targeted at that group for years. But VisiCalc was not just a generational product it was a foundational product. Spreadsheets, word processors, databases – these were the foundational products of the personal computer revolution. Followed in quick succession by a whole new market – computer games.

Find a niche. A group of customer whose problem you can solve in dramatic fashion. Where you are 10X better than existing solutions, which are often manual, clunk,y and expensive. Where customers talk to each other and word of mouth will be your best marketing tool. And stop worrying about all the potential customers you are “leaving behind” and money you are “leaving on the table.” Because they are just that prospects, not paying customers. You’ll get to them in due time – after you dominate your niche.