January 17, 2011
Now we’re moving on to the third type of startups: Startups that look to resegment an existing market as the low cost entrant.
This style of startup is the first of the two types of hybrid startups that we will look at. A large portion of startups that will enter into the market will pursue this course of action, trying to introduce a new product that resgements an existing market.
Segmentation means the startup you are looking into has established a beachhead they feel is a distinct spot within customers’ minds. This area within an existing market is clear, unique and most importantly focuses on an established want or need that exists within the current market.
What makes these startups unique however is their focus on being a low cost entrant in the market. The focus of these products is at the lower tier of the market where consumers will purchase products that may not be as good as top quality products or services, but are good enough based on their pricing.
When looking into these types of startups there are three things that we look at to make sure the company fits with investment criteria:
With type 3 startups the market exists and has existed for quite some time and because of this you’re going to want to look for a management team that has been around the industry. Having this experience on the management team means the startup will have an inside track and a working knowledge of how the market works, putting them on par with their competitors. The more established the market and competitors are the more important it is for these startups to have industry experienced individuals on their management team.
Something to be cautious of when looking at investing in these companies is to understand their entrance model in the market. Selling as low cost entrant generally means that a lot of product is going to be moved in large quantities in order to generate revenue streams which can be very capital intensive in its initial phases.
However this type becomes less capital intensive if the model is dependent on a single distributor. With a piece of technology for example that is only being sold by and produced for a single distributor capital may be required for the creation of this technology but this style of model limits the heavy demand of capital.
The key to success in this style of market is entering towards the peak of the product lifecycle. At this stage existing companies are more likely to be focused on high-margin products in the market and move away from low-margin plays. The prime time for low cost entrants is as the product lifecycle moves towards the late adopters phase, after the height of the life cycle. With timing it is important to look and see if the startups have identified exactly where the segments or niches that they wish to resegment lie and where they are specifically in their product lifecycle.
The tech industry itself is the perfect case study for understanding where low cost resegmentation comes into play. Narrowing that down and examining the mp3 player market alone there are a number of significant players and low cost entrants. At the top companies like Apple (ipod) and Sony (Walkman) have claimed large portions of the market with top-tier products with higher price ranges, leaving the low-tier market open for low cost entrants such as Sandisk and Sansa.