December 14, 2010
As we laid out in our last post there are four types of startups, or rather four different ways to define what exactly a startup is. For the purposes of this post we’re going to look at the first type of startup that we define as:
A New Product in an Existing Market
When you think of startup companies this is generally the image that is going to come to mind. You’ll picture a new company with a great idea that innovates an existing market. The good news for these types of startups and entrepreneurs is that market and the customers are defined already. The legwork has been completed in defining demographics and certain go to market strategies.
Competition exists in this type of market and is guided, driven and defined by the players who are already selling product. Which is good news for the startups that are fighting to enter in. There is little need to focus on defining the market and instead a focus can be shifted towards innovating a product or service. Don Dodge outlines this in an article comparing First Movers and Fast Followers.
Since the product exists already those with an innovative framework can take advantage of those already in the market who are slow to adapt to change. When investing in this type of a startup we believe there are three characteristics that you need to look at. They are Team, Role and Capital.
We believe it is essential to evaluate the team behind any investment, especially one that sits in your startup portfolio. This may seem like table stakes for any investment but we believe there are characteristics of a team that fit specifically with each of these types of startups.
In this instance you’re looking for an experienced team with expertise in the market your startup is trying to penetrate. As we defined earlier, existing markets are already entrenched in their operation, this means suppliers, distributors and relationships are already well established. This isn’t to say that startups with new management teams cannot be successful, rather that investing in a seasoned management team means investing in their expertise and relationships as well.
The role will help determine how the startup you are looking to invest in plans to operate. The key thing to understand is that in existing markets there are both immensely successful companies and large failures. The importance lies in learning from both of these companies. If the startup you’re looking at isn’t modeling and innovating itself on the successes and learning from the failures of others they aren’t doing themselves any favours.
It’s important to understand that startups that are trying to break into existing markets are going to be capital intensive. Remember the competitors are entrenched and well defined and aren’t likely to give up market share easily. Due to this startups in existing markets are going to need a pool of capital to draw from in order to make themselves successful. On top of that this is patient capital that large pool of money is going to need to exist for a lengthy period of time while the new company establishes itself.
An example of this comes from a mobile company in India called Micromax Mobile launching into the mobile handset industry in 2008 Micromax had become the largest Indian domestic mobile handset company and the 3rd largest mobile handset seller in India by the end of March 2010.
Recognizing that innovation was the key to their success the company capitalized on emerging technologies and low production costs to gain market share in a niche market. “Our strategy focuses on innovating, designing and using the latest technologies to develop products at affordable prices.”