As a seed- and early-stage venture capital investor, I nearly always invest in companies that have proven technology and maybe even a working product prototype, but haven’t yet achieved any critical mass or “traction” with commercial customers. As they go through the process of iteration in search of commercial customers to generate meaningful revenue, I have watched nearly every company make the same basic mistake, which I would describe as “taking far too long to make a moderately-better set of decisions about target market selection.”
Instead, a successful company selects a narrow target/segment focus and puts “all the wood behind the arrow” in firing at that target, even if it isn’t yet fully clear that it is the right target. Obviously some amount of thinking should support the selection of an initial market segment to target. Once that choice is made, however, the entrepreneurs should shut down any further effort to re-open the decision or incrementally “convince” doubters of the wisdom of that selection, until the company has experimented with full focus on that effort. Instead, the company should insist on a culture, first coined by Intel, of “disagree, then commit.”
The most important decision is not in the choice of an initial target market segment, but rather, in forcing the shift to an execution-oriented mindset in the sales and marketing effort, which can only really be done well once everyone in the company understands _precisely_ who they are attempting to sell to, and what the value proposition is thought to be. Of course, these will often be wrong - but the more important decision is to define how the company will measure the success of the initial market effort, and then quickly “pivot” or iterate when the evidence demonstrates the need to do so.
As a side note, I think the actual definition of the initial target segment needs to be much narrower than most entrepreneurs intuitively believe. It cannot be something like “manufacturers/OEMs.” Both marketing theory and my own experience have shown that the most successful sales efforts result from the narrowest targeting of prospective customers. This is often counter-intuitive to entrepreneurs who naturally want to be able to sell to the widest possible customer base. That will come, in time, but you can’t sell widely to a large number of customers until you can successfully, repeatedly and predictably sell to a small set of very specific and well-defined customers.
For example, rather than targeting “OEM manufacturers,” I’d suggest a strategy that narrowly targets a defined segment such as “U.S.-based OEM manufacturers with $50-500 million annual revenue that have at least 50 dedicated field support employees and that make electromechanical products that sell for at least $25,000 per product and have at least 1,000 individually-sourced components.” The beauty in doing this is that you will end up with just a few hundred or even a few dozen targets – and then you can put laser focus on winning a meaningful percentage of those accounts with a set of marketing and sales materials, and value proposition messages, that sound to the prospects as though you only exist to serve exactly them. (At some level, this is just a rehash of Geoff Moore’s pioneering work on technology marketing strategy as articulated over 20 years ago in Crossing the Chasm).
The wisdom in forcing this very narrow segmentation is NOT that you will absolutely turn out to be right, or that it will necessarily work. The wisdom is that it is the only real way to really find out whether or not it is right or wrong, and if it is wrong, you can pivot that much sooner.
Too many entrepreneurial companies (in my experience) end up failing, or succeeding sub-optimally, because they take too long to make the highest-quality right decision. If your company is building a medical device for heart implants or control software for airliners, that strategy would be appropriate. However, most technology entrepreneurs aren’t making a product that affects life and death. As a result, I would rather see a company make the _wrong_ decisions much, much faster, and then couple that decision speed with a set of clearly-defined-in-advance metrics for how you will judge whether it was the right decision or not. Once it becomes clear that a certain decision was wrong, you simply change paths and iterate.
The importance of decision speed was nicely captured in the famous “OODA Loop” decision-analysis framework, first developed by US Air Force Colonel John Boyd to improve the way combat fighter pilots made successful decisions. His analysis was that the best pilots do not make better decisions, on average, than the worst pilots. In fact, they often make *more* mistakes than the worst pilots. However, they have much greater _speed_ at which they make decisions (right or wrong) and then quickly evaluate, iterate, and make another decision. The full concept is described adequately on Wikipedia here (http://en.wikipedia.org/wiki/OODA_loop) and there are lots of complete management books devoted to the concept.
In conclusion, most entrepreneurs would benefit from spending far _less_ time trying to make the right decision up-front about what set of customers to target, and far more time narrowing the focus, then launching the sales and marketing effort to see if it works or not. Once you plant the stake in the ground and proceed based on those decisions, and apply well-thought-out metrics and analysis for whether or not the strategy is succeeding, you can change course much more rapidly according to those initial results.
[Blog post]: I had the pleasure recently to participate in a roundtable of entrepreneurial CEOs and investors. One of the topics of discussion involved tactics to keep one’s entrepreneurial organization “honest with itself.” Put more bluntly: how do you make sure you aren’t “breathing your own exhaust?”
The panel produced lots of sensible and common sense ideas, all involving trying to get honest feedback from customers, suppliers, employees, potential employees, investors, etc.
One of the most insightful conversations involved competitors. As many people observed, too often the conversation around an entrepreneurial board table involves dismissal of potential or current competitors. More often it includes an honest assessment of the competitive threat only from the company’s most talented and truly threatening competitor(s).
Yet in reality, competition often shows up not in the form of a brilliantly-planned surgical strike executed by a competitive team of the best and brightest, but rather, via the indirect stumbling and bumbling that characterizes a lot of what passes for strategy. Even if competing entrepreneurs are truly the “best and brightest,” on any given day, week or month, those same entrepreneurs are faced with the same blizzard of real-time chaos that we all are. As a result, what looks like competitive entry onto one’s own turf is often just a serendipitous border crossing by a confused and scrambling team facing its own set of challenges.
If that’s at all the case, how do you predict, prevent, and/or respond to such competition? The insightful practice used by one participant in the roundtable was to lead weekly discussions to brainstorm answers to the question of, "How would a ‘crappy’ imitator or competitor beat us?"
By phrasing the question in this way, you allow into the discussion the natural “dismissiveness” of competitor’s abilities, without also removing their ability to get in your way. As a result, those competitors that everyone tends to dismiss end up still getting considered, discussed, and evaluated.
Second, you explicitly allow people to brainstorm all of the stupid ways that a competitor might end up - inadvertently or not - getting in your way. Often those challenges end up being the more serious ones, and this provides a channel in which entrepreneurs and investors can talk openly and honestly about the potential risks without being worried about the “appearance” of taking a competitor too seriously - which often inhibits the discussion altogether.
I’ll be interested to hear how other entrepreneurs and investors approach this challenge.