CHAPTER FOUR


The Pull of the Market

Attach to Your Customer,
Not to Your Idea

“The greatest danger for a new venture is to ‘know better’ than the customer what the product or service should be.”

—Peter Drucker, Innovation and Entrepreneurship

Apple founder Steve Jobs predicted its impact on society would rival that of the personal computer. Its inventor, Dean Kamen, believed cities and towns would be redesigned around it. “It will be to the car,” he said, “what the car was to the horse-and-buggy.” And legendary venture capitalist John Doerr promised that its maker would be the fastest company in history to reach a billion dollars in sales.¹

In December 2001, in one of the most anticipated launches in commercial history, Kamen and his backers unveiled the Segway Personal Transporter, a revolutionary alternative to walking or driving. The two-wheeled, magically balancing Segway was a technological marvel, ten years and $100 million in the making, and it had wowed riders in super-secret tests. A gleaming production facility sat ready to crank out as many as 40,000 units every month in hopes that city dwellers across the world would embrace the product as a solution for congested traffic, overcrowded parking lots, and long, exhausting walks.

But urban commuters never got the memo. After seven years and more than $250 million in invested capital, the Segway had yet to catch on with its intended market. Only about 25,000 Segways had been sold in total by 2008, mostly for police, security, and industrial use. As BusinessWeek noted in 2006, “the problem that he (Kamen) wanted to solve, the need for a clean, energy efficient vehicle that could coexist with pedestrians and replace the car in the world’s cities, was one that others didn’t see.”² For most urbanites, the Segway seemed no more practical than the bicycle, a tried-and-true device invented two centuries ago and available at a fraction of the cost, prompting the Washington Post to dub it “The Invention That Runs on Hype.”³

But don’t count out Segway just yet. During his tenure as CEO from 2005 to 2010, James D. Norrod pushed the company to expand its foothold in the police, security, and industrial markets, maintaining that “market development is about finding one market that works really well and building your business from there.” The company has also explored new applications for its Smart Motion technology, including robotics, toys, unmanned military vehicles, and the development of four-wheeled, multiperson prototypes. For Norrod, these approaches have been the result of listening to what the market has to say. “If people want four wheels,” he said, “I should give ’em four wheels.”⁴

The Segway story is one dramatic example of a nearly universal experience among new business founders and investors. What at first seems like a slam-dunk business idea is usually an approximation, a first stab at something you hope will resonate with paying customers. You won’t know for sure until real customers buy and use your product. Or not.

Most often, identifying the right market means refining, adapting, even reinventing your original concept. Apple, Yahoo, and Google were not their founders’ first ideas. Chris Holden, referring to the successful startups his venture capital firm has funded, says that “none of them looks identical to what we thought we were investing in.” Two of history’s most celebrated entrepreneurs, Bill Gates and Paul Allen, first started a company called Traf-O-Data but later saw the tremendous market potential for a different business, something they named Microsoft.

Like Dean Kamen and many others with inspired ideas, these entrepreneurs learned a powerful lesson: An idea isn’t great until the market says it is.

Developing a Strong Market Orientation

Of all the factors that can help you get your business off the ground, the most important will be the presence of a ready market, which can be defined as a sufficient number of actual (versus potential) customers who will pay, right now, for a product or service. There is no room for abstraction on this simple point. Truly superior business concepts always translate into living, breathing customers who will pull out their wallets and hand over hard-earned money. Everything else is a warm-up.

This is why hard work, cool technology, lots of funding, or superior talent won’t, by themselves, guarantee startup success. In fact, if the market is right, these attributes might not even be necessary. A founder with questionable skills, little money, and a B-grade product might still launch a business by stumbling into a white-hot market, which can disguise and cure a lot of ills. When J.C. Faulkner built D1 into one of the strongest mortgage companies in the United States, during the late 1990s, he knew that some of his competitors made money only because of a booming market. “When running downhill,” he would say, “everybody thinks they’re an athlete.” He wanted his team to be ready for the inevitable market downswing, and when it came, D1 swiftly outran its competitors.

As a passionate founder, you must wrestle with a paradox. Passion is an inner force, driving you from the inside out. But the surest way to get a new venture off the ground is to build it from the outside in, allowing market forces to pull and shape your idea into a thriving business. As we saw in Chapter Two, your attachment to a cool business concept can amplify your inner world of belief and optimism so much that you lose your objectivity about the needs, desires, and fears of prospective customers and move forward with a product that nobody wants.

The best possible antidote is to bring a strong market orientation to your new venture. A market orientation will immunize you against one of the most dangerous effects of the passion trap: your blind faith that customers will believe in your product simply because you do. And although it won’t guarantee that you’ll immediately find the perfect market for your idea, a healthy market orientation will dramatically improve your odds of finding a ready base of customers to sustain your startup.

What is a market orientation? I’ve found that market-oriented entrepreneurs do three things to ensure that their passion connects with ample opportunity:

1. They obsessively emphasize the market and the customer. This is a mindset issue. How do you think about your business relative to the customers you serve? Are you determined to build your business from the outside in? Are you starting with the market, and developing your business from there, or are you a “product in search of a market”?

2. They strive to know their markets and customers. How fully do you understand your customers, their needs and preferences, and the problems you are solving for them? How will you continue to improve your knowledge over time?

3. They execute on the market opportunity. How will you successfully market and sell your offerings? What kind of sales engine is required for success? Do you really understand how customers experience your products and services, and what kind of value is created for them?

Through the rest of this chapter, I will further define these three strategies to ensure that you find and connect with customers who are just as passionate about your offerings as you are. Then, I’ll share a set of questions for giving your startup idea a market scrub to scrutinize your concept in the bright light of the marketplace.

EMPHASIZE YOUR MARKET

The next time you’re in line at a fast food-restaurant or a corner drugstore, pay attention to the transaction happening in front of you. Do you see a product being sold or a human need being met? Do you see a hamburger or hunger? A bottle of Ibuprofen or a spouse at home with a killer headache?

How you see the world of commerce will govern how you design, build, and run your startup. Whether you see the world as products or as needs is vitally important. We live in an increasingly consumer-and technology-driven culture, and we love stuff: gadgets, widgets, technologies, and things. Most of us, most of the time, “see” products and services when we look at a business.

But every successful offering corresponds to a need it was designed to meet. Products and needs are inseparable. To continually remind myself of this, I keep a shabby hand-drawn rendering of the classic figure-ground illusion (see Figure 4-1) taped to my office wall.

Figure 4-1. The figure-ground illusion.

In the picture, I see the white vase as my product or service. It represents my great idea, my “baby.” Of course, as I continue looking, foreground and background will shift, revealing two faces in profile.

These are the faces of the customers who shape my product, the markets that give life to any business. Whether I notice them or not, they are always there.

Emphasizing your market means continually seeing the faces, never losing sight of the market’s absolute power over your business, despite force of habit drawing your attention back to the vase, again and again. Focus on your market, the wellspring of any healthy business, and you can be confident that the right products and services will emerge over time.

Stacy’s Pita Chips would never have been born if its founders had clung to their original business idea or if they had overlooked an unexpected market need standing, literally, right in front of them. In the mid-1990s, Stacy Madison, a Boston social worker, dreamed of opening a health food restaurant. With very little money, she and her business partner, Mark Andrus, decided to start with a small sandwich cart in downtown Boston, selling all-natural pita-wrap sandwiches. Hungry customers were soon forming long lines down the block. To keep them interested while they waited, Stacy and Mark served them seasoned pita chips baked from leftover pita bread. Customers flipped over the chips, convincing Stacy and Mark to package them for sale in stores. Before long, the retail chip business took off, so they abandoned their restaurant plans and pursued the pita chip idea full-time. In 2006, having achieved more than $60 million in annual sales, Stacy’s Pita Chips was acquired by Frito-Lay, the world’s largest snack food company. Not bad for a lunch-cart business, and all possible because Stacy and Mark put their attention where it belonged, on a customer need.⁵

The idea of placing emphasis on market needs is hardly revolutionary, but it is easier said than done, especially among technologists and product developers. Paul Graham knows this as well as anyone. Through Y Combinator, his seed-stage technology venture fund, he invites a wide array of ideas from very young, mostly brilliant software engineers, hoping to launch the next Google or Facebook. Graham says that a lot of funding requests come from “promising people with unpromising ideas,” so he and his colleagues have settled on a four-word mantra for what makes a technology stick: Make something people want. It permeates every Y Combinator program and is printed on T-shirts given to startup teams. “If you had to reduce the recipe for a successful startup to four words,” Graham says, “those would probably be the four.”⁶

KNOW YOUR MARKET

Anyone who has played Pin the Tail on the Donkey can understand the challenge of launching a new product or service. You’re blindfolded and reaching forward, hopefully closing in on your target but with no way of knowing for sure. The kids who did well in that childhood game always had parents who grabbed their shoulders and lined them up in the right direction. The rest of us blindly wandered halfway across the house.

Knowing your market is like having someone grab you by the shoulders and point you in the right direction. Although you’re flying somewhat blind, your odds of finding a robust market go up dramatically. The reason is simple: Your ability to meet customer needs is strongly correlated to how well you understand them.

In 2005, American companies spent over a trillion dollars a year on outbound marketing, representing almost 10 percent of the country’s gross domestic product. If it were a vertical industry, marketing would rank as the country’s fifth largest, behind manufacturing, government, real estate, and professional services.⁷ The primary purpose of all this activity is to broadcast product messages out to as many prospective customers as possible. Seth Godin, in his 2005 book, All Marketers Are Liars, wrote that “all marketing is about telling stories . . . painting pictures that they (customers) choose to believe.”⁸

Granted, storytelling can be a powerful tool, but it is not the essence of business. A more essential issue is whether a business creates actual value for customers, rather than expected or perceived value, the kind created by marketing impressions. A story won’t determine how well you solve customer problems or whether the market is ultimately satisfied or frustrated with your product. Your customer’s experience of your product, not the stories they hear about it, will make or break your business.

This is why, for a new venture, the first and most vital aspect of marketing is the inbound part, the process of listening to the marketplace, learning about customers, and hearing their individual and collective voices. This will be an ongoing, iterative process. What you “know” may be proven wrong, and even well understood markets will change over time. But you can dramatically improve your odds of a solid start—and avoid some major headaches—by understanding the market you are going after.

To keep it simple, there are three basic paths to getting market knowledge before you launch. You can bring it with you. You can learn it. Or you can hire it.

BRING IT – When it comes to really knowing a customer base, there’s no substitute for direct market experience. I’ll always bet on founders who have worked for years in their targeted industry, especially if that includes field roles in marketing or sales, versus those who are new to a market or who have spent no time in the field.

I’ve already noted the value of J.C. Faulkner’s experience prior to founding D1, and every bit of that experience was centered in the marketplace. Over the first ten years of his business career, he took on branch sales jobs throughout the United States, developing broad industry relationships and learning about the market’s cyclical nature and fluctuating rates. In his last corporate assignment before his startup leap, he immersed himself even more deeply in the market, leading a two-year internal venture to evaluate and buy loans from other mortgage lenders across the country. “In order to work with these lenders,” J.C. says, “I had to go in and get their financials and understand their operations. I studied fifty of these shops over a two-year period, and spent a lot of time with all of them. After a while, I knew them better than they knew themselves.”

J.C. then designed his new venture to out-compete the businesses he had studied. Because of his relationships and credibility across the industry, he attracted top talent to run his first sales branches. Right away, he and his new team exceeded their sales projections, breaking even within nine months.

D1 was born in the market. The very idea of the company came not from a product development lab, but rather from its founder’s sales experience, his relationships within an industry, and his ability to see a phenomenal opportunity in the making. From inception, his venture was tightly nested within a known market space.

LEARN IT – Starting a successful business is a non-stop learning process, most of which happens after you’re up and running. But you can improve your odds of a solid start, and avoid some major headaches, by doing your market homework before you start. Studies have shown that effective market analysis can prevent up to 60 percent of startup failures.⁹

How you collect data, and how much you collect, will depend on the type, scale, and complexity of your startup; how much time and money are available; how much you already know; and so on.

The simplest way to learn about a market is the old-fashioned way. Get out and talk to people whose opinions you trust: potential customers, industry colleagues, and respected competitors. Ask people what they are seeing in the market, how their needs and interests are changing, and what problems and opportunities they are dealing with. Focus on listening to them rather than selling your idea and use their input to reevaluate your product or service. While enhancing your market knowledge, this approach also creates interest in your new business. These conversations plant seeds for future sales and referrals. Build a database of these contacts so that you can keep them informed of your progress as you move forward.

Another informal way to learn about your market is through published sources. Read as much relevant information as you can: industry magazines, research reports, customer databases, census information, etc. The Web is an increasingly broad and deep source of market information (see Appendix B for a list of good starting points for online market research), although the accuracy and quality of Web-based information can be difficult to verify. Plenty of fee-based services are available to provide more reliable market information on sectors most critical to your business plan.

To ensure that you don’t bend the data to fit your preconceptions, hearing what you want to hear, involve others in your information gathering efforts. A talented marketing consultant can conduct surveys or focus groups in a more detached manner than you, and these professionals can research available data more efficiently, unfettered by your hopes and biases. They can also help you overcome the fact that customers aren’t always able to articulate their deeper motivations. They will say they prefer low-calorie ice cream then take the high-cal stuff home in their shopping bag.

One more word about learning in advance: Don’t overdo it. In the absence of real customers, your data collection will reach a point of diminishing returns. Be sure to do your homework and examine your beliefs about the market you are about to enter, but save a healthy chunk of your time, money, and energy for the rich learning that will come only after your products are out there and the clock is running. In Chapter Six, I’ll explore more thoroughly how to set up feedback and learning loops after you launch to continuously build a better understanding of your customer base and your overall market.

HIRE IT – If you don’t have direct experience in your target market, consider hiring or partnering with somebody who does. In his study of 850 technology startups, Edward Roberts of MIT found that “companies that had a marketing person or salesperson at the beginning did better than those that did not. Having a marketing or salesperson (with specific industry expertise) as a cofounder seems to be critical.”¹⁰ If you can find the right person—an important “if”—you can add immediately valuable market expertise to your team, freeing you to focus your energy in areas where you are more likely to shine.

Another approach is to tap an outside sales adviser or marketing consultant on a temporary basis. You can scale the role to meet your specific needs without committing a full salary or giving up ownership in your business. More than ever, because of macro-economic challenges, a lot of highly talented marketing and sales professionals are on the sidelines, acting as free agents, available to help startups better understand their markets. As a bonus, if the person is a great fit, you can opt to bring him or her on board full-time down the road.

EXECUTE ON YOUR MARKET OPPORTUNITY

In his 1987 book, Moments of Truth, Jan Carlzon tells the story of how he reinvigorated his ailing company, the Swedish Air Service (SAS), by focusing his 20,000 employees on the customer experience. His logic was straightforward: The airline served 10 million customers a year. Each customer came into contact with approximately five SAS employees during the year, and each contact lasted an average of 15 seconds. He wrote, “The SAS is ‘created’ 50 million times a year, 15 seconds at a time. These 50 million ‘moments of truth’ are the moments that ultimately determine whether SAS will succeed or fail as a company.”¹¹

More than twenty years later, this notion still cuts to the heart of what makes any business viable and enduring. Carlzon was operating a large service organization, but the idea that businesses are the sum of their customers’ experiences perfectly applies to founders of seed-stage startups, whether they are hawking websites, widgets, or accounting services. The global economic crisis of 2008, and the fact that it was caused by bubbles and run-ups largely empty of assumed value, returned us even more squarely back to fundamentals. Underneath all the noise and clutter that can accompany your startup process, it’s helpful to remember a simple truth: If you create enough value for enough paying customers, much of your initial risk melts away.

When your product or service is ready for prime time, here are five guidelines for gaining an early edge in the marketplace.

1. Invest to acquire customers. By “invest,” I don’t mean spend wads of cash, unless you’re a well-capitalized founder with a clear-headed plan calling for that. I am suggesting that you put other assets to use, including the most precious resources available to you: your focus, time, and energy. Are you directing these toward generating prospects, converting them into paying customers, and stoking the sales engine to build a longer-term revenue stream? Or are you hoping that customers will flock to your better mousetrap simply because of its magical, magnetic pull?

I sought much advice when I started out as an independent consultant. One piece that stuck with me came from a legend in my field, who, in an interview, was asked to name the secret that distinguishes successful consultants from the rest. He thought for a moment, then he replied, “clients.” Although most new founders understand the importance of building a healthy pipeline of clients, they also routinely underestimate what’s required to do it, even with a well-targeted offering.

Revenue is a lagging indicator. Your customer count will be a function of how much time, attention, and, as necessary, money you put into your marketing and sales efforts. The look and feel of your particular approach will depend on your business model and plan, who you are targeting, through what channels, etc., which I’ll discuss in more detail in Chapter Five. Whatever your plan for acquiring customers, be sure not to take short cuts in this vital area.

2. Go for game-changing partnerships. A common theme among successful entrepreneurs is that they don’t attempt to do it all themselves. They create early alliances that bring stability, customers, connections, capacity, or promotional support. Whether it’s that first monster client account or a highly trafficked website that features your product on its home page, big-ticket partnerships can radically alter the growth trajectory of your business. Microsoft was essentially born through a deal to provide the operating system for IBM’s first personal computer. Modality’s first big break came as a result of Mark Williams’s hard-earned partnership with Apple.

As David Thompson notes in his book, Blueprint to a Billion, these alliances are often highly asymmetric, with the larger, more established partner holding all of the power.¹² Such partnerships bring challenges and risks. You can become overly dependent on a single mammoth partner, for example, or lose direct contact with your end user. Making the right alliances work in your favor will call for boldness, creativity, persistence, and strong relationship skills.

As you look across your market, use these questions as guidelines for identifying and landing game-changing alliances:

Who currently has relationships with your target customers?

Who do you currently view as a competitor that, if approached differently, could be a useful partner?

What early customers would instantly connect you with other prospective customers or elevate your business profile in a positive way?

What can you offer each prospective partner and vice versa? Where are the win-win opportunities linking your business concept and theirs?

What specific steps can you take to explore and strengthen the most promising relationships?

3. Understand your user’s experience. There’s nothing like the feeling of making that first sale and serving that first customer. Your effort and sacrifice have borne real fruit. So cash that check, whether for $16 or $16,000, and pop the champagne.

But, after the celebration, remember that early sales don’t always equate to satisfied customers. First-time buyers may flock to you because of the novelty effect of your new product (think of how much traffic most restaurants attract in their first few weeks). Now that real customers are involved, you can begin to answer some vital questions: How effectively are you solving your customers’ problems? Are you creating real value for them? Are they the right customers for you? If so, will they buy from you again and refer other customers to you? Answering questions like these will help you build a sustainable market presence over time.

4. Focus and go deep with the right opportunities. The early stages of a startup are all about opening up, experimenting, and generating possibilities. It’s the time to throw your best stuff out there and see what sticks. But as leads turn into viable market opportunities, many startups reach a point where experimentation is no longer necessary or helpful. To propel the business forward, you must choose, focus, and execute in a few core areas. This often means saying no to some exciting options, a fact that can severely test founders accustomed to saying yes to any potential revenue source. If the yes-habit isn’t broken, you’re likely to stretch yourself too thin and fail to make a major impact with any one initiative.

The challenge is in knowing which opportunities to pursue more deeply, and which ones to avoid. Here are a few guiding questions:

How well does the opportunity align with your purpose, your plan, and your passion?

How will it impact cash flow? Will it yield an immediate return of cash, or will it function as a short-term investment with lagging return?

What is the degree of difficulty? How well does it match up with your strengths?

What will you have to give up to successfully take it on? To what will you say “no” to free up capacity for this “yes”?

What are the costs/risks to you if this opportunity doesn’t work out as planned? Are these acceptable and manageable?

5. If you face a revenue crisis, treat it like one. Falling short of early sales goals is the rule rather than the exception among startups. Usually, these initial shortfalls are not as dangerous as another common phenomenon: the unsettling tendency of founding teams to deny that things may not be going well, to avoid talking about it, and to rationalize away the possible implications. This well-worn path of denial, most acute among passionate, true believers, often delays or obscures critical learning, choices, and actions. In the interest of “staying positive,” founding teams allow the enterprise to sink more deeply into a hole.

Here are a few guidelines for monitoring and reacting to early sales news.

Don’t:

Avoid looking at financial data (this is surprisingly common, like leaving personal 401K statements unopened during a market free-fall).

Shield key partners, investors, or co-founders from disappointing news, as this only ensures they will not be able to help.

Implement a knee-jerk response without understanding what is causing low sales.

Wait for changes in some external circumstance over which you have no control, such as economic recovery.

Do:

Look at sales information frequently and closely.

Take bad signs seriously, before they grow into crises.

Discuss any deviations from your game plan openly with key partners and investors.

Investigate and analyze until you understand why sales are low (see Appendix B for Eric Ries’s simple but powerful process for finding and addressing root cause: “The Five Whys”).

Take appropriate action.

When assessing causes, try to distinguish internal process issues that can be corrected (such as product errors, communication gaps, or distribution snags) from more fundamental issues that cannot be summarily fixed (such as significant, unanticipated shifts in the marketplace). The former circumstance calls for quick, focused action, whereas the latter calls for a big picture reevaluation of your overall business model and approach. In some cases, early sales shortfalls are a canary in the coal mine, an advance signal that the market for your idea is too weak to support a profitable business. If you can grasp this possibility early enough, you’ll have a healthy head start on redirecting your assets and capabilities to a more welcoming opportunity.

Antidote to the Passion Trap: Give Your Idea a
Market Scrub

The best way to protect yourself from attachment to a nonviable business idea is to scrutinize your concept through a market lens. The five sets of questions below will force you to take a market-oriented look at your product or service and better understand your prospective customer base. (This is a simplified list taken from a more thorough set of market-oriented questions contained in the “Startup Readiness Tool” in Appendix A.)

Most likely, these questions will be hard to answer on your first pass. They are designed to provoke scrutiny and analysis of your idea, to lessen your danger of falling into the passion trap and, ultimately, to improve your odds of finding fertile ground for your business idea. Try to develop a well-thought-out perspective on each of the following questions, understanding that your answers will shift over time as you begin to grow your customer base.

1. What basic need or problem are you addressing? What is your value proposition to the customer? Lynn Ivey personally experienced the confusion, worry, and frustration that families feel as they try to care for loved ones struggling with cognitive dementia. By providing a “home away from home,” during the daytime hours, The Ivey would give family caregivers much needed relief and peace of mind and provide ailing seniors with high-quality care and stimulation. Lynn’s clear identification of an acute need was a great starting point, but her challenge would lie in convincing her target audience that her solution was superior to other alternatives and in catching families at the right time, when frustration and worry were great enough to merit The Ivey’s cost and a change from the status quo.

In thinking about the need you are addressing, ask yourself: Are you offering a “pain pill” or a “vitamin?” Pain pills are products or services that solve an acute user problem and alleviate anxiety, fear, or frustration. Plumbers, tow-trucks, and hospital emergency rooms are in the pain resolution business. Vitamins are products that customers view as nice to have, rather than absolutely essential. Upgrading your computer’s processing speed would function as a vitamin for most users, whereas rescuing a crashed hard drive is a pain pill.

The conventional wisdom among marketing professionals is that vitamins are harder to sell than pain pills, but this is not a hard and fast rule. Many successful products and services appeal to higher-level motivations, for excitement, pleasure, or self-improvement, for example. But the more clearly you understand the nature of the value you are attempting to provide, as seen and experienced by the customer, the more effectively you can position and sell your solution.

2. Who is your core customer? Starbucks Coffee’s impressive growth over the years has been driven, in part, by the company’s ability to segment and understand its customers. Starbucks knows that those customers it calls “Super Regulars” comprise 4 percent of all visitors, while generating 20 percent of total revenue. They know that “Coffee House Enthusiasts” are younger coffee drinkers, who are aligned with Starbucks’s core values and bring the greatest future spending potential. When Starbucks planners are evaluating a new idea or initiative, one basic litmus test is whether the change will appeal to Super Regulars and Coffee House Enthusiasts. If not, the discussion often moves on.¹³

As a startup, you can only aspire to Starbucks’s high level of customer understanding, but you can ask the right questions to identify your early market “sweet spot,” that market segment where customer demand for your offerings is likely to be greatest. Start at the simplest level and work from there. Who is most impacted by the problem you are solving? Who is already using your product or something like it? What’s motivating them to use it? How would you describe those who seem like the best fit for your offerings and why?

3. What is the nature of the overall market opportunity? This question gets at the longer-term viability and growth potential for your new business. You can solve acute problems for an initial set of buyers but fail to find enough of them to grow, or even sustain, your business over time. Markets have characteristics and personalities just as people do. They can be young or old; large or small; steady or volatile; wide or narrow. In evaluating your market opportunity, and the broader forces acting upon it, consider at least three dimensions: size, context, and timing.

With regard to size, ask yourself: How large is your target market? How fast is it growing (or declining)? Why is it growing (or declining)? Is it emerging or mature? Is it poised for boom or bust?

When founded, both Modality and The Ivey were entering growth industries with distinct profiles. Mark Williams’s decision to develop applications for the iPhone in 2007 put him on the cusp of an explosive wave of growth in the mobile learning markets worldwide. Lynn Ivey, when she launched her center in 2007, was also catering to a population on the rise, the aging baby boomer generation, although the growth curve for this “age wave” has followed a slower, steadier climb. In fact, Lynn Ivey’s vision for an upscale, full-service adult daycare facility may have been launched well ahead of its time, perhaps by five to ten years.

Concerning context, ask yourself: What’s happening in your industry? What larger forces and trends are driving your opportunity (economic, technological, demographic, social, regulatory, environmental, etc.)?

Modality was riding on the back of a technological seachange, the irreversible movement of computing power onto mobile devices and a population of learners increasingly hungry for higher-quality content accessible at more times and in more places. As we will see in Chapter Six, this broader trend would lead to new categories of revenue opportunities for Modality, reaching beyond its initial direct-to-consumer product line.

As for timing, ask yourself: How long will your window of opportunity be open? Why is now the right time to enter the market?

Mark Williams and his team assumed that their early-to-market advantage would be brief—they referred to it as a “fifteen-second lead”—and they knew competitors would quickly attempt to duplicate their early success with healthcare education titles. But no one fully predicted the explosion of competitive products that filled Apple’s online channel soon after the release of its iPhone Software Developer Kit. By the end of 2009, 100,000 applications would be available to users of iPhone and iPod Touch. Modality’s window of opportunity had, indeed, been narrow. Had the company waited a few additional months to launch, its first products would never have stood out in the long, noisy line of competitors.

4. Who else is currently addressing (or attempting to address) the opportunity, and how? Why do you think the opportunity is not yet fully exploited? The tendency to underrate or dismiss the competition is one of the most common, and dangerous, characteristics of passionate entrepreneurs. The remedy is simple: Take inventory of the relevant players in your chosen market space, and do your homework to understand their strategies, strengths, and weaknesses. Tools for analyzing competitive forces abound, but your willingness to explore the competitive landscape with curiosity and objectivity is more critical than the particular tool used. Seek to understand what is happening in your target market space, being careful not to downplay the strengths of competitors in your market. Also, include in your evaluation any alternatives that serve to satisfy the customer problem you are targeting, even if those alternatives don’t appear to be direct competitors.

One of the effects of Lynn Ivey’s passion for her solution was underestimating the power of two competitive forces at play in her chosen market. The first was the home care industry, which had grown significantly over the prior decade as a result of the same aging trend spotlighted by Lynn. Several home care companies had been entrenched in the local market for years, providing in-home skilled nurses and companions for frail and declining seniors. Although these services were defined as “competition” in Lynn’s first business plan, she actually thought of them as important partners and referral sources, rather than competitors. She hoped they would send prospects to The Ivey who weren’t a good fit for in-home care or bring their own clients to the center for socially stimulating field trips. As she looks back at the sales challenges of her first two years of operation, it’s clear that in-home care was a favored solution for many of her “ideal” client prospects. A second competitive alternative to The Ivey was the simple, powerful force of inertia, the tendency for a family’s status quo situation to maintain itself. Even when family members saw The Ivey as a potential solution for their worries, the complications of switching their loved one into a new routine seemed to outweigh the perceived benefits.

5. What is your competitive advantage? What is unique about your offering (your “secret sauce”)? What differentiates you in the eyes of customers? When Professor Karl Ulrich of Wharton Business School opens his undergraduate product-design class each semester, he rolls into the classroom atop a Segway Personal Transporter. After fielding comical looks from students and offering each of them an opportunity to ride the device, he uses the Segway as a case of an inspired and creative product that has yet to find its ideal user. Beyond the obvious point that the brilliance of a product’s design doesn’t always translate into customers, he contends that the basic market challenge for the Segway is that, although it is potentially handy for a range of potential users (commuters, security guards, golfers, etc.) it’s not the best solution for any of them. In other words, each type of potential user has a more favorable alternative, one that out-competes the Segway as a solution. Golfers have golf carts. Commuters have bikes. And for many, good old-fashioned walking is preferred.¹⁴

In order to build a loyal customer base for your startup, you must provide something uniquely and consistently valuable to them. Honestly assess how your offering is compelling or advantageous in the customer’s eyes, whether through pilot projects, customer feedback, or, at a minimum, a thorough discussion and analysis of how your envisioned product will differentiate itself as experienced by the buying public.

All of these questions are intended to give you a taste of what it means to go beyond untested confidence in your idea and develop a more coherent understanding of market forces and opportunities related to your startup idea. For a more thorough set of questions, see the Market Readiness section of Appendix A. For all of these market questions, be sure to distinguish which of your answers are based on hopes or assumptions, versus verifiable facts, and find ways to test those.