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April 24, 2017

Category creation as strategy in tech

This blog is inspired by the discussions I have every week with our founders but brought to life by the team at Play Bigger. All the clarity and insights are all them.

History shows us that category leaders in tech (and other industries) consume the vast majority of shareholder value in any given market, typically up to 80% at and beyond IPO. The company names and their products become interchangeable and synonymous with their markets, think Uber, Apple, Amazon, Zendesk, Dyson. And often become a verb: “Slack me”, “Google it”.

These companies do not just do something better than their competitors, they emerge as an entirely new and different way of solving a problem we often didn’t know we had. They may not have been the first mover, but they were certainly the one that moved fastest and became rapidly imprinted on our brains as the default creator and actual owner of the category – whether by accident or design we can’t be sure – but what we do know is they get the lion’s share – the best employees, the most customers, the most investment, the highest valuations. 

If a startup is taking venture capital money then their intention from the outset MUST be to own a category, but the odds are stacked against them.

Since 2000, 4,424 American venture-backed technology companies raised a Series A financing and only 69 completed an IPO.

In order to achieve the outcome both they and their investors want they must aspire to being the dominant leader in a large and valuable category.

And they must do it fast. Typically listing or being acquired within 7-8 years of the company being founded.

Why so fast?

The starting point for any emerging tech provider is focusing on a pain – a missing ingredient in a market, a fundamental inequality, a massive inefficiency – the more painful the better and the more valuable to solve the better (10x the cost!). The start up rapidly iterates a solution to solve the pain and deliver on the value and then demonstrate the repeatability of their solution – albeit in a constrained manner. Initially they operate largely under the radar, because as soon as they appear on the radar new entrants will emerge.

For every problem, there are literally dozens, perhaps hundreds of solutions driven by lean-startups, agile development, the ubiquity of networks, cheap cloud-based distribution and lightning-fast word-of-mouth through social media. This is intensifying a winner-take-all economy—especially when we’re talking about digital products and services. Play Bigger.

Think of yourself like the baby iguana in Planet Earth, still and quiet in the middle of an empty space. You have identified the missing link in a market that you believe you can serve uniquely well, you’ve been stealthy and careful to avoid drawing attention. Then you move and – like the Iguana – find yourself in a snake pit.

In the early stage the (the define stage below) the number of competitors explodes as new entrants scramble to solve the problem. You are playing a game of winner takes all.

As a leader emerges (the develop phase below) competitors start to fall away allowing the leader to enjoy superior economics until it enjoys a monopoly position – the dominate phase below.

Interestingly the sweet spot for IPO is in the develop phase – typically within 7-10 years of incorporation – on the back of significant momentum and sustained CAGR >100%.

Don’t leave your category to chance.

If you don’t define the category, the chances are someone else will. Build it and they will come does not cut it. You can have the best product and still be soundly beaten – think Informix, Ingres, Sybase and Oracle. Who had the best product? Who cares?

You need to take control early and fast and educate the world to see the category the same way you do.

Alongside the typical start up journey of:

  • Problem / solution fit
  • Product / market fit
  • Scale up

Is a parallel process of category creation that aligns product, company and market into a single cohesive strategy.

  1. Define your category. Give it a name. Keep it simple and repeat it over and over.
  2. Establish our unique point of view. This frames the problem you solve and why and how you solve it, making it crystal clear why you exist, what you stand against, and why customers should choose you over the rest.
  3. Detail your product and company strategy for solving the problem at scale. an urgent and giant problem. Think big goal backwards, not iteration forwards.
  4. Mobilise (go-to-market, sales, marketing, public relations etc.) to condition the market to your category solution. Align every function of your business to work together to move the minds of your customers and users from the old way to the new way.
  5. Align the company with the category. Why you exist, how you behave and why you will win.

Building a category leader from Europe.

The concept of category creation for a business starting in London, Paris or Helsinki is the same as it is in Boston, New York, San Francisco, but I believe that alongside mastering category creation, European enterprise tech founders also need to master “Crossing the Atlantic”.

Europe is simply to fragmented to build a business with north of $100m in revenues in less than 7-8 years without making it big in the US. So alongside 1) the start-up journey (problem-solution fit, product-market fit, scale up) and 2) the category creation journey (design category, develop category, dominate category) we need to place 3) crossing the atlantic as a core discipline.

Build a strong domestic core – whether in France, Germany or UK – don’t think about scaling across Europe, just focus on your home market, build a robust and then start thinking big, starting small and moving fast into the US. More on this another time.

Thank you to the team at playbigger.com. Their book, also called Play Bigger, is an excellent and inspirational read. They have done what every one of us wants to do – they’ve only gone and created their own category.

Posted by Stephen Millard, Chief Platform Officer at Notion Capital.

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