Analysis: Early stage startup strategies!

In the world of the phrase “the only thing constant in the world is the change!” everyone seems to be changing, so are the strategies around building the companies. However, there are subtle patterns visible.

Patterns to observe:
1. With the exponential increase in the consumer facing internet applications, clearly defined “barriers to entry” has shrinked to one or two killer features in the product.

2. Earlier investors talked about revenue figures, today they like to see “user traction“.

You can only build sustainable viral user traction only when you have clearly demonstrated the barriers to entry to your game. It is so often an illusion as to what does “barriers to entry (bte)” actually mean?

Lets extend this phrase – Barriers to entry is something that doesn’t look to be obvious. Let the whole bunch of competition look down at you to see what you’re doing & say “hey! is that difficult? Even I could do that, probably in a week!”, its only that the more work they do to try to copy your solution, the more they realize that how farther they are from what you’ve accomplished.

While it makes sense to have barriers to entry clearly marked, you never know when a competitor (even in the womb) sizes up the obstacle course & discovered a way around getting from point A to Z. Therefore, where barriers to entry should inevitably be a part of the game, having marked them clearly could again be strategic i.e. identify the barriers to entry early but refrain to open for the public to fathom the depth of the game, we can probably call them as the “hidden/ invisible barriers to entry”.

With big barriers to entry, there comes a high possibility for the competition to underestimate the level of monetary, human or commitment capital required just to compete with you (leave the industry aside).

Look at Google Maps for example. It is so easy for a potential competitor to think about cloning GMaps with having data sourced from known global data vendors & tweak around to build a clone, however, the barriers to entry is that the data is not available just from a single vendor, every country may have one, every city may need a different one, you will need permission from the govt. of the respective countries for several specified areas and lets say you figured out the way to do it, how good would it be to have realized later that the heart(data) of your solution still remains closed with the third party server boxes & making it difficult for you to build a competitive advantage. Further, while you were busy cloning the GMaps, Google was busy collecting its own data. Where do you go now?

While barriers to entry were many, hidden barrier to entry was to have complete control over the data & have it in your own lovely defined model & format.

However, if we observe, figuring out the hidden barriers to entry makes sense only if you pioneer a concept or lead the game else it is most likely to work against you as you’re going to be spending more time looking over your shoulder & less time innovating & driving the market forward.

Further Patterns to observe:
1. It is clear that VCs love to talk about viral traction also known as “Network effect“.
2. Emergence of many ethical & useful ways to build the traffic to your site e.g. paying the bloggers, online gadgetization etc.

There is no dearth of examples to explain the implications behind Network effect. YouTube, Facebook, Skype, eBay, Monster, Flickr, Delicious etc. simply changed the rules of the game. So doesn’t it makes sense to figure out the ways to achieve this Network effect for your lovely product? Don’t you think so? Actually its not that you will not think so but you will have to think so.

However, it may perhaps be the insanity to think so!

We’re yet to see a company that executed just as it planned in the beginning. If it ever happened with a company, it would have been more because of chance than better execution. Network effects accumulate to most of the companies by chance, as an artifact of something they were doing that led to Network effects.

It takes time to figure out the right path, especially in the early days of the company, its not transparent where any network effect can/ will come from, even if it is obvious its only theoretically easy to have them leveraged to your advantage. In reality we only forecast the user base but if it works against you, there’s no come back. Its seldom a case that you actually know as to how to make it work for you?

Lets look down at it. Access to email & IM comes at priority for me early morning than anything else. That should also mean that it should be same for many millions of users like me, therefore, email & IMs are the huge platforms for Network effect. Lets say I use Gtalk, Avinash too uses GTalk & we both know Rajesh, therefore, it doesn’t make sense for Rajesh to use Yahoo. In reality what happened is that rajesh was using Yahoo, MSN & Gtalk already and then me & avinash both started using all of them as well. I wonder if the network effect based on human tendency of depending on other humans was ever considered when there was no competition? if yes, was it at all serious?

The first mover in a new space can generally monetize network effects by selling quickly before they have to drive profits (Skype in VOIP), but it’s not at all clear that the first mover has any long term strategic advantage that could drive value. So does it make sense to spend lots of time thinking about the strategic advantage you can gain from the network effects?

But VCs love it, bloggers talk about it, advertisers pay for it & obvisouly you have some figures to mention in your business plan. What could you possibly do otherwise at an early stage?

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3 responses to “Analysis: Early stage startup strategies!

  1. the userbase is the new barrier to entry, and even that is eroding very quickly. case in point: plaxo just launched the social networking and is quickly becoming essentially the same as linkedin.

    the features are easily clonable, and users are fleeting at the drop of a hat. there simply is no loyalty on the web, and the more i think about it, the more i feel that it’s all about the good old concept on the web as it is offline – the brand. that is the reason buy.com in shopping can’t beat amazon.com, that is the reason yahoo can’t beat google in search.

  2. I think “user-base as the barriers to entry” is still a phenomena in its nascent phase. Go to a VC/Angel, all they wanna know is the user-base you have, it is at least the safest proof of concept today. Plaxo could dare to come only because of its already loyal customer base.

    I quite agree with the brand loyalty concept but that again is the result of too many options available to us as a consumer.

  3. vc’s want to know traffic numbers, because that’s the basis for their exit strategy when proving a product’s value in the short term. if you are going flip, that is an excellent metric to go after. the true value of flickr (when it was acquired by yahoo) was mis-represented by the user base counts. the true value of facebook is grossly overstated by it’s userbase counts. go figure!

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