Managing Risk in your Go-to-Market Strategy
If you haven’t read Howard Gwin’s blog on Digital Puck regarding VC’s and start-ups in Canada, I would recommend that you do. It has some powerful arguments about how VC’s and entrepreneurs should look at building great companies.
Howard also uses a model for assessing risk on go-to-market strategies. He looks at company growth opportunities through the lens of a 4 quadrant system and the ability of the company to execute as the complexity and risk increases.
Market penetration (existing markets, existing products – called same to same): Market penetration is the least risky way for a company to grow. Get some successes, and then build on reference and lighthouse accounts. Don’t get distracted. Hit this elastic market hard to build momentum.
Product development (existing markets, new products – called new to same): This is the second act: coming up with new products to sell into your current market. Ideally the new products are as adjacent as possible. For example, a natural add-on to current product set. Many entrepreneurs started the company based on an understanding of a market problem and a vision to solve it. What’s next often means bringing on new talent and trusting their vision for the next big problem to solve or acquiring companies with adjacent products and cross-selling into both customer bases. Many companies do not cross this milestone.
Market development (new markets, existing products – called same to new): An example is going to Europe or Asia. Recognize that selling to globally may be “same to same” in terms of product and types of customers, but it is a level of complexity and execution risk higher than selling to North America and some companies don’t get past this point
Diversification (new markets, new products – called new to new): Highest reward, highest risk. Only the best pull it off and usually have a brand that is incredible. I was at PeopleSoft (known for its HR systems) when we entered Financial Management organically, and Supply Chain and CRM through acquisitions. These were very hard to execute but more you move up the risk/reward scale, the higher the ultimate win. However, from historical perspective, most companies do not execute to this level.
The net of the above is the risk/reward profile changes significantly as you move from market penetration to diversification. Very few smaller companies make this transition from one level to the next with the exception of going international when your market has been domestic. Howard’s advice: “Execute like hell in a segment, dominate and create great traction and brand, then move up the scale. Let the market determine where you go by pulling you versus you pushing – pushers never prosper – well almost never.”
Howard presents an interesting way to segment the market in terms of company growth. I do something similar, which probably rubbed off from him somewhere along the way, but I like his terms Market Penetration, Product Development, Market Development and Diversification. They sound so much more intelligent than my descriptions.
So, should investors be seeking companies that are in market penetration mode? These are the companies that have enough market with their current product set to grow like crazy and make an aggressive plan without having to move up the risk/reward scale. Once these companies have strong momentum, the strategy can evolve to take more risk as the maturity of the team and the brand grow strong enough. Conservative money would argue Yes because companies in market penetration mode offers lower risk but lower risk may bring lower rewards.
In his Blog, Howard argues that VC money should be focused on the 80/20/80 opportunities (focus 80% of our energy on the 20% of companies that have an 80% chance of succeeding). The “80% chance of succeeding” would seem to me to correlate to companies selling in the Market Penetration quadrants versus the other three. If this holds, then it seems intuitive that the companies with products that sell across all industries would have bigger markets (and therefore more market penetration opportunity and lower risk) then companies with products that focus on one specific industry.
Many of the start-up companies that I work with play in specific industry verticals. This makes me wonder why a VC’s would handicap their chance of success by investing in a company that only sells into one industry market versus one that sells cross-industry? If you consider homeruns of the last 30 years (Microsoft, Yahoo, Google, Salesforce , SAP, PeopleSoft, Oracle, YouTube, LinkedIn, Facebook, etc), they were all cross-industry solutions. I am struggling to name one that was a single industry play. So does developing a single industry solution narrow the market for “Market Penetration” too soon and force the company into “Marketing Development” or “Product Development” stages before they are ready?
I have been thinking more about Howard’s model this morning and am asking myself the question why would anyone ever invest in a single industry vertical solution? I have concluded that there is a piece missing in his 4 quadrant model and that is Competition. Market Penetration is easier to achieve in a less competitive environment. It makes sense that the bigger the market opportunity (ie. cross-industry), then the greater the likelihood of stronger and greater number of competitors. Conversely, the more niche, specific, massively differentiated and uniquely positioned that your product is, then the likelihood that the competition will be less and the opportunity for market penetration will be greater. While there may only be very few Microsoft’s, Oracle’s and Google’s, there are a lot of $100-500M niche plays that started as small companies that they are buying.
I think I have just argued myself around in a circle to where single industry may be a positive attribute not negative or is irrelevant to the discussion. If the key to success (from an investors point of view) is to invest to build a self sustaining company, which then can generate its own cash to move into the Market Development and/or Product Development quadrants, then single industry versus cross industry is not the issue to focus on. The issue is “niche, specific, massively differentiated and uniquely positioned products” versus the competition in whatever market the company is targeting. The size of market only needs to be big enough that it can produce a self sustaining company that is generating enough cash to give it self sufficiency to move on its own into the Market Development and Product Development quadrants.
If you agree with the above, then in picking winners or presenting yourself as a winner, companies need to show that they have room to grow through Market Penetration. Then the question becomes whether the company has the horses to execute (coachable leadership, the right advisors, talented troops, enough initial growth capital to fund Market Penetration, passion, etc). but more on that later…