The business development officer of a Bay Area digital company focusing on digital gifts asked me how she could approach smaller merchants when they are swamped with over thirty startups offering some digital product gift in a similar space. Startups enter into a world where only the paranoid survive. Those with too much hubris or acknowledgement of competition tend to have shorter life spans. But there are formulas for survival and, better yet, strategies that reach the apogee in that market.
Some years back, I accepted the CxO role for a telecom startup in NYC, which the CEO claimed it had a great proprietary product and was number one in its market niche. After a month in my job, I discovered that this company had over 300 competitors, all offering the same service! Upon that revelation, I began to consider how to have that company differentiate itself from others, and how to increase its margins in order to have enough capital in its coffer to survive and keep the lights on. There were five critical components for survival: increase sales, improve margins through infrastructure, raise capital every month to fund growth, change regulatory framework so that it can compete, and grow brand recognition. Mind you that depending on the competitive environment and the industry, the strategic components can be different. Of the 300 competitors, only 2 were able to file an IPO, and, of those two, only one, in which I was employed, survived beyond one year.
From this experience, I gained some experience in survival in competitive environments for startups. First rule, be paranoid. In every meeting, I hear consistently that the company is “first” or the only one to offer that product or service. Nowadays I consider that every startup should show every sense of urgency that it will lose market share or be dethroned from its leadership position. Not until the company achieves an IPO or some other exit strategy, should it not have a sense of urgency.
Second rule, apply marketing rules without breaking the bank. In a world led by engineers, marketing seems anathema to some teams. A former colleague once remarked that if he wanted to bankrupt a company, he preferred to have an engineer or a lawyer to run that company. Great engineered products do not necessarily lead to market leadership. The best example of this scenario is the well written book on this same topic based on Betamax vs. VHS battle — “Fast Forward.”
A product must offer to the potential customer a “vitamin or an aspirin.” And equally important those features of that product must be shown to the potential consumer. Or you have the problem of the “one hand clapping” – a product without a presence. Depending on the product and the budget, the team should select several channels of distributions and analyze the fastest and cheapest routes.
Third rule, handle regulatory and legal hurdles without severely impacting the bottom line. Virtually, every industry has some regulatory requirement. In my earlier blogs, I found from experience that legal and financial services can hit the bottom line severely. And if you give an attorney 3 weeks to do something, it will take that long. And if you require to be done in 2, he can get it done with little impact on quality. In a competitive environment, time is of the essence and every dollar is dear. It is important to handle legal risks, since it can impact the cost of capital, but manage those risks wisely and efficiently.
Fourth rule, let the team be aware of how urgent it is to succeed. Failure to follow many of the factors can increase the cost of capital, decrease sales, or, worst, yet, force the company to close its doors.
Recently, I met with the CEO of a telecom hardware manufacturer interested in expanding its sales throughout Latin America. I asked what were the salient features for his wireless hardware product, and he replied that the product offered the same features as similar products at a lesser price. Now, a quick glance at the telecom wireless industry for that region has an interesting trend. Regulators are opening the markets for competition. The ARPU (Average Revenue Per User) has remained steadily at US$14 per month. Some of the carriers are selling their towers in order to build up cash coffers for the new competitive environment. They are searching for ways to increase smart phone sales to increase data usage with the concomitant revenues. In other words, the potential customer is looking for means to increase profitability or efficiency as a means to have a competitive advantage over the other wireless carriers that increase usage or decrease costs for better margins.
The CEO remarked to me that there is no serious interest in buying his hardware. And I wonder why. His product does not offer either an aspirin or a vitamin for the customer to purchase additional hardware to manage the new competitive environment. His apparent focus is on price, not on improving the overall margins or increase average minutes for a carrier. And now there are mobile apps such as Tango or Line that circumvents the PSTN by VoIP.
Finally, we loop back to the Bay area digital product. Current weakness? To stand out from other competitors. That is a branding problem. One can have some marketing strategy that helps for the product to stand out from the crowd. Also, she also had no study or analysis that looked for the aspirin or vitamin needed. So she needs to do a quick, informal analysis to understand what makes that potential customer tick. But once she delves into that analysis, she can possibly be ahead of the competition. And that is what it takes.