It almost sounds like an entrepreneur’s death wish: launching a startup targeted squarely at a market’s leading product. And yet time and again throughout the technology market’s history, it’s a strategy that has worked for a lucky few. Don’t forget, today’s nearly forgotten brands, such as AltaVista and Excite, were among the giants of online search at the moment when two MBA dropouts decided to launch a new search engine.
But the odds are such that very few startups are destined to even hope of becoming tomorrow’s Google. To increase those odds, entrepreneurs say one key is to pick an overwhelmingly popular product category, to ensure lots of potential customers. Then, it helps to undercut the overpriced products with a disruptive subset of features that fulfill unmet product needs, all the while keeping internal costs down and targeting the right subset of customers.
“You find a weakness or opportunity,” said Raju Vegesna, an evangelist for Zoho, a product group from AdventNet Inc. (DEMO 07). “That means the product has to be commoditized and that there is a clear opportunity for a startup.”
Zoho, for example, has targeted a number of market giants and their extremely popular—and sometimes expensive—products. The Pleasanton, CA-based company makes a suite of office products for various tasks such as word processing, customer relationship management and presentations.
Another secret to success is a close connection with consumers. “You’ve got to listen to the market to hear something that the big players are not hearing,” said Edward S. Coloma, managing director of ThinkFree Inc. (DEMOfall 06, DEMO 2000) in San Jose. “And focus on your core competency. You don’t want to get involved in an apples-to-apples comparison with your large competitor.”
“As a start-up you can’t be everything to everybody,” agreed Andrew Filev, CEO and co-founder of Wrike Inc., a Palo Alto startup whose project-management software competes with Microsoft Office Project. “You can’t combine all the features of the existing product with simplicity, fast time-to-market and your core features, so you have to reduce a lot” and focus on a fewest number of features that will deliver the greatest amount of value.
To illustrate how his strategy can succeed, Filev called to mind laptop computers, once considered a specialty product with no real hope of competing against powerful desktop computers. But by focusing on a key, unmet need – the desire for portability – laptop computer makers were soon able to make a serious dent in desktop computer sales and redefine the personal-computer market.
“You may end up with a product that is simpler in some aspects,” said Filev, “but, overall, is much better for a particular niche.”
Still, it’s also important to create a product that will work with competitors and other popular products already on the market. “Nobody needs a standalone authoring tool,” said Sheri McLeish, an analyst at Forrester Research Inc. in Cambridge, MA. Coloma, for example, pointed out that ThinkFree creates documents that are interchangeable with Microsoft’s.
Keeping costs down while developing a product can also be critical. “Keep your organization lean,” recommended Coloma. One way to do that, said Vegesna, is to use the Internet as a marketing channel, rather than launching pricey marketing campaigns, buying expensive advertising or paying salespeople’s salaries. Zoho, for example, has 250 engineers working on its Zoho software – but fewer than 10 marketing and sales executives. “Customers find us on the Net,” said Vegesna. “They come to us.”
Targeting the right market segment is another critical strategy. McLeish pointed out that it makes sense for startups to target small and medium-sized businesses as customers, rather than large corporations. “The larger the organization, the greater the reluctance to going to an unknown solution,” she said. For startups, small and medium-sized firms are “where the opportunity lies.”
Especially or those offering online products, targeting younger consumers may also makes sense. “People under 40 are going to be more inclined to access things online,” she said, adding, “You might get mindshare from students who move on into jobs where they might continue to use your products.” Finally, targeting customers at the moment when they need to upgrade can catch them in a mood that will be more receptive to your unknown product.
Still entrepreneurs should expect a challenging slog. While Zoho recently boasted signing its millionth customer, Microsoft Office has 120 volume licenses and 250 million users, McLeish pointed out. “It’s an uphill market,” she said but quickly added why so many startups make a dash for the seemingly impossible goal of unseating a market’s 800-pound gorilla. “It is a big opportunity, even if you can get just a part of the market.”
12 Commandments of Competing Against Market Gorillas
1. Target an overwhelmingly popular product category.
2. Don’t get lured into a feature-war with the market leader. You are sure to lose.
3. Find the market leader’s main weakness.
4. Don’t be afraid to build a product with fewer features than the market leader.
5. Build a product that trumps the weaknesses of the market leader.
6. Don’t take venture money unless you are prepared, at some point, to sell your company.
7. Focus on one or a few features and perfect them.
8. Don’t overspend on advertising – try viral marketing instead.
9. Check in frequently with customers to get their feedback.
10. Don’t start with corporate prospects – focus on small to medium businesses that are less resistant to change.
11. Target students to gain their career-long loyalty.
12. Try to get customers to switch to your product at the moment when they are due to upgrade their existing product.
