Importance of owning a market segment – Monopoly, market leader, and innovator’s dilemma

I am having a great time listening to lectures for Stanford CS183B – How to start a startup online. All lectures have been extremely good, and it allowed me to get a sense of how Y Combinator accepted companies into its batches and what made them successful. I am learning so many things, and I see some common underlying themes I want to write about, but two lectures really struck a chord with me.

Before the Startup by Paul Graham and Business Strategy and Monopoly Theory by Peter Thiel, in my opinion, were dead on. Many startups were able to thrive on because many of their ideas seemed bad at the time. If you have an obviously good idea, then many people will go for the same idea. That leads to competitions. For consumers, competition is good, but for business not so. And in a sense, overarching goal of a business is to become a monopoly in its market.

I find Peter and Paul’s main points similar to those of Crossing the Chasm and Innovator’s Dilemma.

In Crossing the Chasm, the author, Geoffrey Moore, argues that in order for disruptive technology company to survive, it needs to reach beyond technology pioneers and early adapters and move to early majority market. The gap between them is so great that many technology companies fail, and he named it “chasm”. What’s the strategy for crossing the chasm successfully? He coined the first market segment in early majority “beach-head market”. This is where company has to put all its resources and try to conquer. Company can get it wrong, of course, and it’s imperative that company finds this sooner than later so that it can correct its course, and hopefully new one is the right one.

One thing he emphasizes in conquering the beach-head market is to be the market leader. Who is market leader? I believe it’s synonymous to monopoly. You need to have at least 60% of the market share in the segment. Market leader has several advantages over #2 and #3 in the market. Because of its reach in the market, there will be auxiliary companies supporting the market leader, thus creating the whole eco-system. Often times, cost of changing product from leader to another is so great that it gives the leader leeway with its customers. After taking the leadership, it can expand to adjacent markets with money and time it earned being the market leader of beach-head market (he compared to going to adjacent markets as using the top pin in bowling to knock down other pins). If I remember correctly, Geoffrey Moore suggested the beach-head market be adequate enough for a startup to tackle.

Similarly, in Innovator’s Dilemma, the author, Clayton Christensen provides examples after examples, time and time again, a startup seems to come out of nowhere and take over the 900-lbs. gorilla of the market. What’s interesting is that companies in Clayton’s examples represent diverse markets – consumer, enterprise, and even to steel mills. They all had a few things in common.

They all started by attacking the market segment with much lower margin so market leader is happy to let them take it. Market leader is usually larger in size, and thus require much higher margin to operate and make profits. While market leader grows nominally by producing products for handful of larger customers, startup becomes leader in its segment and advances its products at faster rate. When the market leader notices startups’ progress, it’s often too late and even its larger customers are ready to become startup’s customers.

Those two books definitely shaped my views of startups, and Paul and Peter’s lectures seem to validate the books’ main points. There are, of course, many other things that contribute to a startup’s success or failure – co-founder dynamics, team, culture, executions, and any external events. However, I believe, one thing is sure to attribute to startup’s success.

It could be that it’s a market segment on one cares or that the idea you are working on seems to be bad to everyone else. Whatever it is, startup needs to become a leader in market segment to survive and succeed.

Become a leader or monopoly in a market segment

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Best way to learn is to imitate (and how it should apply to startups in emerging markets)

Recently there were interesting articles beng circulated and discussed in the valley. One is Black Swan Farming by Paul Graham and the other one is Screw the Black Swans by Dave McClure. Interestingly enough, the fireside chat with Vinod Khosla at the TechCrunch Disrupt SF 2012 was a timely interview and speaks to the different viewpoints.

I suspected, but was surprised to learn that out of all YC companies, Airbnb and Dropbox account for three quarters (3/4) in terms of about $10 Billion valuation. Paul was saying how difficult it is to pick a game changer winner. What makes it more difficult is how great ideas seem like bad ideas in the beginning. If an idea looks good, then everyone including large companies will work on it, and startups will have even less chance of succeeding. It’s when an idea seems bad and thus hard time getting funded, but at the end succeeds, it’s a game changer (homerun).

Vinod Khosla said pretty much the same. His fund looks for companies that will make tremendous impact when successful. It doesn’t matter when they fail. Founders will move on to a new project. But they don’t want to invest in companies that will make a little to no impact when successful. Again, Vinod is looking for a game changer (homerun) company.

Dave on the other hand is saying that 500 startups focus on Ichiro’s of the world (consistent hitting) rather than Barry Bond’s of the world (homerun king). He goes further into discussing the differences between YC and 500 startups (like hackers vs. hustlers), but my main takeaway was what kind of companies they were looking to fund.

These discussions made me think about how startups in emerging markets (including Korea) could do better. When babies are born, they learn mostly by imitating people around them. There is also an old saying, “Imitation is the best form of flattery”. Many amateur athletes also learn by imitating professional players (watching and learning). Korea is the only country I know best outside the US, and I always noticed the lack of virtuous seed funding cycle in Korea – successful founders seed investing in other startups. Once startup is up and running, and shows notable tractions, they can raise money from VCs and the process and valuation will be much better. However, startups often fail even before they could show traction because either they make multiple mistakes or run out of money before they can pivot. Without proper seed funding (and mentoring), they will have really hard time reaching the traction point.

At any rate, I think the best way for startups in Korea (or in emerging markets) to produce good enough winners to start the virtuous cycle is to imitate successful US startups in Korea (or in emerging markets), and after having a few successful exits, the founders can help other founders by investing and mentoring them. Furthermore, after successful exits, those founders would be in much better position to take bigger risk and attempt to make big impacts. In baseball analogy, it would be something along the line of having a few good seasons of hitting consistently, then you can swing for homeruns. No doubt those good seasons would be a confidence builder as well.

I keep hearing how there are many incubators and accelerators popping up in Korea. Someone recently expressed a concern that it’s like a startup bubble and a few failures will have devastating effect on the whole startup movements. I think this type of imitation strategy will be good at least in the beginning. After there are good number of successful and experienced founders, they would be better equipped to make sounding decisions and also to help other up-and-coming founders. It would truly strengthen startup community in Korea (or in emerging markets).

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How can you not get romantic about startups?

Recently I watched Moneyball – a non-fiction movie about how Billy Beane at Oakland A’s used statistics to get most under-valued players and create the most valued (least amount spent per game) team in MLB. If you haven’t watched it, I strongly recommend it. I don’t usually shed tears watching a movie, and as a proud male (not that I am a sexist), I wouldn’t admit it even if I did, but I did watching Moneyball. Moneyball! It wasn’t a Oscar-worth drama. Nor was it gut-wrenching tear jerker. But why did I cry watching the movie?

*SPOILER ALERT!*

Because it was about one man’s lonely, uncertain fight against status quo under heavy pressure and criticism. Once a promising baseball player, Billy turned down a full scholarship to Stanford to join New York Mets as first-round draft for $125K. But he never became a top baseball player his scouts had predicted. He went through a number of minor leagues and other major league teams with not much to show for. He ended up at Oakland A’s, and he asked to become a scout. Later he became an assistant GM and a GM.

His push to use statistical analysis to pick players was controversial to say the least. He picked players against professional scouts’ advice. The scene where he and another coach visiting Scott Hatteberg was touching, since you could tell from his house and his reaction afterwards, he probably thought he could never play baseball again, but he was so grateful for having been given another chance. First 40 or so games, Oakland A was dead last in its division. Pressure and criticism were directed to him from all directions. It looked like he was divorced and had a daughter who was staying with his ex-wife. He tried to hide the pain he was going through, but the daughter could still see everything was not quite alright.

Then, the team started winning and became the first in its division. It had 19-game winning streak. On the game where they could have 20-game winning streak, they blew 11-0 lead at 11-11 tie. Then, Scott Hatteberg, the guy all baseball teams had written off as too injured to play, stepped up and hit a walk-off home run. They achieved 20-game winning streak.

What’s more touching is when Billy turned down Red Sox’s $12.5M offer to stay with Oakland A’s because his decision to go with New York Mets was his last decision made based on money.

Also, another notable thing he said is “How can you not get romantic about baseball?” after some dramatic finish.

It may have to do with my personality – always rooting for underdogs, preferring hole-in-the-wall or local places to established places, etc., but the whole movie was touching to me because of its resemblance to startups. Not all startups are made up of under-valued coders/marketers, but I believe some are. Somewhere in a corporate world, there would be some who think their skills and opinions aren’t properly appreciated (not financially). I wouldn’t call entrepreneurs misfits, but they are definitely different. They know the odds of success is low (1 out of 10 or less), but they keep going against all odds, criticism, roller coaster emotions, and tremendous pressure. Most of them are in it to challenge status-quo and traditional way of doing things, and to disrupt the market. Often times, they are going against huge corporations with lots of cash. When one makes it, it’s a home run (but not always). Sometimes they will turn down a big offer to keep moving ahead because they believe in the products, company and the team. Many startups, whether they make it or not, have dramatic stories behind them.

Seriously, How can you not get romantic about startups?

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Never never give up on your life

When I first read TechCrunch’s article on Diaspora co-founder Ilya Zhitomirskiy’s death, I didn’t think much of it except that it didn’t mention anything about the cause of the death. It usually means only thing, and my suspicion was confirmed by hacker news thread.

http://news.ycombinator.com/item?id=3231531

What I particularly noticed about the thread was discussion of failure and stress of founding a startup and other suicides by very smart folks. It also reminded me of earlier tragic passing of a co-founder of a Y-Combinator-funded company and the article I read on WIRED magazine about two AI scientists committing suicides almost in identical ways.

I would never know why these guys did what they did. But for me, I have one thing that would prevent me from thinking about it. It’s my kids and my family to an extent. It’s a double-edged sword. On one side, it’s the reason for not being able to take huge risk, but on the other side, it’s the reason for my sanity no matter how shitty my life is at any given moment (and my life right now isn’t all that spectacular).

Also, we should also keep things in perspective. In grand scheme of this universe, we are just small part of green/blue spec called Earth. You shouldn’t care about and be afraid of failures/rejections. Who cares? People will forget and move on. I think it’s courageous and commendable to just try. Regardless of outcome, having tried something sets you ahead of many others.

Just remember the following quotes.

“Regret for the things we did can be tempered by time; it is regret for the things we did not do that is inconsolable.”

Also, especially this one.

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

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Relevance in current Internet

I just finished reading TechCrunch article, How Facebook Can Put Google Out of Business. This also reminded me of Paul Adam’s articles, The Real Life Social Network and How Your Customers’ Social Circles Influence What They Buy, What They Do and Where They Go. And also this good analogy of Facebook, Google and other hot startups.

I was also asked a lot of questions about problem of current social media and how I could make it better as part of interview questions. One common answer I provide is the relevance. How important are these news, status updates, tweets, etc. to me? I agree that the biggest difference between Facebook and Google is the core of each company – people (social) or links (web pages).

Many companies are trying to figure out who you are as a person. For example, another favorite startup of mine, Hunch, is trying to figure out who you are and what you would like based on what you already like. Netflix tries to figure out what movies you might like based on your ratings of movies. Amazon has been doing it for a while with features like “you might also like…” Facebook is obviously in good position because of the social interaction data they have – what you shared, who you have interacted with, what you liked, etc. in addition to social graph. Twitter can also certainly figure out by analyzing followers, tweets and especially retweets, but right now I feel that noise-to-signal ratio on Twitter is too high. You control tweet relevance by carefully choosing who you follow.

We are bound to create more data. The amount of data we generate will never decrease. In the sea of data, it would be harder and harder to find information that is relevant to you, but to others. In this sense, Facebook is definitely sitting on a gold mine. It’s kind of creepy, but the more interactions you have on Facebook, the more Facebook knows you, and it provides good targeting data to advertisers. Can Google build significant social product? Nothing is impossible, but I think it would be very hard. Facebook is just too big, and I just don’t see why I would use similar feature on another platform. Once you have your social network established on one platform, it is extremely hard to create the similar network on a different platform. In social network, the winner takes all, unless the winner screws up big time. It could happen (as has happened a couple of times already with Friendster and MySpace).

We are living in an interesting time, indeed.

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Silicon Valley Bubble

I went back home to the East Coast, Washington DC suburb, this past holiday season. I also went up to see my friends and cousins in NJ and NY. Having the first meaningful conversation with my friends and relatives in about two years made me realize one thing about Silicon Valley.

We (those of us living in the SF Bay Area) are living in a bubble. I am not talking about startup/options/hype kind of bubble, but a tech bubble. I was the one most knowledgeable about up-to-date information of facebook and its eco-system with apps and social games, twitter, google, etc. None of my friends and relatives seem to know nor even care about such information.

It’s just amazing and unbelievable when you think about such high concentration of technical knowledge, talent and money in one geographical area.

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Kitchen Nightmares and Entrepreneurship

I am a big fan of Hulu. Ever since I found Hulu, I don’t watch much of TV. This is clearly new way of watching TV shows.It’s very convenient, and I get to watch whatever I want (as long as episodes are available) and whenever I want. Since I don’t have much time to watch during the weekday nights, I tend to “binge” watch on weekend nights.

I have recently discovered a very interesting show called “Kitchen Nightmares“, and while it’s entertaining and a little formulaic, I drew a lot of parallels with entrepreneurship.

Passion

It was amazing to see how many co-owners didn’t have passion for their restaurants! It was very clear some owners were using it for their ego trip, even though it was failing. You need that fire in the belly, which enables you to take charge of chaotic situation and plow through.

Passion was something a lot of investors and entrepreneurs talk about (also in the book called “Monk and the Riddle“). An entrepreneur without passion is an oxymoron. If investors see the lack of passion, it’s the fastest way to getting turned down.

Leadership

Oh, man, did it matter! I have never seen inside of a kitchen during dinner rush, but it was definitely chaotic. If there is no clear leadership, everything falls apart. Bad restaurants were plagued with inconsistent food, confusion in the kitchen and among wait staff, and angry customers who had to wait for a long time for their food to arrive or whose food wasn’t exactly top quality. It also turned out that whoever took charge happened to be one with hottest passion, most fire in the belly. And it shows.

Also in entrepreneurship, especially in hard times, leadership matters the most. Someone with hottest passion may not be the best leader, but that person will at least carry the company through especially in hard times. Continue reading

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Bloglation – Translate, Save, and Share!

Last Thursday, I released private alpha version of Bloglation, which lets a user translate any web page, save and share. It’s supposed to be private, but I need to get some good feedback from real users. If you are bi-lingual (or not) and interested in translating cool ideas, concepts and/or knowledge, please go ahead. And don’t forget to send me any comments/feedback you have.

I also wanted to maintain a separate blog just for bloglation. You can find it here.

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Those who say it cannot be done shouldn’t interrupt the people doing it

Michael Arrington at TechCrunch had a new posting about Don Dodge’s forced departure from Microsoft, and in that post, he had a great quote.

What a great quote it is! In the same post, he had a link to his previous blog post about Yossi Vardi and another quote from Theodore Roosevelt. What a great quote! This is a kind of thing that drives entrepreneurs.

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

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Now is the best time to start a company

It may sound strange, but many people have expressed the same opinion.

NOW is the best time to start a company.

I was reading an article from the latest Wired magazine, “Back to the Garage: How Economic Turmoil Breeds Innovation” which gives an example of Tom Siebel who started Siebel Systems in 1993 when economy was faltering then. He was able to hire good software engineers relatively easily and cheaply. He also got an office space quite cheaply as well. It also reminded me of a conversation I had with my friend who is a VC partner (I consider him a friend, but I am not sure if he does). He said this is best time for VC to invest in a company as well. VCs do have money from funds they had raised before the meltdown. Because of downturn, valuation of a company would be lower.

I had the same opinion during the first Internet bubble burst. Historically those companies that survive the economic downturn usually come out as the winner. During the bubble, it was very difficult to find good engineers and sometime companies hired people who could barely type. But when the bubble bursted and companies either closed or laid off many people, the pool of available engineers grew. VCs certainly still had money then. I was quite certain even then that economic downturn would be the best time to start a company.

Due to my unemployment, I frequently visit FuckedStartups.com a lot. There are certainly many layoffs going on. This was all prompted by Sequia Capital’s warning to their portfolio companies a few months ago. Where would all the laid off engineers go? I’ve been searching for a while, but no one is really hiring. Even those who are hiring are taking their sweet time interviewing many folks. However, Americans are quite ingenious. In these tough times, someone with a good idea will hook up with others in similar situation and start a company together.

It also reminds me of the notion of “Creative Destruction”. History of Silicon Valley is filled with successful companies born during the bust time following boom time.

Me? I have more pressing need to support my family, so I am going for a full-time employment. I can’t start a company when my family relies on me for financial needs. But, when my wife starts working, that would be a different story. Look out, world!

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