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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Lean Startup in Education (Hacking for Education)

Today I have had the most productive conversation with my wife (which is shame because I think she has a lot of good insights and look at things from different view points). It was inside the car, while we were driving to Lawrence Hall of Science, which is an awesome place all around.

I had to leave my most current job abruptly, and knowing the reasons behind it, she asked me what’s the most important element angel investors look before making an investment. It was an easy question to answer – the team, of course. And she wholeheartedly agreed. She said she experienced exactly the same at her Korean school, where she teaches grade school kids, and at Korean American Community Center, where she worked before working at the Korean school.

The Korean school she teaches at is part of a church (I am an atheist, but I welcome all religions), and thus their curriculum is not directed or regulated by school district. She said she and a few other teachers like to try new ways of teaching kids. Their attitudes were just like those of tech startup founders. Failure is okay, since you will learn more from failures and apply it to the next new idea. However, she said there were other teachers who are very resistant to trying new things even if they are not the ones implementing or preparing the experiment. Not only do they waste time, they also put out the passion brought on my good teachers. So, she understood how important the team is. Not everyone in the team needs to be super smart, but it’s important for the team to be open to experiments, not be afraid of failures and support each other.

She said she saw the same thing at the Korean American Community Service. She worked there as an office manager until our first child was born. The community center reached the peak while she was there, because she said everyone was open to trying new things – services or classes or whatever – to serve the community better. And most of all, they had the full support from the head of the community center. She also said amazing thing about leadership. Good leadership is not about leading, but creating an environment for team members to innovate. You shouldn’t try to make everyone follow your views, thoughts or directions, but instead give team members freedom to experiment, learn from successes/failures and move  forward. I was like DANG! That’s the most insightful thing I heard from my wife (again, I should have more conversations with her) . :)

I told her that’s the exact operating principal for tech startups these days. I couldn’t believe we were in such unison! And it got me thinking about our education system.  Many people are concerned about our failing education system, and WE HAD THE ANSWER ALL ALONG! Apply “Lean Startup” principal to our education. Encourage teachers to take 20% of their time to innovate. It’s not possible without school district’s support, but if there is, it’s totally doable. And have Lighting Talk or Lesson Learned sessions with other teachers so that they could learn from others’ successes or failures. And pivot if an idea didn’t work out. Or perhaps we need an national website for teachers to share their experiments and lessons learned from them. I truly believe this HACKING FOR EDUCATION will save us, and put our great nation again in leading position.

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How to convert from MySQL to Postgres

I have been using MySQL for probably as long as I could remember. For Bloglation, search capability is an important feature since it’s hard to browse each post one by one. I will probably implement tagging functionality, but even so, it’s important to be able to search the contents with a keyword(s). While Ultrasphinx works well, Heroku only supports WebSolr… I was using acts_as_ferret using /tmp for index files, but the problem using the /tmp directory is that ferret index files most likely to disappear at some point.

Then, I found out that Postgres supports full-text search and since Heroku uses Postgres, I could use other plug-ins like acts_as_tsearch or texticle for free. Free is important to me, since it’s not making any money.

Searching online, there are various ways to do it like Pivotal Labs’ script or Heroku’s Taps gem, but I wanted to do it in an old way like AEdifice to check everything is going alright at each step.

1. First thing to do is to backup MySQL

For me, it was important to backup preserving encoding, since it had many different languages. First I pulled db from Heroku thinking that I 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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Duck Tape Programmer

I’ve first read Jamie’s response to Joel’s writing on him on Coders at Work. I didn’t think much of it, and then I had a chance to read Joel’s actual writing. It sort of coincided with another discussion I had with an aspiring entrepreneur I met yesterday. And I decided I like the term, duck tape programmer.

The aspiring entrepreneur I met had his opinion about certain Rails programmers, and that’s exactly who Joel described as “someone with a coffee mug”.  I don’t think it’s a matter of right or wrong, but about the whole approach towards programming. The entrepreneur said that he has met many smart programmers who can talk up the latest movement and fads in programming world, but when it’s time to deliver, they are stuck in their world, trying to come up with best looking code using the latest techniques. However, the kind of programmers most value to startups are those who just get things done.

Some of the cool things he said were,

Peter asked Zawinski, “Overengineering seems to be a pet peeve of yours.”

“Yeah,” he says, “At the end of the day, ship the fucking thing! It’s great to rewrite your code and make it cleaner and by the third time it’ll actually be pretty. But that’s not the point—you’re not here to write code; you’re here to ship products.”

My hero.

Duct tape programmers are pragmatic. Zawinski popularized Richard Gabriel’s precept of Worse is Better. A 50%-good solution that people actually have solves more problems and survives longer than a 99% solution that nobody has because it’s in your lab where you’re endlessly polishing the damn thing. Shipping is a feature. A really important feature. Your product must have it.

I think what Joel referred as duct tape programmers are hackers in Paul Graham’s definition. Just as I concur with Paul, I do with Joel on this. Hacker or duct tape programmer, I aspire to be the one who just gets things done.

I am going to buy that book, which has very similar cover as Founders at Work.

Sweet!

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Ready to take a red pill?

The following is a Craigslist Wanted ad I placed when I was doing the social networking website for new parents. I don’t know why, but I wanted to see if I still had it, and I did.

You take the blue pill and the story ends. You wake in your bed and believe whatever you want to believe. You take the red pill and you stay in Wonderland and I show you how deep the rabbit-hole goes.

I am not offering truth, but I am offering you a chance to change status quo and be a founding member of a start-up company.

I am looking for a co-founder in DC metro area with web development experiences in LAMP (Linux, Apache, MySQL and PHP) environment. Prior social networking or web 2.0 development or startup experience would be a plus, not necessary. The right candidate(s) will be entrepreneurial, passionate about starting up your own company, and ready to commit time and/or money.

Social networking has so many potential niche markets, e.g. facebook for college students, linkedin for business users, and dogster for dog owners. It’s true that this space is getting crowded, but with right niche market and understanding of it, one can be very well successful. The key is to target passion centric segment. Only after becoming a leader in a niche market with laser-like focus, you can expand and grow much bigger. Our target customers are definitely very passionate about what they do and they can benefit most from features in the plan.

If you are interested in learning more, please send me an email with your resume and a brief description of why you think you are a good fit. We will take it from there.

I look forward to hearing from a fellow entrepreneur.

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Forget Everything, Just Build First

Over the weekend, while nursing a sick kid, I read this guest blog post on TechCrunch by Meebo CEO, Seth Sternberg, called From Nothing to Something. How to Get There. It was so good that I immediately re-tweeted the story and asked my followers to read it right then. You should read it, if you haven’t done so.

I share the same exact sentiment as the following quotes,

Second, like I said, forget everything else and just get your product out the door. No office. No phone system. No hiring. No press. No legal muck. No raising money. No looking for partnerships (who’s going to partner with you anyway?). The success or failure of the adoption of your product is what will create 99% of the initial value of your company. If no one ever uses your product, you have no value. Oh, and for the record, raising VC does not help get traction – in another blog post, I’ll argue that if anything, it hurts.

I am so glad that a successful entrepreneur who went through multiple failures are giving the same advice I feel as my mantra for a startup. How awesome is that.

Forget Everything. Just Build First.

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