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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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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Korea will be left behind

It’s okay to be patriotic. You should love your country, but it should not keep you from being objective.

In one way, Koreans are kind of Xenophobic. It’s not exactly it because they don’t hate foreigners, but because they think they are better than others. It was very clear when I lived in Korea for two years. It’s media’s fault, which is pretty much propaganda machine for everything to do with Korea. Come to think of it, this kind of blind loyalty is rampant in Korea.

When you are in the middle of it, it’s really hard to tell others about different things. But it becomes crystal clear when you are outside Korea. Whatever Koreans think they are best at, people in other parts of world simply don’t care.

Now, you may ask, “why do you care?” I shouldn’t. What Korea does or doesn’t do doesn’t affect me. So, why? I used to ask that myself, and I found an answer. Because I am a Korean, too (well, 1/2 of me is. Not that I am mixed, but I just happened to live 1/2 of my life in the US). I didn’t want to care, but I can’t help it.

Anyhow, I think Korea is in big trouble. They will be completely left behind in 10 years or so. Because they don’t invest in important technologies. But, you might say, “C’mon. Korea has the highest rate of Broadband penetration! Their mobile technology is way ahead of the 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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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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SF Women 2.0 Startup Weekend Wrap-up

Last weekend, I attended SF Women 2.0 Startup Weekend. At first, I didn’t know what to expect, but I ended up having a blast. I wasn’t sure if I wanted to pitch my idea, but I decided to do it while taking a shower in the morning. No one ended up joining my team, and I think it was just wrong crowd to pitch an idea around solar industry. I ended up joining an eccentric geek, H@rlan Knighwood, and worked on his project, ForkThis.  He coined it “Massively Parallel Creative Collaboration Engine”, which sounded like a title of a Ph.D. thesis. We had four core members and two floaters, and one of the member and I came up with gentler, funnier explanation, Friendly Online Rapid Kollaboration. What he has is a really cool idea. Anyone can start an idea, and anyone else can take the idea and “fork” it. After many forks, original forker can see what the differences are (similar to diff in unix-like OS) and accept/reject them and update the original idea. The team talked about different business models, but my personal opinion was that first focus should be to make it free and get as many as users possible. A few obvious options would be charging for private collaboration (Github) or charge for packaged solution (Zimbra). Anyhow, over the weekend, I added external forking – scraping external site’s page and creating a new fork – and twitter integration – option to tweet a new fork. Harlan worked on creating javascript snippet for website owners to copy and paste to their sites and massaging format after scraping.

Overall, it was a really cool experience. About 170  people showed up and 38 people pitched their ideas. 100’s of people getting together in one place, some pitching ideas, forming instant teams, and creating product/service and basically starting a company in 54 hours!  It just can’t get any cooler than this. Startup Weekend takes a place in many other cities (not all of them simultaneously), but the turn-out in SF should top the list. There are just so many interested in starting a company.

The pitches were also quite interesting, too. Some outrageous, some out of this world, and some really useful. Those with familiar concept (web 2.0, social networking, and twitter) were able to form a team easily. On the last day was presentation and demo, and the one that looked coolest was Foodspotting. They came with something that was already in progress, and thus didn’t start from the scratch at the event. To be fair, Harlan already had working demo he came in, too. However, Foodspotting was probably the most stunning visually. All their graphics were all slick and looked very polished. Whoever there designer was, s/he was awesome. One of the judge panelists pledged $5,000 to Foodspotting in funding before he left.

My philosophy around web sites was functionality/simplicity first and looks second. Perhaps I should think differently about that?  Users are humans, and I think it’s something you can’t get away with. Humans are naturally drawn to beautiful things from building to opposite sex. Having an awesome designer is definitely an asset.

Anyhow, the whole 54-hours took me back to college years. Teams of people working on interesting stuff, friendly people willing to answer and help others – not just team members, and overall just aurora of creativity, drive and affinity. Again, I had a blast and I wish I can help host one in Korea as well.

The following is a slide of pictures I took at the Startup Weekend.

Team Members: Harlan Knight Wood, Yang Chung, Tee Chapple, Toya Thomas-Cruz, Olivier Minkowski, John Weiss

Johny and I are interviewed at 8:18 mark

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Why there are not many startups in Korea

When I set out to translate Paul Graham’s Why to Not Not Start a Startup to Korean, my former colleague who is much better in written Korean helped me. I read the article before, but re-reading it and discussing it with the former colleague made me realize that there are two very fundamental cultural differences that prevent many people, especially the young, from starting a company.

The first is very bad stigma against failure. In Korean society, they have deep seeded notion that success is measured by the path you take in life – where you went to school, where you work, what title you have, where you live, who you marry, etc. Any deviation from that is frowned upon. It doesn’t mean there isn’t anyone like that, but it’s very rare. Those who don’t follow the “right” path is considered failure and treated as such. And they wouldn’t be able to get a good job or will not be promoted high enough even if s/he has a job, because they don’t have the right credentials. Considering that, failure from a startup company is even worse. When you do, getting a job becomes extremely hard. There is an additional element of lack of venture funding. That means most startups are infused with founders’ money or loan, and if they fail, they lose literally everything.

The second is age hierarchy. Because in Confucius society (which Korea society is based on), you have to respect the elders, it’s very hard to challenge any notion from the elders. It had also seeped into corporate culture, where people are promoted mostly based on ages. Thus, people with higher titles tend to be older. And thus, it’s hard to challenge them, culturally. That totally kills or severely limits innovations.

Those two reasons alone would be enough to inhibit anyone from attempting to start  a company.

A stereotype say Asians generally study harder and score higher in test exams. That in no way means higher intelligence or smartness. What matters in a startup is not book smart, but almost start smart and being resourceful. That’s why hackers are better fit for founders of startups.

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왜 창업을 해야 하나? (Why to Not Not Start a Startup)

내 가 Silicon Valley에 온 이유는 high-tech회사를 창업을 하고 싶어한 이유였다. 거의 nothing에서 something을 만들어내고 부를 만들수 있다는 것이 참 묘한 매력이 있었다. 하지만 창업에는 marketing이나 영업에 경험이 필요하다 생각하여, 그쪽으로 career를 바꾸었으나, Paul Graham의 essay를 읽고, 그가 하는 Y-combinator라 하는 incubator의 한 leader이자 Paul의 아내인 Jessica Livingston이 지은 Founders at Work라 는 책을 읽고는 이제서야 다시 software developer로 다시 career를 바꾸려 한다. 거의 모든 성공적인 high-tech회사들은 engineer가 시작했다. 하지만 벌써 가족이 있는 난 너무 늦은것 같다. 하지만 다른 젊은 사람하나라도 이 글들을 읽고 성공할 수 있으면 하는 것이 나의 바람이다. 번역을 하면서 다시 essay를 읽었는데, 한국과 미국의 문화적 차이를 확실히 느끼게 하며, 왜 한국에 startup회사들이 많이 없는지 알수 있을것 같다. 참 안타까운 일이다. 하지만 이 essay를 쓰는 이유는 독자 중 1%만 창업을 하고 성공해서 한국의 startup 문화를 바꿀수 있으면 하는 바램이다.

이번 essay를 시작으로 Paul Graham의 많은 essay를 한글로 번역할 예정이다. 이미 Paul Graham에게는 허락을 받은 상태이다. Paul Graham은 Viaweb이라는 최초의 application service provider software을 lisp언어로 써 고객이 자신의 e-commerce site을 짓고 운영할 수 있게 했다. 나중에 Yahoo에 팔아 나중에 Yahoo! Store이 되었다. 그후 Y-Combinator라는 incubator회사를 만들어 많은 web 2.0회사를 투자헀고, 조언을 해 주었다. 내 개인적으로도 최고로 존경하는 사람이다.

왜 창업을 해야 하나?

2007년 3월

(이 에세이는 2007 년 Startup School과 버클리 CSUA에서 발표를 바탕으로 기고했습니다.)

지금은 Y-Comibator의 성공율을 측정 할 만큼 운영해 왔다고 생각한다. 2005 년 여름에는 8개의 회사가 있었다. 그 중 최소 4개는 성공적이었다. Reddit과 Infogami는 합병했고, 또다른 회사가 합병이 되었으나, 말 할수는 없다. 또 다른 회사는 너무나 잘 돼서 원하면 10분안에 인수될수 있는 Loopt이다.

그래서, 처음 여름에 시작했던 창업자들 중에 반정도가 그들의 기준으로 봐서는 부자가 되었다. (한가지 배운점은 부자의 종류가 여러가지 있다는 것이다).

그러나, 우리의 성공율이 항상 50%일 것이라고는 장담을 할 수 없다. 처음은 예외일 수가 있다. 하지만 우리는 항상 이야기하는 10%의 성공율 보다는 잘 할수 있을것이다. 한 25%정도는 안전한 숫자로 생각된다.

실패한 창업자들도 그렇게 나쁜 시간을 가졌다는 생각을 하지 않는 듯 한다. 8개 회사 중 3개는 죽었을 것이다. 그 중 두 개는 여름 끝에 다른 일을 찾았다. 그들이 큰 상처를 입었다고 생각하지는 않는다. 가장 상처를 많이 받았을 회사는 일년 동안 열심히 일했지만 Google Calendar에 밀린 Kiko이였다. 하지만 끝은 행복하게 되었다. eBay에 100만 달러에 팔았기 때문이다. Angel 투자자들에게 돈을 돌려준 이후 그들은 한 1년 동안의 연봉 만큼을 건졌다.[1] 그 이후 그들은 바로 새롭고 더 재미있는, Justin.TV라는 회사를 창업했다.

그래서 여기에 더욱 놀라운 통계가 있다: 처음 창업자들은 아무도 고통적인 경험을 하지 않았는 것이다. 여느 startup처럼 좋은 일과 나쁜 일이 있었지만, 아무도 직장에 다니는 일과 바꾸지는 않을 것이라고 생각한다. 이 통계는 예외가 아닐 것이다. 장기적인 성공율이 무엇이든지, 일반적인 직업을 갖고싶어하는 창업자는 아무도 없을 것이다.

그럼 나에게 가장 큰 미스테리는, 왜 더 많은 사람들이 창업을 않하는 것일까? 거의 모든 창업자들이 일반 직장을 싫어하고 높은 비율이 부자가 되는데, 왜 모든 사람이 창업을 하지 않을까? 많은 사람들이 자금신청을 수천개를 받을 것으로 생각하나, 사실은 수백개에 그친다. 왜 더 많이 신청하지 않을까? 창업되는 회사가 꾀 많은 것 같지만 창업에 필요한 기술을 가지고 있는 사람들에 비해 작다. Programmer의 대부분이 대학 졸업 후 평범한 직장을 찾아, 그 곳에 머물고 만다.

사람들은 자기 자신의 이익과 반대로 행동하는것 같다. 왜 그럴까? 답은 있는것 같다. Y-Combinator가 벤처 자금 지원 절차의 매우 시작에 있기 때문에, 창업에 대해 불확신이 있는 사람들의 심리에 대해서는 알수있는 이는, 우리만큼 좋은위치에 있는 회사는 없을 것이다.

불확신이 항상 나쁜것은 아니다. 당신이 창업을 생각하고 있는 hacker (Paul Graham의 hacker는 보통 사람이 생각하는 hacker가 아님. 그의 hacker는 어떤 수로든, 어떻게든 많들어 내는 programmer임) 라면, 불확신은 지극히 당연한것이다. Larry와 Sergey도 Google시작전에, Jerry와 Filo도 Yahoo시작전에 똑같이 불확신을 가지고 있었다. 사실은 성공적인 startup들의 거의가 너무 확실한 사업자들 보다는 불확실한 hacker가 시작하였다.

이것들을 증명하는 몇 가지 증거가있다. 우리가 투자하고 성공한 startup들 중에 많은 곳들이 거의 마지막순간에 자금신청을 하기로 결정했다고 했다. 일부는 마감일 몇 시간전에 결정 하기도했다.

불 확실성을 다루는 방법을 구성 요소로 분석하는 것이다. 누가 뭔가를 꺼려 대부분의 사람들은, 약 8 여러 가지 이유가 함께 머리를 혼합되어서 어떤것이 가장 큰이유인지 모른다. 어떤 것은 정당하고, 어떤 것은 가짜이지만, 상대적인 비율을 모른다면 전반적인 불확성이 정당한지, 가짜인지 모를 것이다.

그래서, 난 사람들의 창업을 꺼려하는 요소들을 나열하고 어떤 것들이 정당한 것인지 설명할 것이다. 그럼 창업을 생각하는 사람들이 자신의 감정을 점검할 수 있는 체크리스트로 쓸수 있을것이다.

내 목표는 당신의 자신감을 높이는 것이다. 하지만 이것은 보통 자신감을 높이는 것과는 두 가지 점이 다르다. 첫째, 나의 동기는 솔직함이다. 자신감을 높이는 사업을 하는 사람들은 사람들이 그들의 책을 사거나 당신이 얼마나 위대한가를 말해주는 세미나에 참석하면 벌써 목표를 달성한 것이다. 창업을 해야 되지 않은 사람을 장려하면, 내 인생은 더 피곤해진다. 너무 많은 사람들을 Y-Combinator에 신청하도록 권장 하면, 내 일은 더 많아지게 된다.

둘째는 나의 방법이다. 난 긍정적인 대신, 부정적일 것이다. 할수 있다고 말하는 대시, 난 당신이 창업을 하지 않고있는 이유를 보여주고, 왜 거의 모두가 무시되어야 하는지 말해주겠다.

그럼, 우리모두가 가지고 태어난 것부터 시작하겠다.

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