Well, in my last blog post, I reminisced how in the nineties, Geoffrey A. Moore with his book “Crossing the Chasm” established the reference model for high-tech market entry and growth strategies.
His thinking quickly became common knowledge in the valley. Often times this was implicit knowledge – even people who had never read the book acquired the concepts “by osmosis”.
However, with the end of the dotcom boom, “Crossing the Chasm” seemed to go a little bit out of fashion.
That’s why I found a recent article by Andy Rachleff very interesting: “To Get Big, You’ve Got to Start Small.” In this article, Andy points out that “Crossing the Chasm” still has valuable messages for us today.
As a former partner at Benchmark Capital (a leading Silicon Valley VC) Andy is very familiar with the VC industry. In his current role as CEO of Wealthfront, a young startup that provides software-based financial advisory services, he is using the focused niche strategy from “Crossing the Chasm” to grow his company.
Andy points out that lessons from “Crossing the Chasm” are still entirely valid for today’s startup world, specifically the idea to employ a very focused niche strategy to build traction and start the scaling process for a company:
“This advice contrasts with the view, commonly held by today’s entrepreneurs, that companies need to address a large market from the start.
In their eagerness to win, entrepreneurs ignore the lessons of history. Name a successful tech company. The overwhelming odds are that it followed Moore’s advice.
Facebook started with students at Ivy League universities. eBay focused first on collectibles. LinkedIn’s initial target was execs in Silicon Valley. Google’s early ads appealed to start-ups that couldn’t afford the minimum buy associated with banner ads. Amazon started with books. Each company added functionality and addressed a broader audience–but over time, not from the beginning.
Over my long venture capital career, the biggest mistake I saw start-ups make was attempting to skip the early adopter stage to move directly into the early majority stage. Founders wanted to get big, fast. “
Andy lists two reasons why founders tend to make this mistake today: the history of successful companies often does not emphasize the earlier focus on a niche market and founders feel pressure from VCs who need portfolio companies to reach critical mass within a couple of years.
“Many bloggers and industry analysts don’t understand that approach. Few have read Crossing the Chasm, so they think there must be something wrong with an initially narrowly focused service. They’ve read successful companies’ revised official histories, which often leave out the early focus. Instead of emphasizing their first niche product, winners typically act as if they addressed a large market from the beginning.”
“Venture capitalists care deeply about the ultimate size of market the company addresses because it is typically the greatest determinant of outcome.”
So that explains why VCs very understandably look for portfolio companies that ultimately adress big markets. However, in Andy’s experience, and as the examples of successful companies show, this does not mean that a startup should focus on a big market right from the beginning. Or, as Andy concludes:
“Oddly, to get big you must first start by addressing a small market.”
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