Teaching Startup: How new ventures create their own markets

Editor’s note: Veteran entrepreneur Joe Procopio’s Teaching Startup series is published on Tuesdays.

RESEARCH TRIANGLE PARK – One of the biggest mistakes entrepreneurs make is trying to be a competitor in an existing market instead of creating their own market. In this post, I’ll give you some case studies and strategies to get you thinking bigger.

Whether we’re first time founders or serial entrepreneurs, it’s an easy trap to fall into, and often we don’t even realize it. We come up with an elegant new solution for a costly problem, but then we shoot ourselves in the foot trying to be a clone of the very incumbents we claim to disrupt.

Startups will chase the establishment for a lot of reasons, but mainly because it makes it easier to gain initial traction. We call ourselves Uber, but safer. We’re Bitcoin, but lighter. We’re Facebook, but without all the evil.

Joe Procopio

Not long ago, I wrote a post after talking to a bunch of my investor friends about why some entrepreneurs can’t get a second look. One of the highlights of that post (according to readers) was a line an investor quoted from Lucius Birch: “The problem with first-time entrepreneurs is they tend to dream too small.”

Dream too small, miss your moonshot. Entrepreneurs need to remember that we’re not here to hate the player, we’re here to change the game.

Disrupting a Market vs Creating a Market

I’m not a fan of the term “disruption,” mainly because the word means nothing and the wrong thing all at the same time. I get it though. Disruption is about the evolution of how we do things, and getting to the new thing first, because first is where the money is.

It’s like back in the late 2000s when Apple saved its flailing computer company by disrupting the telecom industry with the iPhone. But Apple wasn’t trying to build a better phone, they were building a tiny, personal, wireless computer.

Apple didn’t disrupt anything. Instead, they created a new and ridiculously copious software market that they still dominate, much to the chagrin of software giants like Google and Microsoft — who, in 2007, were crushing Apple in the traditional software market.

At every single startup I’ve been involved with over the last 20 years, at some point we flipped the switch to stop running headlong into the incumbents and start running alongside them. The goal was to stop losing to the big boys at their own game and start making them play ours.

Case Study #1: YouTube Before YouTube

While creating a market is a must, there’s no guarantee it will work. Here’s how I learned that the hard way.

In the beginning of the 2000s, Zoom Culture was a $15 million venture backed startup that aimed to disrupt television. Professional digital video cameras were just starting to become affordable, and video content was just starting to become crowdsourced. This was before YouTube, so all this new video content had no home.

On my side of our company, we were creating that home. The process was cumbersome — broadband was also not prevalent yet — but we developed a way for these new auteurs to upload and compress their videos so we could stream them on our site, even over dial-up.

The other side of the company, led by former television network executives, would then take the most popular footage, package it, and try to sell it to the networks and the exploding basic cable industry. While that kind of programming would become a sub-genre of reality TV by the 2010s, it was laughed at in 2002. The networks already had America’s Funniest Home Videos, and its popularity was waning.

I was the switch-flipper in this scenario, having already done a couple tech startups in the past. I called for us to drop the traditional television development strategy and just host the content ourselves, making our own market. We didn’t need 22-minute run times, we didn’t need C-list celebrity hosts, we didn’t need TBS and TNT. We could do it all online.

As Zoom Culture wound down, partly because of that traditional network strategy, partly because of the dot-com bust, I got permission to try to save the online strategy if I could raise the money. We were a couple years too early, VCs wouldn’t touch us.

Google bought YouTube three years later.

Case Study #2: NLG Before NLG

Sometimes you have the killer product, but you’re just doing it wrong.

Automated Insights started life as a sports-data company until we developed a platform for Natural Language Generation (NLG), or automated content as it was known in 2010. To show off our platform, we used our enhanced sports data sets to automatically generate recaps and previews of games.

Our tech was pretty amazing, thanks to a bunch of brilliant people wielding new science, and we were posting unique sports articles that sounded exactly like they were written by a professional sports writer. We garnered a bunch of interest from most media orgs, including ESPN and the Associated Press. They kept a close eye on us, we kept trying to take their lunch.

Here’s the problem.

Every single pro team and every single major college team generates more than enough interest to require at least one beat reporter to cover the team. It was a game we weren’t going to win because it was a market that was saturated with cheap coverage. We could make our solution free, and no one would bite.

But then we noticed something nuts. The smaller colleges we were covering didn’t get a huge audience, of course, but that small audience was ridiculously engaged. Turns out some of those schools got no coverage, not even from the university itself. That’s when we realized: What if we not only provided stories where no human was providing them, but also where no human was able to provide them?

In other words, our content wasn’t meant to write one story that would be read by millions, it was meant to write a million stories, each one read by one person. That became the NLG market. We didn’t invent it, but we attacked it and won it. Three years later we were acquired by a private equity firm.

Case Study 3: What Are You Disrupting?

I talked to a founder last week who is looking to disrupt hiring, having invented a new way for candidates to offer themselves up for jobs and for companies to hire better-fit employees. The strategy and the tech are working, albeit in a limited fashion.

His issue: He can’t get around the traditionalist hiring thinking — the decades old process of resume-application-interview-hire. The candidate end of his business is solid, the job-seekers love it. The results are encouraging, people are getting hired quicker and are happier at their job. The companies are slow to adopt, because they can’t break the old paradigm.

My advice here is to stop going after the hiring market and start going after how we approach having a job.

It’s no secret that the concept of a job is changing. There is less loyalty, less tenure, less skill, more knowledge, more portability, more flexibility. Yet we’re still hiring like we did in the 1950s, when skilled workers put 40 years into a company and came out on the other end with a gold watch.

My friend’s company needs to follow and exploit that disruption — be the new catalyst for the new paradigm.

Slack was all over this. Everyone thinks Slack is a new way to instant message. But Slack is actually attacking the way we communicate at work, and the incumbent there is email.

Uber didn’t get there in time, and neither did Lyft. They spent ages and fortunes going after the taxi industry (so to speak). But ride-sharing is about the changing dynamic of car ownership, not about cheap rides after happy hour. Both companies have course-corrected, but the ride (pun intended) has been super rocky, and let’s face it, you and I aren’t going to raise Uber money to be able to afford that wild golden goose chase.

Strategies for Creating a Market

I can’t tell you exactly how to create your own market. And like I said, even if you do, there’s no guarantee you’ll be successful. But creating a new market is not just a better alternative than taking on incumbents, it’s mandatory. So here are some of the broad points I’ve used and advised.

Write your third act. Every startup should have an A Story, what you’re doing today, a B Story, what you plan to do at the next level, and a C Story, what’s going to get you to a billion dollars. Your time should be focused on the A and the B, and the split between those two depends on how far along you are. But the C Story should always be considered when making big decisions, and it should define some of the strategy in making your market.

Stop using incumbent methods and terms. It’s kind of a crutch to put ourselves up against known players to explain what we do, but it will always be a losing strategy. At Automated Insights, I fought hard against terms and methods related to writing, publishing, and reading, because we weren’t about publishing articles, we were about deciphering complex information.

Education is going to be part of your spend. One of the primary reasons we rely on incumbent terms is it makes it easier to sell a new thing to an existing customer base. But if our startup is really breaking ground and doing something that’s never been done before, no sale will happen without some education. Once your prospects understand what it is you’re truly doing, the sale becomes exponentially easier.

Create a managed services team. Again, if you’re first to a new market, your customers are also not going to have the expertise to get the most out of your product. Build and offer a managed services team to get their organization to a point where they can take full advantage. This ranges from a customer success team on the front end to custom developers and data wranglers on the back end.

Your customers will define how the market works, not you. You may be on the forefront of a new science, but the ultimate success of your market depends on a balance of how your customers adopt your product and how your startup feeds that adoption. Too many startups make the mistake of anticipating what the customer wants next. They’ll tell you if you listen.

Develop a cash cow mentality. In every new market, you’re going to have traditionalists, i.e. in the Automated Insights example, we had plenty of customers who just wanted computers to write and publish articles for their readers. We knew that these customers would not be taking full advantage of our product, and we knew that some of these implementations would fail over time, but we took them on. The one thing we didn’t do was customize the product or add band-aid features to fit the old paradigm. They needed to evolve, we didn’t need to devolve.

Once your new market is established, and if it takes hold, the incumbents will stop laughing at you and start copying you. This is an entirely new problem, but it’s a good one to have.

About the author

Joe Procopio is the founder of teachingstartup.com and the COO of IoT/Beer startup Precision Fermentation. Joe has a long entrepreneurial history in the Triangle that includes Spiffy, Automated Insights, and ExitEvent. More info at joeprocopio.com.