Starting Up in Emerging Industries
JP Morgan projects impact investing will grow into a $1T market opportunity in the next decade. While capital is beginning to flow internationally, current levels of activity pale in comparison (especially in Canada). It’s still a young, misunderstood, largely unformed industry.
For the past year and a half at Venture Deli, we have tried to navigate from surviving our first year, to thriving in the ones to come. Along the way we’ve learned valuable lessons about how to make it in a young and emerging industry that I think apply to many other sectors of the economy.
There are very practical differences to starting up and thriving in emerging industry, compared to already formed and competitive ones. There are entrepreneurial truisms that are indispensable to success in one scenario, and a barrier to it in another.
Emerging industries may be constituted by only a handful of actors (institutions, entrepreneurs, academia, and most importantly, customers). Many of them will know each-other, and spend much of their time deliberating and collaborating with one another. The concepts and shape of the opportunity will remain largely unclear to people outside that community, for the time being. At some point, their efforts begin to resonate with others for reasons of curiousity, critique, or financial potential. Being an entrepreneur in this environment is a very different experience than being one in an established industry.
Established industries often have a robust field of actors, with an already established food chain of commercial entities. Their dialogue doesn’t happen at obscure conferences, but rather out in the open, with larger audiences. Their debates aren’t settled principally by research papers, but by corporate strategy. Their commercial hierarchy creates opportunities for acquisition. Most importantly, they are supported by a number of customer segments with well-known consumption behaviours. Consumer electronics is an example of this.
So why do these two scenarios necessitate different entrepreneurial choices?
Competitive vs Complimentary
Established industries tend to have tense competition over market share. Emerging industries are trying to create market share to begin with. The biggest threat in the former is that a competitor will outperform or outflank you somehow. In the latter, the biggest threat is that there won’t be enough paying customers soon enough, or at all. I would argue that having a few competitors in an emerging industry is helpful, not harmful. Obviously given the choice, I wouldn’t want to see a competitor around, but from a bird’s eye view, I can appreciate the sum-sum dynamic of a few groups. The main job of entrepreneurs in this scenario is not to outperform, it’s to educate people into becoming customers. That’s an uphill battle, so having a few other groups to shoulder the burden helps. Too often, entrepreneurs get distracted by competition (whether real or phantom menace), when instead it should serve as proof that there’s actually merit to their hypothesis (i.e., they’re not totally crazy).
Differentiated vs Generic
In established industries, differentiation is vital to prying market share away from existing players. Any start-up going after an established market without a killer differentiator is dead. In an emerging market, differentiation doesn’t matter nearly as much. In fact, since educating customers is the entrepreneur’s main job, having a generic offering is probably a better choice. Being generic allows you to cast the net as widely as possible so that you survive long enough to see the market grow. As well, because emerging industries have a dearth of accepted standards and best practices, the early spoils go the company that can package the conceptual into the purchasable. This is very much where impact investing is today.
Better vs First
First mover advantage is a term people throw around, but it’s often not a key determinant of eventual success. Google wasn’t the first search engine, Facebook wasn’t the first social network, and Groupon wasn’t the first daily deal company. They just got it right. So being a first mover is less important than getting it right. Unless, that is, you’re in an emerging industry. In that case, being first usually helps because the first group of more adventurous customers will choose you, and the second group of more risk averse customers will want to go with an already vetted provider (you). This advantage will fade as the market matures, but it is significant early on. Speed to market is more important than refinement.
Focus vs Flexibility
In our company, the pendulum has swung many times from focus to flexibility, and vice versa. There is a delicate play between the two that requires careful attention to the market’s growth. In established markets, if you’re doing more than one thing at a time, you’re diffusing your energy and fighting wars on too many fronts. In emerging industry, if you focus on one thing at a time (one product offering, one customer group, one business model), you’re making yourself vulnerable. That’s because there’s no track record to show that any of these focus areas is a good bet. Most importantly, uncharted markets hold many surprising opportunities, so nimbleness may actually lead to discovery. In an emerging industry, you have to be flexible with pricing and products. Rather than going into a sales meeting and harvesting the opportunity on the table, you have to walk into a general introduction meeting and make the opportunities from scratch. Rather than searching, sales in emerging industries is a lot like bricolage. That said, flexibility can be deadly if it grants you too much comfort in making money doing many different things. Flexibility is a survival tactic, but focus is a strategy for thriving. Only stay in flexibility mode for as long as you absolutely need to, and when there’s a real opening (acceptance for your main intended product/service), reallocate all your resources towards it and run like hell.
Exit Food Chain
In the digital media space, there are (far too) many companies sprouting up that are “one-feature” plays (a more aesthetic inbox, for example). Despite lacking imagination, I can understand why entrepreneurs go for this. There’s a ready and willing group of top industry predators atop the food chain who are buying up little up and comers regularly. These entrepreneurs are hoping to be rewarded handsomely for providing the next gadget one of the predators can deploy in their much more important game of chess. Little start-ups are just little DARPAs for companies like Google, FB, Amazon, Microsoft and Apple. Between them, these predators have hundreds of billions of dollars at their disposal to satisfy their hunger. In an emerging industry, there are no likely exit targets, so you can’t focus on one little feature. You have to want to build a visionary company that can become one of the predators later on. And maybe, just maybe, you’ll start to look like a good meal for players in an adjacent industry who are starting to see the financial potential in yours. But don’t count on it, and don’t build towards it.
Clearly, our story at Venture Deli is far from written. We may be only be beginning chapter 2 or 3, but I think there has been valuable learning about what it takes to navigate a industry in mid formation.