The Target Market Trap

Ambitious entrepreneurs naturally aim to create large companies in large markets. They make their plans, build their newfangled products, assemble scrappy teams and then set out on their holy quests to be big winners.

But most startups don’t make it very far — most fail pretty fast. So what was the key problem? Was it their team, market, plan, “timing” or “not enough capital?”

From what I see, capable startup teams chasing big markets fail most often because they don’t narrow their target market focus enough in the early stages of their companies. They try to serve “everyone” in a potential big market rather than focus on a well-defined customer group where they can execute and win.

I call this the target market trap. How can you grow big unless you aim broadly from the start? It’s an easy trap for an ambitious entrepreneur to fall into, and it’s a common cause of startup distress.

When you are a small company, you should be focused on a small segment of the market that you can reach and serve with your meager resources — to the exclusion of the rest of the market. Laser focus is more likely to create early success that can then lead you to larger markets and eventually to your dream of “everyone” in the big market.

This is a strange idea to big-thinking startup leaders, but it’s really how the world works. You have to start small to get big, conquering consecutively larger markets as you grow. You just can’t do it all at once – even if you have lots of investment capital.

Surprise! Big companies started in smaller markets

All the big guys started small before they eventually conquered a big market. Amazon, Apple, Microsoft, HP, IBM, Google, Facebook, Walmart. Pick any big player these days. They may broadly serve big markets now, but all of them were laser focused on a specific small segment of their market in their early days.

  • Microsoft – Microsoft is the ultimate large, successful company that servers “everyone” with a variety of products. However, while their ambitious long term goal was “a computer on every desk and every home,” they started in 1975 as provider of BASIC programming tools for the first personal computers, then made operating systems for IBM PCs, then more development tools, then Windows, then Microsoft Office, then Windows Servers, xBox and others. Check out the Microsoft history timeline to see their progression.
  • Facebook – Facebook has quickly become a mainstream social website and is now used by over 500 million people. But Facebook didn’t start out targeting the masses. Far from it. At first, Facebook was only for Harvard students. Once that quickly caught on, they expanded to Ivy League schools, then to all university students, then to high school students, then everyone over 13.  Now parents and grandparents are signing up and Facebook is expanding internationally, but they didn’t start by serving “everyone.” It’s true – a business with a massive impact started to serve just the students on one campus. Facebook timeline
  • Amazon – Yes, Amazon sells everything that you can buy with one click on the Web, but in the beginning in 1996 they only targeted serious book buyers who had an Internet connection and were comfortable shopping online. This was a relatively small group in the beginning — compared to large market they serve today. Amazon timeline
  • Apple – Apple leads many exciting broad markets in digital media, personal computing and mobile consumer devices now, but they started out with products for computer hobbyists, families with kids and elementary schools. And Apple computers (Apple IIC, Macintosh) always addressed smaller niche markets in the PC world – for 30 years. Apple timeline
  • Walmart – In their first 10 years, Walmart existed only as a no-frills discount retailer in rural Arkansas with 15 stores, because Sears or Kmart would never go there. Now are the largest retailer in the world. Walmart timeline video

You get the idea. Try this with any big company you know. Where did they start? Pretty small and narrow at first, then they grew very fast as they expanded their focus.

The journey to being big starts by starting small and winning consecutively larger markets over time, rather than by getting 1% of a broad mass market, then 2% (often called “Chinese math“). Aim too broadly and you won’t have the traction, credibility or cash to stay alive long enough to win at any level.

Investors already know how this works. So do successful entrepreneurs and marketers.

I have found that most startups almost can’t focus narrowly enough, especially bootstrapping companies without outside investors. But this focus doesn’t mean you can’t grow extremely fast. All the companies listed above were growth superstars even though they started by serving narrowly defined markets.

You have to narrow focus so you can execute efficiently to succeed at something, knowing that bigger markets can be attacked once you’ve proven yourself and have more resources as you grow.

Dream big, but start smaller.

The Basic Elements of the Angel Investor Pitch

Angel investors regularly hear pitches from local entrepreneurs who need money for their growing startups. Unfortunately, too many entrepreneurs don’t succeed in their first meeting with potential investors.

How can you be more successful with your fundraising efforts?

Forget your fancy PowerPoint slides, dynamite demo and tremendous track record. If you can’t tell a simple and compelling story about your business, you won’t get past first base with an investor.

Surprisingly, many entrepreneurs don’t tell a story that includes the simple answers the key questions that investors need to answer first. And most startup CEOs don’t do this well — even though the basic elements of a compelling investor pitch are freely available and have been common practice for years. (Several investor pitch resources listed below.)

Every angel investor (or VC) needs to hear your answer to these basic questions to consider investing in your company. Miss one of these key elements and your story is incomplete.

The basic angel investor pitch

1. Introduction

  • What exactly does your company do?
  • What is the key value proposition?

2. Team

  • What is the background and story of the CEO?
  • Who are the key employees and advisors?

3. Problem/Opportunity

  • What is the problem you are going to solve?
  • For whom will you solve this problem?
  • How big and urgent is this problem for this market?

4. Product/Solution

  • What specifically is the product or service?
  • How does it address the market problem?
  • What is the current stage of development?

5. Technology

  • What the secret sauce technology or unique delivery approach?
  • How is this defensible?

6. Competitive Advantage

  • What are the key market segments and current competitors?
  • How are you different and better than competitors?

7. Business Model

  • How do you make money?
  • Is this a common or new model in your industry?

8. Go To Market

  • How will you build awareness and grow sales?
  • What traction do you have so far with customers?

9. Company Status

  • Current number of customers, employees
  • History, accomplishments and status

10. Financials

  • Expected (pro forma) revenues, expenses, profits/losses for 5 years
  • What are the key factors that drive this business?

11. Investment

  • How much money are you raising at what valuation?
  • How are you planning to spend this money?
  • What are some likely exit scenarios?

This isn’t a revolutionary approach. This is the simple form of the standard investor pitch that has been been used for years.

Is there just one way to tell the story? Of course not. Only eleven slides allowed? Every investor and every startup is different, so make the adjustments that make sense. Also, a great presentation won’t make up make up for a mediocre CEO.

Your basic startup story gets you in the game with investors. Your selling skills, your knowledge of the business and several other factors get across the finish line to raise money.

It isn’t easy, so don’t avoid the fundamentals of your startup pitch.

Popular investor pitch resources

What investor pitch resources or suggestions are most valuable to you?

Modern Marketing Requires More Effort, Less Spending

Any business that is succeeding in the marketing game is relentless about executing their focused strategy. Owning a valuable position in the market is not easy. It takes focus, creativity and discipline. The discipline to communicate your focused message every day for years to the best of your abilities.

Technology entrepreneurs typically underestimate the marketing execution effort required to succeed – and overestimate the marketing investment.

Big budgets are no longer the magic pill that moves markets. The game has changed.

Execution is always harder than it looks

Like losing weight or getting fit, it’s easier to develop your plan than to actually give up sweets or exercise before the sun comes up every day. Billions of dollars are spent on diet plans, health clubs, and low fat foods, but more Americans are getting bigger each year. Most dieters have a decent plan, but they lack the discipline to do the hard things every day (forever) that are required to be healthier.

Unfortunately, modern marketing is more work and effort than “quick fix” spending on advertising and direct mail campaigns. It’s difficult to continually make your product or service great, write useful content for the Web, participate in the social conversation, develop partner relationships, test and retest new approaches, refine your strategy and all the other things required to grow fast and build a valuable reputation.

The bad news is most marketing activities these days require painstaking labor and detailed savvy about a wide variety of tactics. The good news that most marketing tactics don’t require significant budget any more.

Winning without big budgets

One fast-growing business that is succeeding in the marketing game is FireHost. FireHost delivers truly secure hosting for small and medium-sized businesses that have critically important websites but not big budgets. (FireHost has been a client of New Avenue and I’m an investor, too.)

Yes, FireHost offers much-needed service that is very disruptive to old dedicated hosting business (that costs too much and isn’t very secure). But the FireHost team is winning because they execute like crazy in every part of their business, including marketing.

During an important strategy discussion early last year, we decided that “secure hosting” was an available position in the big hosting market and FireHost was uniquely positioned to go after it. After this meeting, the FireHost team made a long list of the hundreds of additional things they would have to deliver and communicate to be known as the most secure hosting available.

Within months they delivered almost all the items on the list, including changes to their services, infrastructure, website, branding, marketing activities, messaging and content, search keywords, and on and on. When they finished that list they made a new long list. They have done this each quarter for a year. And each quarter they are more laser-focused than before.

Now FireHost is an acclaimed hosting company that is growing twice as fast as the industry and has successfully raised $2 million in capital to help them grow faster.

Lucky? Nope. Great product and terrific support? Yep. But that’s not enough.

The FireHost team executes 10X more marketing activity each month than any other company their size that I have ever seen. They have grown fast without a big budget. It is extremely hard work — and they do it better than most companies of any size.

Here’s another example: How did Marty Zwilling of Startup Professionals get over 200,000 loyal followers on Twitter and build hugely popular website for entrepreneurs?  Without a marketing budget?  Well, Marty has posted a useful article on his blog every day for the past two years. Every day.

This is how the fastest growing companies are doing it now. Modern marketing is mostly about work: consistent effort and constant improvement.  Not big budgets.

To win in the marketing game, be prepared to put in the extraordinary effort every day that is required.