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Month: September 2012

Being Hyper Local vs. Chasing Big Market

One thing I’ve once again recognized from yesterday’s event was strength of being hyper local.

Amongst 9 startups that pitched on stage, Hong Kong-based ButterBoom caught my eyes. They said it started as a fashion blog site covering celebrity photos, luxury shops and related stories in the region. The service offered by the startup can be particularly useful to those who are traveling and shopping in Hong Kong. At the end of the pitch they talked about their intent to expand business to other cities in Asia.

Being hyper local may sound against fundamental strategy that startup has to always think bigger because the bigger market size startup is aiming, the better chance there is for startup to become a billion dollar company.

To realize this, initial set of questions any investor asks you always includes “What is your market size?” Therefore, you are so tempted to say “Sir, we are looking at XXX million dollar market.” You say this because you want to attract investors by giving impression that your startup will grow like anything and become a billion dollar company in the future.

Unfortunately, reality is completely opposite. Startups aiming at such big market right from the beginning never succeed. If you design your product just for everyone in favor of big market, probably you will face difficulty with attracting people for long time.

Instead, design your product to very specific group of people. Say communication app for people who have their parents needing daycare service but those who are unable to speak or write. Market size may not look big enough initially. However, this kind of service is not easily replaceable by others and people will gladly pay for product as long as it removes their core pain.

While you design your product this way, important thing is that you need to look at something ‘repeatable’ and ‘scalable’ at later stage of startup cycle. By repeatable it means product can be replicated at different location to a slightly different group of people. By scalable it means company can increase size of business by pouring more money into cost factors (e.g. marketing, sales, development.) You can always start your business in small area or with small group of people, copy it to somewhere else and then scale it once your business model is verified.

So the better answer to above question is “Sir, we will become a billion dollar company but we need to start with this niche market because…” Facebook wasn’t designed for everyone initially. It was a website exclusive to students at Harvard. Telsa did not aim at wider audience of business person with model S initially. Instead, it captured enthusiastic fans of electric sport car. These companies repeated what’s already working and scaled it until no other competitor can catch up. Same thing can be applied to any product or service.

Hence, there is nothing wrong with being hyper local. It’s just a matter of how you draw a path from the point where you started to the point where you want to reach.

A Word About Government Grants

I’m writing this post while rehearsing my pitch for Myojo Waraku, Japanese SXSW taking place Sep 8 & 9 in Fukuoka. I’ll be on stage demoing latest product there.

A couple of months ago I asked one of my prospective investors/advisors who live outside Japan whether it’s good or not for early stage startup to participate pitch contest. His answer was basically yes as long as it helps startup gain visibility and attract audiences that it has to talk to: investors and customers.

From time to time we see same kind of contests initiated by government, and in most cases startups are given some sort of grants by government in reward for winning the prize. Only difference is that the former is just one-off event, but the latter is long-lasting event that may span across many months if not years.

This type of government-driven pitch contest or sometimes called ‘collaboration’ can be seen often in countries and cities where they promote themselves as next Israel or next Silicon Valley. People at government believe pouring chunk of public money into startups may foster foundation of whatever next thing they are trying to be.

While it is true that government plays important role as substitute for angels/VCs where there is shortage of venture money (aka risk money) in industry, there is a couple of things you need to be aware when taking money from government.

Among them, one pitfall that is particularly cautious to early stage startup is that everything has to be spec’ed out up front and you need to produce hard evidence at the end of funding period. For those who exercise Lean Startup Methodology it’s obvious that product that’s being spec’ed out prior to hitting market is almost guaranteed to fail.

There is even greater risk for early stage startups taking money from government such that it has to compromise something important, speed. And, speed is sometimes the only advantage over incumbents that startup is trying to compete.

While you are busy talking to other parties participating same pitch contest and preparing whatever materials you need to submit to government, some smart startups may come in and just get market before you actually even start. Not to mention it becomes harder for startup to pivot once you start working with government and it may be too late to pivot if you wait until funding period is over.

At the end of the day, government is not a customer and startups facing customers on a daily basis always win. Facebook, Instagram, AirBnB weren’t born out of government grants (as far as I know.) They might not be successful today if they scarified one of the most important assets at the time, speed.

I’m not completely against a whole idea of government grants helping startup kick-off business. It does help startup up to certain point. But you need to be 100% sure about what you are receiving from it and what you are giving away to it before committing great amount of your time to work with government and other parties associated with it.