…then when everyone in the world is wearing even just one of our incredible shoes – the left or the right, it doesn’t matter(!) – we will be able to monetize information about how different buckets of individuals move through the physical world, track mass migrations, sell people stuff they want, alleviate human suffering, and become bigger than facebook.
It is surprising how often I get pitched a business model which assumes penetration at huge scale has already happened. Surprising because it makes no sense early in a startup’s evolution to focus on what happens after a massive success of its primary product. Unless individual customers are motivated to buy the product in droves for its own sake, there will be no market penetration to provide data or a network effect valuable enough to monetize.
It is like fantasizing about what one will be able to buy after winning the lottery.
Founders are frequently so convinced of the value of what they’re doing that they mentally skip ahead to the next level of accomplishment and focus. They are seduced by the business models opened up by their imagined success, instead of concentrating on working obsessively to ensure that their product is so attractive to a potential customer that it will be bought and paid for in the short-term, before substantial market share is conquered.
As a potential investor, I see a founder’s belief that their business model only really kicks in once they’ve achieved world-class (so, by definition, rare) success to be a huge red flag. The only ways to saturate a market with a product are to make it irresistible to the customer or to subsidize its distribution. That subsidy, an investor understands, is likely to come from his or her own pockets.
Of course, investors are interested in the ways that their stake will be supercharged by scale and network effects. Founders must inspire investors with enthusiasm for a long-term, big-picture, future. But the first step towards credibility needs to be established and justified so the investor will start to believe in the vision and envision a world in which the product has achieved scale. Only then are scenarios which only kick in after massive market penetration credible and interesting.
Example
Tile is a low energy bluetooth beacon sold as a tag for physical items to help find them when they get misplaced. Using its inexpensive, transmit-only, long-lasting, battery-powered transmitter, a tag can be detected by any cell phone running an app configured to sense a Tile. At scale, once these apps permeate cell-phones everywhere a business case becomes possible where Tile can locate items pretty much anywhere in the world they end up. This is a valuable use case, and the competing technology which would allow this would require much more expensive hardware, including GPS/Wifi and/or cellular connectivity, clearly a totally different ballpark in terms of cost and complexity.
But the ability to “find anything anywhere” is predicated on achieving massive scale, which can only happen once individuals are motivated to purchase Tiles for a different purpose. In this case the immediate value is the ability to find Tiles anywhere the owner has been, which in many cases includes where they last left the object tagged with the Tile.
Without the basic use-case, which drives individual adoption before massive market penetration, no one buys the device, and the second level is never unlocked.
Tile was sufficiently useful to buyers that they’ve sold 20 million tiles in 230 countries, motivating enough downloads of their sensing app, enhanced by paid embedding of their sensing in other highly installed apps, that it becomes likely that someone with one of these apps has detected the location of any tile out there, in real time and in locations far removed from the owner.
Tile is an example of a business where the grand scheme business model was achieved, and illustrates that the long term vision is important, but they achieved it by focusing on the initial, individual value their product provided even before scale was achieved.
As an investor, I want to hear both business models – the short-term, individual value one, and the long-term, scale and network effect enabled supercharged one – but I need to buy into the individual use-case before dwelling on the long-term one. If the founder is pitching mostly the second, it leaves me skeptical of their understanding of the degree to which the first years of development will have to be ultra focused on the first.
Related Strikes
You have to Stand Alone
and today only, two business plans for the price of one!
This is a related pitch-strike, in which an insufficiently compelling business model is bolstered by a second, also insufficient one. For example, a few years ago I was pitched the concept of buying buildings to convert into individual office spaces (think WeWorks), and running expensive restaurants in them for the tenants. Two totally different businesses, with different skill sets, resource and financial requirements, and totally different risk-reward profiles. Why not take the business which is a better match for the founding team in terms of profitability, match on skills, experience, and enthusiasm, and focus on that?
In other words, be a dessert topping or a floor wax, not both.
There are cases where two lines of business are required to make a startup idea viable, where there is synergy and even a requirement for both to be addressed in order to make either succeed. But that is not a positive factor in considering the investment; it’s a negative one! It isn’t easy to make a start-up work well, but it is far harder to make two of them succeed simultaneously.
Focusing and executing well on one of the models alone is often good enough if done obsessively. WeWorks implemented the first business model above to huge success, though later got into trouble and became overextended due to questionable practices and is in the process of extracting itself from that now. Had they been distracted by trying to run restaurants at the same time, they would probably have failed.
A Huge Market Doesn’t Owe You a Small Piece of Itself
…and if just 0.1% of humanity uses our product…
There are 9 billion people in the world. If we achieve just .1% market penetration of just one of our shoes, left or right – it doesn’t matter, we will be selling 9 million shoes a year!
Market penetration for tech products doesn’t works like this. One gets either 0% or a substantial part of the market. And in a massive market where these kinds of nominal numbers might have appeal, the big question is how to win over the competition.
Huge markets are attractive to investors, but require well thought-out and articulated strategies for how they will be cracked and defended.
The Best of All Business Models
My product is so useful it sells itself to each potential client I show it to. I have positive unit economics. The more clients I have, the more useful my product is to each existing client because of network effects. The market for it is huge, and under-serviced, and once I service 1% of that market a whole additional business model kicks in that doubles my per-client revenue. Until I have that penetration, I’m concentrating all my efforts on growing the current beachhead business, leaving the execution of the scale model to when we’ve achieved scale.
It’s not that investors don’t love business models that become radically more valuable at vast scale—we totally do.
But we know that something is going to have to pay to achieve that scale. If the business model you’re pitching us from now to scale isn’t going to pay for it, it looks very much like you’re asking us to.
Marc Meyer is a long-time Silicon Valley technologist, founder (6 startups, 4 exits, 1 IPO), executive, investor, advisor, teacher and coach. He has invested in and advised over 100 companies, chairs the Advisor Council at Berkeley SkyDeck, is on the Selection Committee of HBS Alumni Angels, advises at multiple accelerators, and has an Executive Coaching practice helping leaders achieve their greatest potential.
The “VC Pitch Strike” series discusses common missteps which I seen entrepreneurs make when pitching in the hope that these musings will help you avoid some hard knocks.
Super insightful article!