Andy Bateman, CEO of The Leading Edge recently wrote an article asking a pertinent question: When will the start-up bubble burst? Bateman cited the popular stat that 95% of tech start-ups fail and the sometimes questionable decision by investors to pump money into ideas that fail before they even launch.
A better question however is what does this mean for aspiring start-ups?
Tech start-ups seem to be the flavour of the month but let’s not forget all the humble ol’ non-tech start-ups and entrepreneurs while we’re at it.
For starters, the start-up bubble, tech or no tech, will never burst, it will just be harder to get funded. This is because investors (even the most haphazard so-called ‘Angel’ investors) are getting more savvy and less dazzled by the bright lights of the next Zuckerberg-like enterprise promise.
Execution credentials and potential
What investors are paying increasing attention to is execution credentials and potentials over the next big ‘twitter/reddit/pinterest-minus-delicious-plus-youtube’.
Understanding the business model yourself and the ability to communicate it on a single piece of paper is the logical place to start. Look to Alexander Osterwalder’s Business Model Canvas to get you going. It’s perfect to demonstrate execution strength capabilities.
Minimise competition threat and put up barriers
Surprisingly competition is one thing that is often underestimated, particularly with revolutionary new product/tech startups.
You’re the original, you did it first, that matters right? Just try to find one of your friends who still has a kodak camera and you’ll get your answer.
Nothing beats a classic: Porter’s Five Forces
Never underestimate a classic, even by a 1979 framework created by Michael Porter which has stood the test of time and is probably more relevant than ever.
The model draws upon five forces that determine competitive industry and attractiveness of a market. If you’ve decided to enter or create a market, this model forces you to be prepared for external threats and inevitable power relationships at play.
1. Threat of new entrants
If your idea has even an iota of revenue potential, your hard efforts could be eroded by a stream of new competitors before you can say ‘I-need-to-print-business-cards’.
What can you do to put up new barriers? Brand equity and awareness is a start, but this question may force you to consider eventual licensing or franchise models in areas you don’t have the manpower to cover.
2. Threat of substitute products or services
Note that this should not be confused with competitors’ similar products but entirely different ones instead. Cue example: Anyone remember how big satellite radio was going to be? Neither do I, you can thank iTunes for that.
One strategy is to build in buyer switching costs. Although having lost market share to newer entrant Android, Apple would have lost a lot more had it not been for sunken costs users have put into apps over the years. Switching would mean buying all those bloody apps all over again.
3. Bargaining power of customers
Put simply, the higher the barriers to switch are, the lower the bargaining power of customers is and the less sensitive they are to price changes. This isn’t a license to price gouge but gives a firm some breathing space in the critical first three years of operation.
This force looks at the ability of customers to put firms under pressure. The take away here is extremely simple. Make. Them. Happy.
Customers have more choice than ever. They also crave information. So, via your content marketing strategy, make sure they are conditioned to turn to your brand when they want it. Commanding this thought leadership position in the market is an invaluable asset.
Gary Vaynerchuk is the king of understanding the bargainng power of customers. See Video below:
4. Bargaining power of suppliers
One of the things I love about Alexander Osterwalder’s business model canvas is that it considers the strategic importance of building relationships with partners.
If the power relationship is more in the favour of the supplier, a start-up needs to convert this into a relationship so they aren’t easily swayed by the next suave start-up that has more money than you do.
5. Intensity of competitive rivalry
A low intensity in this force is often the major reason why a business often starts up in the first place. This should always be monitored to identify future market diversification opportunities and to keep an eye out for those pesky competitors.
The take away here is to actively measure your competition and changing behaviours and needs of your target market. This doesn’t have to be elaborate to being with either i.e. set up google alerts, use social media monitoring tools and sign up to every page and email newsletter in relevant industries you can find.
Traditionally, we are asked to do more in communicating value, establishing competitive advantage and being innovative based on the firm concentration ratio in the industry. Sorry Mr. Porter but this is a flawed and rubbish position. You should be doing this anyway.
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