You think you have come up with a brilliant idea for your startup. You have done the preliminary market research and spoken to many potential customers, and the feedback has been very positive. But how do you really know that it will form the basis for a great company?
Figuring this out is no easy task. After all, venture capitalists are paid millions of dollars in management fees, and even then, for the most successful investors, only one out of 10 picks is a major hit. To consider whether a startup idea has the potential to become a major success, it is important to consider the idea from a number of different strategic perspectives.
Incumbents are hard to beat on their own turf.
Most markets you will target will have existing players and market leaders that have been around for years. Incumbents are extremely hard to beat unless there is a major transformation in the industry that you can exploit first. Incumbents typically have a strong industry reputation, a host of features, a fine-tuned sales engine, and customer lock-ins that make it difficult for customers to consider a new player in the market.
Everyone today is familiar with the success of Microsoft Office. What people don't know is how difficult it was for Microsoft to gain a leadership position in the office productivity space before Windows became a popular platform. Before the advent of Windows, WordPerfect and Lotus 1-2-3 were the de facto market leaders on the MS-DOS operating system. However, Microsoft had very little success beating WordPerfect and Lotus 1-2-3. Users were just too used to the keystroke-based user interfaces of WordPerfect and Lotus 1-2-3 and were locked into the macros that they had created in Lotus 1-2-3.
Once Windows 3.0 came on the scene in 1990 and started becoming popular, things shifted in Microsoft's favor. WordPerfect and Lotus made the mistake of simply porting their applications from MS-DOS to Windows, which meant that the applications didn't perform well on Windows. Not surprisingly, Microsoft built new word processing and spreadsheet apps from the ground up and designed the applications to take advantage of the capabilities offered by Windows.
Next, Microsoft made the brilliant move to package these applications along with Microsoft PowerPoint into a bundle called Microsoft Office and made it cheaper than purchasing each application individually. It was no surprise that, as Windows became more popular, the market share leadership shifted to Microsoft Office as users wanted the best and most comprehensive suite of applications for Windows.
Global industry transformations are when successful disruption happens.
The best opportunities for disruption happen when the industry you are targeting is undergoing a dramatic transformation. At that time, incumbents are typically slow to move because they have existing investments and business models that they are unwilling to disrupt. Microsoft, for example, failed to recognize how its hold on the PC industry would be disrupted first by the internet and later by mobile devices. It took a very expensive acquisition of Hotmail for Microsoft to get into the game with MSN.com, and it was soon eclipsed again by players like Google and Facebook.
In 2007, when I launched Livemocha, a social language learning platform, the entire world was going through a globalization phenomenon with dramatic outsourcing of manufacturing and knowledge worker jobs. Global trade was also showing significant growth as tariffs and trade barriers were coming down. These transformations were all responsible for the significant interest in foreign language learning, especially English, throughout the world. Not surprisingly, Livemocha rapidly grew to 15 million members in 200 different countries.
Technology platform shifts.
Over the past three decades, we have seen new technology platforms emerge that have created tremendous opportunities for startups. We had the emergence of the PC platform in the 1980s, followed by the internet platform in the '90s. Finally, mobile emerged as the broadest platform for computing in the early 2000s, enabling more than 4.5 billion users worldwide to gain access to the internet.
Each of these new technology platforms has allowed a whole new generation of companies to emerge and become massive players in the industry. Microsoft rode the PC platform wave, followed by Google and Amazon, which rode the internet wave, and, finally, Facebook and Apple which rode the move to mobile.
Looking ahead, we are seeing a significant opportunity for new startup creation with the emergence of artificial intelligence and machine learning (AI/ML) technology. The advent of cheap GPU-based computing power and AI/ML services offered by all the major cloud providers like Amazon Web Services, Microsoft Azure, and Google Cloud Platform has enabled a whole new generation of AI/ML-based startups to emerge and disrupt existing players in their market. Companies like UIPath (which recently went public) have emerged that are powering digital transformation and automating work processes for large enterprises.