From the dot-com bubble to the latest “Great Recession,” one statistic received tremendous play in the media: the chance of a new business failing within five years is close to 50%. According to a report cited in the Wall Street Journal, three out of four venture capital-backed startups are doomed to eventual failure.
Common failure factors are well-reported – the company wasn’t staffed with the right people, or the product didn’t scale effectively. Research suggests the most common underlying reason behind tech startup failure is lack of access to or running out of capital. Given this year’s investment environment, let’s assume you’ve secured the money for your tech startup: now what?
Perhaps the single most important factor out of the gate is your plan to market to and ensure proper coverage of your Total Addressable Market (TAM). You don’t have a go-to market strategy until you know your TAM. Many companies simply do not have a full customer picture. They instead opt to launch a product and sell through brute-force. While quickly getting your product in the hands of users is important, doing so without sufficient planning can set your business up for failure. If you don’t know your customer targets, your costs and your long-term model, you could be playing Russian roulette. Simply put, building and consistently updating your customer picture and the overall target market is essential to staying ahead. Without it, you’re relying on luck for success.
TAM is the antidote to what might be the biggest failure factor in the startup ecosystem: “Building a solution looking for a problem, i.e., not targeting a ‘market need.’” Cited by CB Insights as the No. 1 problem in a post-mortem of 101 startup failures, this issue is cited by studies across the board. In a separate survey of 100 startup entrepreneurs, 20 percent said their startup failed because of poor product market fit.
The big picture questions include: how many potential customers are out there? What’s the status quo you’ll be disrupting? Is change really needed (or do you just like the idea of change)? What regions do your target customers operate in? Where should you set up your operate and what should your distribution model look like? To market a product, you need to examine how your prospects’ decision-making process works (from research to purchase decision, for instance), and place data-backed bets on where to place your chips. How will your customer find you? What are their key pain points? From B2B selling to direct-to-consumer, segmenting and analyzing this data and constantly re-evaluating based on what types of prospects you successfully sell to will inform the evolution of your marketing funnel. As one CEO recently told me, the days of word-of-mouth marketing strategies are behind us.
TAM coverage isn’t just invaluable to selling an existing product. It’s also fundamental to the pivot vs. persevere debate: do you move forward on your initial product model, or do you course-correct? On a long-term timeline, evidence suggests the majority of technology companies do indeed pivot. IBM moved from enterprise machines to enterprise computing, to personal computers, back to enterprise computing. YouTube’s humble beginnings involved serving as a video dating site. Its eventual acquirer, Google, is powered by advertising revenue, but its ultimate goal appears to be artificial intelligence. Car manufacturer Tesla is transforming (or arguably, has already transformed) into a battery company.
We often make business more complicated than it needs to be. It helps to imagine running a lemonade stand: who are the households in your neighbourhood? How many ingredients (lemons, sugar, water) do you need? It makes a difference if you’re in a cul-de-sac of 15 houses, or if you have 500 houses you can sell to. Without knowing what you stand to sell, you might overspend up-front on your product because your market is too small, or under-invest and miss a big opportunity.
A lot of companies don’t do this. They simply build something they feel is cool and then struggle to sell in a complex business environment. The keys to how to sell are right in front of you.
By Joe Hyland, CMO, ON24