Vertical Markets 1: Bad Advice – All Startups are the Same

In the past entrepreneurship was viewed (and taught) as a single process, with a single approach to creating a business plan and securing funding for a startup.  The best entrepreneurship textbooks and blogs assume that advice to startups is generalizable.  But as I learned from my students this “one-size-fits-all” approach does not work for all startups.  Different market opportunities present radically different startup risks and costs.

Capital Requirements
In my class students form teams and spend a semester building a detailed plan for a company. When I started teaching I launched project teams with this advice: All you need is a half a million dollars to start a company and at most a few million more to scale the company.” And the students nodded, OK, yes sir, and they wrote down, “a half a million bucks to start.”

The next week in class a project group raised their hands and said, “Hey, Professor Blank, we found out the common wisdom in the biotech business is that “we need $10-20 million just for the R&D phase and 100’s of million to get through clinical trials.”

“Of course,” I said, “Life science is completely different. The time to product and scale of investment is radically different than other startup markets.”

Intellectual Property
At the next class I said, “You all ought to get out and start talking to customers on day one, and get early feedback on your idea. You don’t need to worry about any Intellectual Property (IP) issues. Just get out of the building.”

The next week another team, working on a new type of solid oxide fuel cell, remarked, “Professor Blank, in our industry there’s a ton of patents and stuff and people tell us we shouldn’t be out there unless we start patent protecting all our IP.”

“Oops,” I said, “you’re right.  In clean tech nanomaterials you guys need to be talking to patent attorneys.  Don’t share the details of your manufacturing process with customers until you’ve locked up your intellectual property.”

Government Regulations
I turned to the class and said, “The rest of you can keep building your company and shipping your product because you don’t need to worry about government regulations. You’re a startup, just get your product out the door.”

The next week another group raised their hands, “Professor Blank, we’re building a medical device and there’s something called the 510K that the FDA requires, and that’s a two-year process.”

Verticals Are Different
I began to realize that entrepreneurs (and their professors) act like every vertical market and industry has the same set of rules. The guidelines I had originally proposed to my students worked for enterprise software or Web 2.0 startups, but medical device, biotech and cleantech startups required radically different approaches.

So the first heuristic is: do not assume the startup rules are the same for all vertical markets.

Now when my students begin their team projects, I list 13 vertical markets on the whiteboard.  Just for discussion, the markets I chose were:

  • Web 2.0,
  • enterprise software
  • enterprise hardware
  • communications software
  • communications hardware
  • consumer electronics
  • games software
Vertical Markets

Vertical Markets - Click to Enlarge

  • semiconductors
  • Electronic Design Automation (EDA)
  • clean tech
  • medical devices
  • life sciences
  • personalized medicine

There’s nothing special about this list other than it represents a diverse set of markets.  If your market is missing, just add it as we go through this discussion.

Entrepreneurs who have experience in the vertical market they’re entering do this analysis automatically. If you don’t have deep knowledge of the domain you are about to start a business in, you need to begin by understanding the answers to questions like these:

  • What vertical market are you in?
  • Do you have domain expertise in your market?
  • Do you have advisors who are domain experts in your market?
  • Do your potential investors understand your market?
  • What is it that’s unique about the market I’m in?

We’ll talk about the implications of what vertical market you’re entering in the next few posts. 

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11 Responses

  1. I would like to humbly suggest banning the term “vertical” altogether.

    To insiders in any market, the very use of the word reveals an outsider who does not understand their industry and tries to frame it in comparison to some largely irrelevant “horizontals”. Competing with such companies is pure pleasure – just harp on their mis-understandings of the market.

    There are no verticals, there are industries and markets.

    • Dmitry,
      I think your comment makes my point.
      The post is not written for “insiders” or domain experts inside a vertical.
      The goal is to give “outsiders,” learning how to think across multiple verticals, a set of tools to analyze the difference.

      The next few posts will make this clear.

      steve

  2. Steve,

    I understand what you meant, but would like note that even “internal” use of this “vertical” terminology often colors people’s attitude towards their markets (vertical vs. horizontal). Before long this can spill out into external communications with some pretty horrific results.

    So I’d still rather refer to “industries” and “markets”.

  3. [...] Vertical Markets 1: Bad Advice – All Startups are the Same In the past entrepreneurship was viewed (and taught) as a single process, with a single approach to creating a business [...] [...]

  4. I told the class that all you need is a half a million dollars to start a company. All teams raised their hands and screamed: we hundreds of angels and dozens of VCs, all of them say they will only fund deals with prototypes, beta customers, first revenue and executive teams all in place, and they say it will be 2 years from now because their coffers are out of cash and LPs in default.

    Yeah, I said. You kids have to learn to do it the old fashioned way they did it before they new economy and Silicon Valley. Bootstrap for years!

  5. In economics, there is an industry stack. It is actually a tree that organizes all sectors, industries, and sub-industries. The verticallity of a particular market refers to its height in the tree. In defining a product, you can easily move up or down and accidentally make a mess of your target market.

    A vertical market has a culture. It has a vocabulary. It has its own meanings. Focusing on level of the industry stack will help you get your meaning right, which leads to successful communications within that market. Nothing is generic in a vertical. Do not move around into other verticals within the same branch of the overall industry tree.

    Moore’s technology adoption lifecycle tells us to find a client. That client is inherently in a vertical, so stage gate the vertical for seats and dollars. Build the client’s visualization with your technology, but your technology is not the product. The products you develop in the bowling alley are there to carry your technology and get it adopted.

    Moore’s bowling ally does tell us to get eight clients in different, widely separated verticals. You will sum them going into the horizontal market, so spread them out.

    Vertical markets are a risk and cost reduction strategy. You can bootstrap without VC money. Don’t let VC money slow you down. With an appropriate marketure, requirements elicitation processes, and a product roadmap organized around minimal marketable functionality, yoiu can build your market, company, technology, and product simultaneously and symmetrically.

    No, linearity in business is a tragic myth. Make no claim beyond the walls of your current market. Know that market transitions happen even in the horizontal market. Linearity leads to such advice as listening to the voice of the customer, which has driven enough companies into the ditch. Non-linearity is approaching. Non-linearity is the constant. Non-linearity is the change that you must be ready for. When the environment changes, its too late to talk about change.

  6. I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.
    Thanks,
    Joe

  7. [...] You need to truly understand the differences within your “big market” and why they exist. Rest assured there are differences, and they can be significant. Steve Blank points out that a common mistake people make when giving advice is that all startups are the same [...]

  8. Dmitriy is right – we should ban the use of industry buzzwords like “verticals”, “metrics” and “horizontals” altogether. It’s nothing more than self-indulgant magniloquence regurgitated by androids that read it in a training manual and seek to elevate themselves above those who reside outside their domain (read: “If you don’t get it, you can’t participate”). The original terms we used were perfectly fine…why %$#@ with them?

  9. Why are you getting stuck on a word? Vertical is a reference term (or a category) not an actual industry. “vertical” works perfectly fine in quickly telling you about a general direction of a company’s business model.

    And while in some cultures it is ok to “ban” words, that’s not really what we do in the US.

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