"The following section is largely written based on discussions with Kaj Hagros, a venture capital investor at Berlin-based Redstone. He has 20 years of experience in CEO and COO roles heading sales, marketing, and operations based in Europe, Asia, and the USA."
One of the critical success factors for an early-stage startup is entering the market in a smart way. Sometimes entrepreneurs think they can just create such a great product that selling it will be very easy. However, this is almost never the case.
The entry market
An early-stage startup should define their customers as precisely as possible and focus first on solving a problem for them. It’s much easier to create a working solution and operating model for a group of similar customers, rather than trying to serve many different customer segments. In order to scale rapidly, a startup can’t customize their product for every customer, which means that customer needs should be quite similar.
If a startup is serving very different types of customers, their needs are probably different. This makes it difficult to know who to listen to. The startup can also lose visibility into how they are reaching product/market fit. Different types of customers may also want to work in different ways with the startup, increasing your operational complexity – and startups can’t afford operational complexity.
The startup’s entry market should be a small group of similar customers who seem to be the easiest first group of customers to acquire. When evaluating which is the best entry market, many things matter. Of course, looking at who could benefit most from the startup’s product is important, but also other business fundamentals matter – like how easy it is to reach the customers, how open the customers are to trying out new solutions, geographical location, and so on.
People often don’t realize that a niche product can be a huge business if it’s possible to scale globally (and startups should by definition be creating globally scalable businesses).
For example, if your market is Finland (5.5 million people), and there are 2,000 potential customers that can pay €200 every year for a niche product, that means the market is €400,000 – too small to be sustainable. But if the situation is the same in all Western countries (roughly 1 billion people), then the market size is €80 million. That’s of course not huge, but it’s significantly bigger than the initial estimate.
Once startups have scaled within their initial niche, it can often be easier to then expand the product and reach new customer segments, which can multiply the market size – which means the entry market is different from the total addressable market.
Go-to-market strategy refers to the set of integrated tactics which a company will use to connect with customers. Sometimes startup entrepreneurs say something like “we’ll write some blogs, sell first in our home market and then move abroad”, but that is not a go-to-market strategy. A go-to-market strategy covers the structural choices about how a startup enters the market. It includes things like channels, pricing, possible partners, business model, and entry market – basically, everything that matters when a startup is entering a market. Finding an effective go-to-market strategy is an essential part of reaching product/market fit.
Startups almost always have limited resources and have to come up with a cost-effective strategy to enter the market. The best go-to-market strategies are often “hacks” to get the product in front of potential customers with minimum effort and in a way that makes the product seem attractive.
The pitfall for many first-time founders is to settle on an initial plan about how to enter the market. For example, the initial plan might often be to do direct sales. However, for most startups there are usually five to ten different ways to enter the market, which means it’s beneficial to take your time to come up with and evaluate different options. Often the best and most effective go-to-market strategies are not the obvious ones. Another thing to take into consideration is that the go-to-market strategy is about entering the market – the long-term plan on how to acquire customers can in some cases be different.
Examples of go-to-market strategies
The different go-to-market strategies mentioned below are not a complete list and there are many other possibilities, but this should help give you some ideas.
1) Direct sales
Selling directly to the customer is the strategy that most startups think about first. There are two options: inbound and outbound sales. Outbound sales are the traditional way of pushing a product to potential customers and inbound sales means selling to a customer when they signal their interest somehow. Usually startups start with direct sales and it almost always works, even though it can also be very expensive.
2) Indirect sales
Here, a partner or distributor sells the product for the startup. This can be very effective for a startup but often hard to achieve as an early stage company. There are many different variations in indirect sales, but in all cases the startup needs to offer a great value proposition to the third party that will sell your product.
3) Give away and monetize
This is about giving away the initial product for free (or very cheaply). After that, the startup has some way to generate more revenue from the customer such as selling additional features or selling data.
4) Systemic or industrial interlock
This means integrating the startup’s product with some other offering where customers are likely to buy the product. For example, a taxi company could aim to integrate their offering with an airport portal, TripAdvisor, or a similar service where there are a lot of people who are probably potential customers. This is one of the go-to-market strategies that can be very effective, but finalizing a deal with some relevant offering is the challenge.
5) Thought leadership
Startups create value by solving a clear problem. However, you can be creative when it comes to monetizing your offering. For example, one startup who created mobile analytics software had the initial plan of simply selling the software. However, they started to use the software themselves and publish rankings and information about different mobile apps, creating their own media presence in the process. Their media presence became so popular and interesting that another company bought the startup.
6) Going “viral”
For products sold completely online using marketing funnels, like apps or hardware products in e-commerce stores, many aim to go viral. This means that the product organically spreads to customers through social networks. This is achieved when every new customer brings one or more new customers – then growth will continue organically. This is hard to achieve, but you can make it more likely by giving a promo code to users. For example, the food delivery service Wolt gives an invite code to its users. If you invite a new user to Wolt with your code, you get a €5 gift card to Wolt.
How to know if you’ve reached product/market fit
Reaching product/market fit is often described as a binary thing (yes/no), but it can be hard for an entrepreneur to identify when you’ve achieved it (since reality is often not that black and white). In some cases metrics can help, sometimes an entrepreneur just “knows” it, and in some cases it’s something you can only identify some time after it happened.
Reaching product/market fit is the number one goal for all early-stage startups. It requires a lot of work from the moment you get the initial idea and identify a problem you could try to solve.
Most startups don’t ever reach product/market fit and instead disappear as either the resources or the belief in the product runs out. But this is not a bad thing as there is no point in building companies around products that don’t create significant value for anyone. The startup ecosystem is also there to support entrepreneurs who have failed.
Keeping the startup small and agile while searching for product/market fit is smart as the goal should be to learn and iterate as fast as possible. In their best form, early-stage startups are machines that can rapidly find new solutions to significant problems.
However, even after a startup has achieved product/market fit, they should never stop developing their product and way of operating. And the same iterative development process based on customer feedback can be applied to bigger companies too. However, for bigger companies it’s often harder to iterate at the same rapid pace as startups.
Insights from an entrepreneur – Supercell
Ilkka Paananen is the CEO and co-founder of Supercell, a mobile game development company that has created the popular Brawl Stars, Clash Royale, Boom Beach, Clash of Clans and Hay Day mobile games.
How can you know when a pivot is needed?
“When we started Supercell, our mission was to create cross-platform games, meaning you could log in and play games on many different platforms like Facebook, on a website, and on your mobile. We had to decide which platforms we wanted to start with. We chose Facebook and a website because, in 2010, those were the platforms where you could reach the most people. For example Farmville, a game from Zynga, was on Facebook and they had 80 million daily active players.
“Our first game was called Gunshine and it was available on Facebook and on its own website. However, our thinking had a few problems. The first and most serious one was that we had quite a small team, something like 25 people, and we didn't have enough focus – our resources were split across many different things. The second problem was that the game we developed was not optimal for playing on both a touchscreen and on a computer. Thirdly, by the time we published the game, Facebook was already somewhat saturated and getting traffic was not so easy anymore. These problems resulted in a game that didn’t fly in the way we wanted. At best, we got maybe 500,000 monthly users – not a disaster, but not enough for our ambition level.
“We started developing the game in 2010 and had it in the beta phase in January 2011. In beta testing, the metrics looked fine as the players were mainly early adopters. We raised funding and the idea was to start scaling, but in the summer we realized that the metrics didn’t scale. The more people who were not early adopters started playing, the worse our metrics became. In fall 2011 we understood that we had to change something radically.”
What changed with your pivot?
“We were not only unhappy with our game, we also started to worry about Facebook as a game platform. Games were not important to Facebook and it felt like we were building our house on an unstable foundation. However, at the same time, the iPad was starting to look like a great device and they were getting more popular all the time. We played some games on an iPad and thought that the device was super cool but the games were surprisingly bad.
“We started thinking ‘what if we focus everything on iPads?’ One of the key elements in our product vision was that we wanted to create games that people play together. The iPad didn’t have any games where people could do that. So we thought to continue with our original product vision but to remove everything unnecessary so that we didn’t have to worry about different platforms and could focus everything on making games for the iPad.
“We had also learned that our game was a bit too hardcore for casual players because it was slightly too hard to learn. So we made a difficult decision and flushed everything down the toilet we had been working on previously, including a few new projects we had been developing with the old strategy. In a way, we started the company again almost from zero in November 2011. We quickly had five projects going on at the same time and the target platform was the iPad – we even had a slogan, ‘tablet first’, and we were the first game development company to focus on the iPad.
“In February 2012 we launched one product with the new strategy but it failed, and in April we killed another project before launch because we just didn’t believe in it anymore. But then the third product we created was Hay Day. It went to beta phase at the end of May, and then Clash of Clans started beta right before the summer holidays. From that point, Supercell was born in the way people today know it.”
What are the hard things about a pivot?
“Discussions about the pivot started with the core team, the founders and a few very early employees. We made our decision, and then I told everyone about it in our Friday weekly meeting. I explained that we were changing strategy, why we were doing it and how we were changing it. After that, we bought every employee an iPad as a present. The idea was to get everyone excited about the new platform. It worked perfectly and people started to connect with the iPad.
“Of course, I also told our board about it. Our investors, as great investors, understood that it’s important to back the founders. For sure, it was not the most exhilarating board meeting ever, but that’s how it is sometimes.
“This was a big change. At that time we had over 30 people, and some people decided to leave and some didn’t fit in with the new strategy. But it also united those of us who stayed, because it was an especially tough situation. Suddenly we were a firm that had no products, no revenue, nothing. Some people said to us that 'I don’t believe in this at all, you don’t play games on tablets.'”
What do you recommend for testing ideas quickly?
“At Supercell, every employee is in a way accountable to everyone else. So every team has freedom but also responsibility. If something is not working, we expect the team to figure it out. So testing ideas quickly is about having the right people and a culture where it’s okay to fail.
“Generally speaking, we have two phases. In product development we don’t have any outside validation for the products. Of course, sometimes we give a game for testing to the whole company, and in all cases the team needs to play the game themselves. But we don’t have any hard numbers to decide if we should continue the idea or not. The team has to make decisions based on how they feel about it – ‘do we believe in this, is this the best game we want to create,’ etc.
“If the team continues to work on the game and it gets to the beta testing phase, the decision on whether to continue or not shifts in a way to the users. We beta-launch the game in a few chosen test markets and acquire something like 20 or 30 thousand users. At this point, we use proper metrics – how many people download it, how many return to playing the game, how many times a day do the play it, how much do they use money, etc. Before we do the beta, we agree what these numbers should be for us to consider publishing the game properly.
“Killing an idea is hard because you get emotionally attached to it. It demands a lot from people to keep it clear why we are here and why this company exists. You could believe that killing ideas becomes easier once you have done it many times but that is not the case.
“One thing that we didn’t realize in the beginning that you learn from failures but also from successes. This is often forgotten, or we at least forgot it. We used a lot of time analyzing failures but then we realized that why don’t we discuss what has lead us to our successes. Quite often when entrepreneurs succeed they don’t know why it happened. You should enjoy victories but also think: ‘what did we do right?’”