The founders I work or have worked with do not only have a problem they’re looking to solve; they also have a set of skills, often built up while working for another company, that they’re looking to bring to bear on that problem. As I learned while working for Intuit, the three key rules are (1) select a relevant problem, (2) that you have a suitable solution for and (3) where you’re uniquely suited to apply the solution to the problem as that gives you the “unfair advantage” that helps you build differentiation and a moat around your business. The set of skills of founders should be and often are the “unfair advantage” I’m looking for in a startup.
Mature industries typically are horizontalized and there’s an architecture of the business ecosystem that defines the roles of and interfaces between the different participants. As a company in that space, you can survive and even thrive just by focusing your energy and creativity on doing a good job within the box you chose to inhabit. The ecosystem’s architecture will ensure that your results will fit and are integrated with that of other players and end-users can assemble their desired offering or ask an integrator to put it together for them.
The challenge in a startup is that the only way you can win is to disrupt an existing market and associated business ecosystem. Often this means bringing in some type of major innovation, which can be technological but can equally well be a business model or process innovation. The immediate consequence, however, is that due to the disruptive nature, the business ecosystem serving the market you’re looking to address doesn’t ‘fit’ you. Or, rather, you don’t fit into any of the roles and positions defined in the ecosystem. And, of course, it might well be that you’re looking to create an entirely new market, in which case there’s no business ecosystem architecture at all to rely on.
For a startup, this means that you need to convince customers to try something new and unproven by promising benefits that often are 10x existing solutions in some dimension. However, for them to experience that benefit, you can’t just provide the piece you happen to be really good at and for which you have the skills. You also need to provide everything else that’s needed for a complete solution for your customers to experience the benefits you’re providing.
This may well read as completely obvious, but I see many founders fall into the trap where they want to put their energy just on the part that provides the key differentiation. This is because they’ve been trained to focus on specialization as a key success factor and are used to leaving everything else for others to pick up. As a startup, however, the only party that could pick up the rest required for integration is the customer and the more work you offload to the customer, the higher the hurdle is for the customer to adopt your solution.
In our relation with potential customers, the main principle should be to remove as much friction as possible and simplify the adoption of your offering as much as possible. This of course includes free trials and discounts, but integration of your offering into the rest of the infrastructure at the company is typically complex and expensive.
The consequence is that, especially as an early-stage startup, you need to take responsibility far beyond your differentiation sweet spot and provide solutions that normally would have been provided by others in the business ecosystem. Once you gain traction and the number of customers increases, others will appear who are willing to take a part of your scope and occupy a box in the new business ecosystem you’re building. However, you first need to get there. This is typically referred to as vertical integration. Despite your limited resources, you need to provide a vertically integrated offering to your customers as there’s nobody to take on the rest.
As a founder, accept that you need to solve a lot beyond the immediate scope of your expertise, at least initially. Failing to provide a vertically integrated offering to your intended customers is simply setting yourself up to fail. Vertically integrate first, horizontalize once the business matures. As Peter Thiel said, “Vertical integration is sort of a very under-explored modality of technological progress that people would do well to look more at.”