I believe that figuring out the right category as early as possible is critically important for startups.
Timo, Jarkko and I founded Lifeline Ventures on October 2009*. Since then we’ve taken a closer look at 100+ typically very early stage startups. When I meet the founders I always ask them to describe their category in one sentence. Somewhat surprisingly, only a handful of teams has been able to do this; typically, the category is way too broad and vague.
*) When reading my posts, keep in mind that I’m not exactly an industry veteran.
I ask the question because one of our key investment criteria is whether the company has the potential to become a category leader.
This isn’t as megalomanic as it may sound, because the category can be, and almost always needs to be, very specific. It could be as narrowly defined as, for example, “adenovirus-based gene therapy for metastatic cancer” or “social TV for sports fans”.
A well-defined category enables answering two questions:
- is the category relevant-enough today or in the near-future, and
- who are the current and potential competitors.
I tend to get excited if the answer to the first question is positive and the team has, or they can credibly build, sustainable advantage over competitors. In the case of pre-launch, pre-revenue, pre-almost-anything company, there just isn’t that much other relevant data to base the investment decision on.
The main advantage of being a category leader is that it has a lot of strategic options, including the expansion by taking over other categories. Also, it’s just so much easier to operate (sell, recruit, partner, …) when you are not standing in the shadow of an 800 pound gorilla. Almost always you’d rather be, as Brad Feld suggested, the 12 pound gorilla of a more specific category. If your solution is both global and scalable, surprisingly narrow categories are big-enough for creating a serious business.
Actually, I hereby promise to buy a tall cappuccino (one per team, tax excluded) for every entrepreneur who comes to the meeting with a relevant, specific category. See you over a cup of java!