Focus on 1 opportunity instead of trying to do 10 things
As an early-stage investor, I’m often pitched by startups offering platform technologies.
They’ve developed a core technology with many different uses. Imagine, for example, a new material that repels water. Sounds intriguing. And valuable.
This material could be used for boats and ships to reduce drag. Or sprayed on car windshields to improve vision. It might be coated on skis to make them faster. Or create a waterproof layer for shoes and clothing. In fact, the possible applications are endless. Wonderful!
Each of the applications is a huge opportunity. Put them together, and we have a monster.
There’s no way this startup can fail to be a success. Even if one market is slow to take off, there a dozen more to pick up the slack. It’s like investing in 10 startups for the price of 1.
The founders seem surprised when investors aren’t excited. What’s wrong, they ask me. The answer, unfortunately, is well…everything.
Invest in Businesses Not Technologies
Let’s start with the basics: what are venture investors looking for? The answer is pretty simple: a business that will grow to $ 100M in a short period of time (ideally 5 years, 7 years max) and be acquired at a high multiple.
The key is we’re investing in a business, not an idea, not a technology, not a patent. And this isn’t a business; it’s 5 separate businesses, or 10 businesses, or however many different fields the company decides to enter.
Even though they’re all based on the same base technology, each business is different. Each product is different. Each customer base is different. Each one will be a tough challenge.
Breaking into one new market as a startup is really tough. Most fail. You might think breaking into five new markets means five more chances to succeed. But it’s actually five times tougher.
Each new application will take product development. It will take customer discovery. It will take manufacturing and supply chain expertise. It will take marketing targeted to those users. It will take hiring and managing a dedicated sales team with deep connections in that industry. It will require building relationships with different resellers, distributors, partners, retailers, and industry influencers.
Doing one is difficult. Doing five at the same time is impossible. Not with the extremely limited resources and tiny, overburdened team of a startup.
Sure, a big company like 3M or BASF could do it, but they have billions of dollars to play with and existing relationships to leverage. They have manufacturing facilities already built and entire supply chain teams to get it done. A startup has to build everything from scratch.
It’s often said that creating a startup is like building an airplane while flying it. Building a platform technology is like building 10 different aircraft at the same time while somehow trying to pilot all of them over a zipline Running between them. Even Boeing struggles developing more than one aircraft at a time.
No Exit Plan
The exit strategy of a platform technology is to sell off the different business to companies in each industry, and reinvest the money into expanding into new markets in a virtuous flywheel.
That strategy works for big companies, but not for venture investors. The venture model, for good or bad, requires selling off the entire business for a fast return.
There isn’t an exit strategy that works with platform technologies. Acquirers don’t acquire technology — they’re buying a business — and when it’s a startup, it’s a business that’s still only half-baked.
A key part of any deal is that the CEO, CTO, and other key executives have to join the acquirer to manage the transition. There’s no way to sell off each product line to different acquirers one at a time.
How About Licensing?
One solution to reaching multiple markets is to license the technology to partners and let them build the products. That allows the company to focus on the technology rather than getting bogged down in the messy work of building and selling products.
Licensing is a great business model, if you can actually find partners willing to pay substantial license fees instead of developing a competing product themselves. It takes little capital and requires only a small technical team.
While licensing is a great business model for founders, it doesn’t work for investors. Getting paid 2-3% in license fees is too small to grow the business to venture scale. And nobody acquires licensing businesses except private equity, and they won’t pay venture-sized returns.
The Solution — Pick One
The solution is simple: pick one of the many possible uses — the big one with the biggest pants on fire need — and focus exclusively on that. Learn everything about that market. Hire a team with deep expertise in that market. Build a product targeted specifically at the needs of that market. Became a leader in that market. And eventually get acquired by a giant in that industry.
If, at some point, you find that one opportunity isn’t working out as well as hoped, then you have a choice. You can pivot to developing a different product for that industry. Or you can start over with a different use case.
Pitching to Investors
If you have a platform technology with many potential uses, don’t pitch that to investors. Instead, tell us about that one big, urgent problem in the industry you’re targeting and how you intend to solve it. Show us how you plan to break into this market and grow sales exponentially to $ 100M in a few short years. Tell us why an industry giant will be forced to dig deep into its pockets to acquire the business or risk becoming irrelevant.
Then somewhere in the middle of the presentation, mention there are other potential uses. Customers are already contacting you, demanding samples, but you’ve had to say no. You can’t lose your focus now, there’s too much to do, but perhaps one day in the future, you’ll be able to explore those opportunities, too.
That tells investors that you’ve looked at multiple opportunities and selected the most lucrative one. And if along the way, this product doesn’t work out, well…you’ll be ready to pivot to the next one. But only as a last resort. Because right now you’re laser focused on making that one business a success rather than trying to develop technologies for 10 different markets.
Do Your Research. Then Choose.
There are a lot of possible uses, a lot of opportunities, a lot of needs. You’d like to get to them all. But you can’t. Accept that and you’re well on your way.
Once you’ve accepted that you’ll have to pick one opportunity, then the choice is which one. Do your research. Go to trade shows for each industry. Talk to 100 potential customers for each use case.
Map out the business model canvas for each with a simple business plan — what is the product, customers, go-to-market, costs and revenues. What is the exit strategy and how long will it take to get there?
Once you understand the choices, then it’s time to decide. Pick one. Then get started building your product for those users.
Then maybe one day, in 5 years or 10, once that business is built and exited, you’ll be ready to take the same technology to opportunity number 2.
The Silicon Valley startup, SüprDüpr, has developed a teleportation platform. Teleportation has many applications in transportation, space, and military. Which one should they focus on first? Find out in the award-winning Silicon Valley novel, To Kill a Unicorn. 4.8 stars on Amazon!
