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Gaps in the Market

Startup founders often say to me, “We’re going ahead with this new startup … we’ve identified a gap in the market!” It’s a common refrain explaining why someone is starting a business, and how the startup is positioned against competition. There’s a gap in the market.

The question to ask at that point is simple: “Is there really a gap?”

Too often, startup founders haven’t done enough homework and really don’t understand the industry they’re going into. They use incomplete evidence and analysis to come to the fairly significant conclusion that there’s a gap in the market. Here are some examples I’ve seen in the past:

  1. Anecdotal evidence: “A friend of mine who works in the industry says this is a huge problem.” That’s anecdotal evidence and it’s not enough to really understand a market. The anecdotes may be right, but like most “stories” they’re embellished or altered away from pure fact.
  2. Backyard evidence: “Companies in this area are way behind the times and need a new, more innovative and less expensive solution.” Backyard evidence -if gathered correctly- can be a compelling first place to start, but be careful that there aren’t any regional specifics as to why there may be a better local market vs. everywhere else. Serving a local market (at least with a software/web startup) is extremely difficult and narrow minded. Don’t make the assumption that a local gap in the market will be reflected everywhere else as well.
  3. Me too evidence: “I see a bunch of startups jumping into the space (reading it on Techcrunch), I knew there was an opportunity there!” You can identify trends and certainly identify competition from the press, but I wouldn’t base my assessment of a market on what I see published online. Plus, there’s no way of knowing if all the other startups did their homework either.
  4. Past experience evidence: “I’ve been in this industry for 10 years, I know what’s going on.” This kind of domain knowledge can be extremely valuable. I’ve often counselled people to stay out of industries they haven’t participated in because they really won’t appreciate the intricacies of it. But past experience is powered by the bias of one person, so be careful about how you interpret it, especially when it’s someone else’s experience and not yours.

Knowing your market isn’t something you should take lightly. It can make or break you, simple as that.

Using super-biased, incomplete, casual, close-minded or anecdotal evidence as a determinant about whether or not you should start a company, and then how to position it in the market, your value proposition, and what you should build, is incredibly risky. Instead, take a rigorous, scientific approach to identifying market gaps. Talk to more people. Talk to people outside of your local area and comfort zone. Do more research on competition. Try and disprove yourself instead of seeking “evidence” that only proves your point. Hack something together, show it to prospects and get them to pay for it.

Even after you’ve identified a gap, you have to then understand why the gap exists. A gap alone doesn’t provide enough validation to jump into it. There could be lots of reasons why a gap isn’t being filled.

Don’t jump blindly into a startup and industry that you don’t understand, using a haphazard “gaps in the market” analysis … it’ll hurt.

Sleeping Under Your Desk

sleeping under desk

I’ve slept under my desk before.

A few times in fact. It wasn’t comfortable, but it was more comfortable than sleeping on my chair or on top of my desk (I’ve tried both.) Somehow the existence of the desk made it feel a bit safer…

At one point (at one of my startups many years ago) we bought a couch that converted into a bed. I never used it, but my partner did. Others may have as well. There was an air mattress floating around somewhere too.

Startups aren’t fair. Neither is life. It may be that entrepreneurs are so young these days (particularly in the hotbed of Silicon Valley) that they haven’t had enough life experience to appreciate that fact. They’ve got all the enthusiasm and hustle in the world (both needed in massive quantities to succeed) but not the battle scars to understand what it’ll ultimately take.

But startups don’t own the “work insane hours like mad fools” space entirely unto themselves. Have you ever met a doctor that’s on a 24 or 36-hour shift? Now that’s insane, especially since they’re job is to save people’s lives. I’ve known young lawyers who join a firm as a junior associate and work absurd amounts; consistently more, for longer periods of time, than most people in any startup. And big game companies are known for pushing their people into super intense crunch periods before their games are finished. Life is hard. Work is hard. No shit.

There are plenty of examples of people having to work hard. Perhaps too hard. There’s definitely a startup culture around working tons of hours, although you can’t measure success or output simply in hours. Most of the time there’s some level of compensation: high salaries, big bonuses, etc. Whether the compensation matches the expectations is not always obvious or true, but there’s usually something in place. In a startup, the motivation is the experience – you either want to live the experience of the roller coaster or you don’t. I completely understand if you don’t, and even those addicted to the experience question themselves from time to time when things are really bad. Compensation in startups is tricky because salaries are usually lower (certainly at the beginning) than market value. This is often compensated with equity and the dream of future riches. Most don’t get there, which is why those future riches are a difficult lever for motivation, especially when the equity doled out is so little. The earliest employees deserve a bigger piece of the pie.

There are lots of great reasons to join a startup. But there are cons too. That’s life – pros and cons – and being able to balance those to your own comfort level is important for your survival and success. I don’t see the level of complaining that Michael Arrington makes reference to, but it doesn’t surprise me. The grass is always greener on the other side right?

Whenever this discussion around work/life balance, startup culture, startup “realities”, etc. emerges I always go back to a post I wrote in July, 2007 when I was starting Standout Jobs and my second son had just been born: How to Start a Company and Family at the Same Time. It still makes me nod and smile, and although my kids are a bit older now, it’s still a crazy struggle every day to figure out the right balance between family, startup / job, myself, my wife and life. Who knows if I’ve got it right?

Joining a startup – particularly an early stage one – isn’t a simple career choice, it’s a lifestyle choice. You have to go in eyes open and not only understand what’s coming, or just appreciate what’s coming, but embrace the experience fully, and be in it because of the experience.

And every once in awhile, that’ll mean sleeping under your desk…

Man lying under desk image from Shutterstock.

The $250,000 Funding Trap

$250,000 is a lot of money. Venture investors might not think so, but for most of us it’s a lot of moolah. And for early stage startups it’s often the amount they ask for coming out of the gate (or $500,000 – which seems to be pretty standard as a first, seed ask). The problem is that $250,000 is a dangerous amount of money to invest in an early stage startup.

For first-time entrepreneurs, $250,000 sounds like a million dollars. Maybe more. They’ve just raised money, they feel like giants ready to take on the world, they feel validated, and success is guaranteed! So they start spending. Office space. Office furniture. Business cards. T-shirts. Introductory video about their business. And then they spend more – particularly on hiring. All of a sudden, a founding team of two is a small startup of five.

The problem is that $250,000 runs out very quickly. And the milestones needed to raise the next round of financing are either not properly defined (and then it’s just a wishy washy mess later on), or they’re unrealistic. Founders – with their pockets bulging full of cash – get distracted from the core of building a product that customers want, and all of a sudden those seemingly easy-to-hit milestones 6-9 months out are impossible, and the company is losing momentum. This experience may be inevitable (think: The Startup Curve and the Trough of Sorrow), but it’s made particularly worse and potentially deadly when a startup doesn’t have enough capital.

$250,000 is a lot of money. I don’t like the idea that people can be flippant about spending that kind of money when there are many, many ways that money could be used for something useful in the world. But psychologically to startup founders it seems like even MORE money than it really is, and that puts a lot of startups into trouble. It results in a lot of startups struggling to raise follow-on capital, and ultimately failing before they even have a chance to succeed (what I’ve called Startup D.O.A.)

At Year One Labs we decided to invest up to $50,000 per startup. This is more than typical accelerators/incubators but far less than $250,000, or even $100,000. The thinking was that anything more than $50,000 and entrepreneurs would more readily make mistakes with the money. Anything less and they wouldn’t be able to survive (for up to 12 months in the program.) We didn’t want founders starving to death, but we also didn’t want them feeling comfortable or overly confident in their ability to spend. One thing accelerators and incubators have done successfully is chip away at the early stage $250,000 funding rounds. They make it possible and acceptable for entrepreneurs to take a lot less money, but get a lot more help and guidance. That help and guidance, the mentorship and focused access into key networks (of partners, other entrepreneurs, investors, etc.) is a value that traditional venture investors and even angel investors don’t provide (at least not on a consistent basis.) More startups will emerge further along with more traction out of relatively short accelerators than they would have with $250,000 in funding (and less value-add). They can then raise a more substantial follow-on round and give themselves a proper runway.

Going from a $250,000 round to a $500,000 or $1M round is extremely difficult. Founders are given too much flexibility to make too many mistakes with $250,000 in their pocket, and they realize (often too late) that they’re out of money, and haven’t hit key milestones. They also get too distracted (with that amount of money) but also realize that they have to start raising almost immediately, which is a further distraction. One advantage of (most) accelerators and incubators is the focus of a demo day that brings a lot of concentrated investor interest at one time. That can speed up some of the normal process of fundraising, which is great.

This isn’t meant to be a pro-accelerator/incubator post per se. I’ve certainly raised some concerns and issues with the accelerator model. But I’ve seen a lot of companies raise $250,000 or thereabouts only to run into a heap of trouble after the fact. These startups were most likely not able to raise more (even if they wanted to), so they go with a lower raise. Investors may look at this as hedging their bets instead of investing too much too early, but I think they are doing startups a disservice.

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About Ben Yoskovitz
I recently joined GoInstant as VP Product. GoInstant changes how we use the web, making it shareable like never before.

I'm also a Founding Partner at Year One Labs, an early stage accelerator in Montreal. Previously I founded Standout Jobs (and sold it). I'm a hands-on startup guy, helping companies grow successfully from the idea forward. You can reach me at byosko at gmail dot com.

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