Contents
Preface
Acknowledgments
Introduction
Six Themes of the 24 Steps
Step 0: Getting Started
Three Ways to Start a New Venture
How to Go from “I Have a Passion” to “I Have an Idea or Technology”
Finding a Founding Team: Entrepreneurship Is not a Solo Sport
Where You Go from Here
Step 1: Market Segmentation
In This Step, You Will:
The Single Necessary and Sufficient Condition for a Business
Create a New Market That You Will Dominate
When “Paying Customers” Lead You Astray
Complex Paying Customers: Primary Versus Secondary Customers
and Two-Sided Markets
How to Do a Market Segmentation
How Long Should I Spend on Market Segmentation?
Example
Summary
Step 2: Select a Beachhead Market
In This Step, You Will:
How to Choose Your Beachhead Market
Your Beachhead Market Still Needs to Be Segmented Further
Example
Summary
Step 3: Build an End User Profile
In This Step, You Will:
Why Target a Specific Demographic?
Does Your Founding Team Include Someone in the End User Profile?
Examples
Summary
Step 4: Calculate the Total Addressable Market (TAM) Size for the
Beachhead Market
In This Step, You Will:
Bottom-Up Analysis
Top-Down Analysis
From “How Many End Users?” to “Show Me the Money”
What Should My Tam Be?
Examples
Summary
Step 5: Profile the Persona for the Beachhead Market
In This Step, You Will:
How to Choose and Profile Your Persona
The Persona Is more than Just an Exercise
Should I Create Multiple Personas? If so, When?
The Persona Helps You Focus on What to Do—and What Not to Do
Examples
Summary
Step 6: Full Life Cycle Use Case
In This Step, You Will:
What to Include in a Full Life Cycle Use Case
Examples
Summary
Step 7: High-Level Product Specification
In This Step, You Will:
Creating a High-Level Product Specification
Then, Make a Product Brochure
Examples
Summary
Step 8: Quantify the Value Proposition
In This Step, You Will:
Aligning Your Value Proposition with the Persona’s Priorities
Keep it Simple: The “as-is” State Versus the “Possible” State with
Your Product
Examples
Summary
Step 9: Identify Your Next 10 Customers
In This Step, You Will:
How to Complete This Step
Is the Current Persona Valid?
Dealing with Negative Feedback
Examples
Summary
Step 10: Define Your Core
In This Step, You Will:
A few Examples of Core
How to Define your Core
What about Intellectual Property? or Culture?
Core Is Different than Competitive Position
First-Mover Advantage Is not a Core
Locking Up Suppliers Is Typically not a Core
Example
Summary
Step 11: Chart Your Competitive Position
In This Step, You Will:
The Toughest Competitor of all: The Customer’s Status Quo
How to Chart Your Competitive Position
Examples
Summary
Step 12: Determine the Customer’s Decision-Making Unit (DMU)
In This Step, You Will:
Primary Roles in the Decision-Making Unit
Additional Roles in the Decision-Making Unit (DMU)
How to Determine the Decision-Making Unit
Examples
Summary
Step 13: Map the Process to Acquire a Paying Customer
In This Step, You Will:
How to Map the Process
Budgeting/Purchasing Authority
Time Is of the Essence
Consumer Versus B2B
Examples
Summary
Step 14: Calculate the Total Addressable Market Size for Follow-on
Markets
In This Step, You Will:
How to Calculate Broader Tam
Example
Summary
Step 15: Design a Business Model
In This Step, You Will:
A Business Model Is not Pricing
Key Factors When Designing a Business Model
Free Is not a Business Model
Generalized Categories of Business Models
Think Outside the Existing Categories
Summary
Step 16: Set Your Pricing Framework
In This Step, You Will:
Basic Pricing Concepts
Example
Summary
Step 17: Calculate the Lifetime Value (LTV) of an Acquired Customer
In This Step, You Will:
Key Inputs to Calculate the LTV
How to Calculate Lifetime Value
How to Calculate the LTV: “Widget” Plus Yearly Maintenance Fee
Important Considerations
Summary
Step 18: Map the Sales Process to Acquire a Customer
In This Step, You Will:
Four Factors Entrepreneurs Often Overlook about Customer
Acquisition Costs
Your Sales Process Changes over Time
How to Map Your Sales Process
Sales Process Comparisons: Zynga, Groupon, Linkedin, Facebook
Example
Summary
Step 19: Calculate the Cost of Customer Acquisition (COCA)
In This Step, You Will:
Why Coca Matters
How not to Calculate Coca: A bottom-up Perspective
The Right Way to Calculate Coca: A top-down Perspective
How to Reduce Coca
Examples
Summary
Step 20: Identify Key Assumptions
In This Step, You Will:
How to Identify Your Key Assumptions
Example
Summary
Step 21: Test Key Assumptions
In This Step, You Will:
Now That We Have Identified The Assumptions, Let’s Test them
Examples of Easily Testable Assumptions: Student Teams
Summary
Step 22: Define the Minimum Viable Business Product (MVBP)
In This Step, You Will:
Three Conditions of a Minimum Viable Business Product
Examples
Summary
Step 23: Show That “The Dogs Will Eat the Dog Food”
In This Step, You Will:
Examples
Summary
Step 24: Develop a Product Plan
In This Step, You Will:
Example
Summary
Postlude: A Business Is more than 24 Steps
Glossary
About the Author
Index
Praise for Disciplined Entrepreneurship
“Entrepreneurship is not only a mind-set but a skill set. The 24 Steps present a practical step-by-step
process to channel the creative spirit to maximize the chances of success and ultimate impact.”
—Mitch Kapor, Founder, Lotus Development Corporation
“While I am not a big fan of business plans, I am a big fan of the business planning process. This book
provides an invaluable comprehensive framework for innovation-driven entrepreneurs to execute the
business planning process.”
—Brad Feld, Managing Director of the Foundry Group, Co-Founder of TechStars, and Creator of the
Startup Revolution book series
“We have had Bill working with entrepreneurs in Scotland for the past three years using the 24 Steps,
and we have been delighted with the results. Not only is the framework an extremely helpful road map,
it has also given entrepreneurs the confidence to go on the journey and take their businesses to the next
level. This is a very valuable approach that works across borders.”
—Alex Paterson, Chief Executive, Highlands and Islands Enterprise Scotland
“This is the book I wish I’d had when I was starting out—concise, great examples, in plain English,
combining classic entrepreneurship theory with what’s happening in today’s startup world. If you’re a
serious entrepreneur, read it carefully and keep it close at hand for the journey ahead.”
—Frederic Kerrest, Co-Founder, Okta, and MIT Patrick J. McGovern, Jr. Entrepreneurship Award
recipient
“According to conventional wisdom, entrepreneurship is solely an innate trait. Nothing could be further
from the truth. Entrepreneurship is a learned skill which can be honed through crisp execution. This
book can help every entrepreneur dramatically increase the likelihood of success by providing step-bystep guidance on how to approach starting a new business. I recommend it to all ambitious
entrepreneurs.”
—Doug Leone, Managing Partner, Sequoia Capital
“Invaluable. This book superbly summarizes the lessons taught to us at MIT. It is the book I wish I had
when we were launching HubSpot six years ago.”
—Brian Halligan, Co-Founder and CEO, Hubspot, and author of Inbound Marketing
“Bill and I have had many discussions about entrepreneurship, and I really respect his perspective on
the topic. While the spirit of entrepreneurship is often about serendipity, the execution is not. This book
takes you through a systematic approach to significantly increase your odds of succeeding in making a
world-changing and sustainable company. I loved the content and the simple nature of the book.”
—Joi Ito, Director, MIT Media Lab
“Ideas are a dime a dozen but great entrepreneurs are what create value. They have to be passionate
and skilled. Maybe passion can’t be taught, but execution skills can, and this book does a wonderful
job providing a structure and wisdom with each step to help entrepreneurs be more successful. I highly
recommend it.”
—Paul Maeder, Founding Partner of Highland Capital and 2012 Chair of the National Venture
Capital Association
“Bill’s concept of a team creating an entrepreneur is intriguing but also validated by research and
experience. This list of disciplined steps to creating a venture can not only help entrepreneurs increase
their likelihood of success, but also identify the skills and people he/she will need on the team in the
crucial early steps in a company’s life, and to create a common language the team can share in talking
about the tasks before them. I might have suggested that he call his book The Holistic Entrepreneur.”
—Thomas A. McDonnell, President and CEO, Ewing Marion Kauffman Foundation
“Social entrepreneurs must develop business models which balance social impact with business
sustainability. Soko focuses on building a successful and scalable business model, which will lead to
scaled social impact in the communities where we work. The 24 Step process outlined by Bill Aulet is
a very useful framework for any type of business to get from an idea to full realization.”
—Ella Peinovich and Gwen Floyd, Founders of ShopSoko.com, Africa’s first mobile marketplace
“I had the great pleasure to work with Bill and see how his methodical mind breaks down complex
problems to their essence and then logically solves them to build a great company. This book will be a
great help to entrepreneurs worldwide, which is very important because the world needs more
entrepreneurs like Bill.”
—Thomas Massie, current member of Congress, and Founder, SensAble Devices and SensAble
Technologies
“Entrepreneurship is becoming increasingly scientific each day as the body of knowledge and research
grows. This book is a valuable addition in that it provides an end-to-end guide to the product marketing
process across multiple industries. It is what you would expect from MIT.”
—David Skok, Partner, Matrix Partners
“Training our young engineers to be entrepreneurs is an imperative for the future and this book will
help in that regard. It provides a road map for getting the product-market fit as tight as possible. There
are many considerations in this process and this book captures them well and provides practical
guidance on how to resolve them.”
—Tom Byers, Entrepreneurship Professorship Endowed Chair in the Stanford School of Engineering;
Faculty Director, Stanford Technology Ventures Program
“This is an excellent practical guide for entrepreneurs so they can see the whole process and not miss
critical steps as they bring products to market. Growing out of the actual experience of teaching MIT
students, it adds to the growing body of thoughtful literature in the field that bodes well for the
consistent development of young entrepreneurs.”
—Joe Lassiter, Faculty Chair of the Harvard Innovation Lab, and Heinz Professor of Management
Practice at the Harvard Business School
“I am just so excited to see now that entrepreneurs everywhere are going to get what I got at MIT to
help hone my entrepreneurial skills. It is years of knowledge and wisdom in a box that every
entrepreneur should read, even if you already have a business.”
—Sal Lupoli, Founder of Sal’s Pizza and Lupoli Companies
“As an intuitive entrepreneur, I prefer less structure. That being said, after having worked through the
steps in this book to launch Lark, I realize that some structure is very valuable. This book provides
enough guidance to help you succeed but not too much to stifle creativity. It is a must-have for
entrepreneurs to read the first time but also as a reference.”
—Julia Hu, Founder and CEO of Lark Technologies
“Disciplined Entrepreneurship is highly relevant and is on my recommended reading list for
entrepreneurship students and entrepreneurs. It moves the reader forward through practical and
important steps that they might otherwise miss, in their innovation-driven startup journey.”
—Professor Gregory B. Vit, Director, the Dobson Centre for Entrepreneurial Studies, McGill
University
Cover image: Marius Ursache
Cover design: C. Wallace
Copyright © 2013 by Bill Aulet. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
Adaption of figure [“Bowling Alley Market Development” (p.38)] and brief quote from pp. 22-3 from
INSIDE THE TORNADO by GEOFFREY A. MOORE. Copyright 1995 © by Geoffrey A. Moore
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ISBN 978-1-118-69228-8 (cloth); ISBN 978-1-118-72081-3 (ebk); ISBN 978-1-118-72088-2 (ebk)
Throughout my entrepreneurial career, my family has been a rock of Gibraltar that I could always
count on with unconditional support and love, and I dedicate this book to them. First, I had the best
parents a son could ever have in the now-deceased Becky and Herb Aulet. I was blessed with four
wonderful sons, Kenny, Tommy, Kyle, and Chris, who wondered why their father couldn’t be like
others but put up with it . . . and have excelled in spite of this.
Most of all, I dedicate this book to my wonderful and patient wife of 30 years, Lisa, who married a
young corporate soldier so many years ago and ended up with a crazy old entrepreneur and stuck
with me the whole time. This book is for you.
PREFACE
THIS BOOK IS DESIGNED as an integrated toolbox for first-time and repeat entrepreneurs so that they
can build great enterprises based on new innovative products. Serial entrepreneurs with deep experience
in a particular field or industry will also find this 24-step guide useful to more efficiently bring products
to market.
As an entrepreneur, I have found many sources to be helpful, from books to mentors, and most of all, my
own experiences. However, I have not found a single source that pulls everything together and does it
well.
Many of the books I have found are excellent and have great material, including: Geoffrey Moore’s
Crossing the Chasm, W. Chan Kim and Renée Mauborgne’s Blue Ocean Strategy, Brian Halligan and
Dharmesh Shah’s Inbound Marketing, Steve Blank’s Four Steps to the Epiphany, Eric Ries’s The Lean
Startup, Ash Maurya’s Running Lean, and Alex Osterwalder and Yves Pigneur’s Business Model
Generation. These are valuable books and I will reference many of them in this book. However, they are
focused in depth on a few key points without providing the more fulsome roadmap that I have felt
appropriate when teaching my students at the Massachusetts Institute of Technology (MIT) and in my other
workshops. I believe that each is an important tool at the right time during product conception,
development, and launch, but what was needed was a toolbox that contained these and more.
Using the analogy of a toolbox, a screwdriver is a great tool for certain situations, but it does not
function as well as a hammer in other situations. Likewise, to choose one example, the ideas and
techniques in Inbound Marketing are extremely valuable, but they are even more helpful as part of a
broader context used at the right time.
The goal of this book, then, is to provide guidance in a messy and sometimes confusing process where
you, the entrepreneur, are attempting to do something that has never been done before. What a terribly
difficult task to take on, but what an incredibly important one. This book comes out of my workshops
around the world and MIT courses where I built and refined this approach over years with hundreds of
great entrepreneurs.
Certainly, there are other elements to consider when working toward a successful new venture, from
culture and team to sales, financing, and leadership. But the foundation of an innovation-driven enterprise
is the product that is created, and so that is the focus of this book.
This process will not necessarily be sequential in nature. I tried to make a logical linear process of 24
steps to get you started, but you should realize that when you gain knowledge in one step, you may need to
reevaluate previous steps, and refine or even redo your previous work. This iterative process of
“spiraling” toward the optimal answer is important because you do not have unlimited time to perfect
your work on a particular step. You will need to make first-pass estimates based on research, and they
will often need revision.
Each of these steps has rigorously evaluated whether a customer would benefit from your product,
regardless of whether an analyst, potential investor, or technology writer standing on the sidelines can see
the value. As someone once said to me, “In concept, concept and reality are the same, but in reality,
concept and reality are not the same at all.”
This book also provides a common language to discuss key aspects of venture creation so that you can
more effectively discuss your new venture with advisors, mentors, and fellow entrepreneurs. I have
carefully defined each step to refer to a discrete part of the process. I recall my father getting very
frustrated when he would ask for a pair of pliers and I would give him a wrench. Now I feel the same
way he did when I ask my students what their “business model” is and they talk about their Total
Addressable Market or Pricing.
The result of this integrated toolbox with a common language is what we at MIT like to call
“disciplined entrepreneurship.” Some people tell me that entrepreneurship should not be disciplined, but
chaotic and unpredictable—and it is. But that is precisely why a framework to attack problems in a
systematic manner is extremely valuable. You already have enough risk with factors that are beyond your
control, so the framework provided by disciplined entrepreneurship helps you succeed by reducing your
risk in factors that you can have control over. The process can help you succeed, or it can help you fail
faster if failure was inevitable for the path you were on. Either way, this process will help you.
This is the book I wish I had 20 years ago when I first became an entrepreneur.
Note on examples in this book: Throughout the book, I include a number of examples from MIT student
teams who took the 15.390 New Enterprises course while in their degree programs. These examples are
not always fully fleshed out because of the students’ time limitations. I provide them in this book as
examples that illustrate the basic concepts of the steps. I have altered some of them to better illustrate best
practices and pitfalls for various steps, but kept the essence of the situations. The examples are all
consistent with my experiences in founding companies. The projects described in the examples might not
have turned into full-fledged companies, depending on the decisions the student teams made after
completing their coursework, but their examples are educational nonetheless.
ACKNOWLEDGMENTS
A HUGE THANK YOU to my editor-in-chief Chris Snyder and editorial advisor Nancy Nichols,
without whom this book would still be in my head and maybe on my computer. A very special thanks to
my Romanian entrepreneur and friend Marius Ursache who did the illustrations for this book in such a
delightful way that I was always like a kid on Christmas morning when I saw his e-mails come in with
new drawings because I was so excited to see them and he never let me down. And thanks to the team at
John Wiley & Sons, led by Shannon Vargo, that brought this book to production in record time and with
utmost professionalism.
Lauren Abda, Yevgeniy Alexeyev, Greg Backstrom, Christina Birch, Michael Bishop, Adam Blake,
Young Joon Cha, Vishal Chaturvedi, Ryan Choi, Kevin Clough, Yazan Damiri, Charles Deguire, Deepak
Dugar, Max Faingezicht, Daniel Fisberg, Patrick Flynn, Tim Fu, Pierre Fuller, Megan Glendon, David
Gordon, Melinda Hale, Katy Hartman, Kendall Herbst, Nick Holda, Julia Hu, Max Hurd, Ricardo
Jasinski, Max Kanter, Mustafa Khalifeh, Zach LaBry, Jake Levine, Michael Lo, Dulcie Madden, Vasco
Mendes de Campos, Aditya Nag, Madeline Ng, Inigo De Pascual Basterra, Ella Peinovich, Giorgi
Razmadze, Adam Rein, Izak van Rensburg, Miriam Reyes, Sophia Scipio, Colin Sidoti, Sam Telleen,
Jocelyn Trigg, Pedro Valencia, Eduard Viladesau, and Leo Weitzenhoff all need to be acknowledged for
their contributions to and/or reviews of sections of this book. Thank you also to 3D Systems and Dollar
Shave Club for their permission to include certain images.
This book came about because I have been able to work at MIT for the past six years and interact with
the best entrepreneurship faculty in the world. I have been honored to work with them. Of the many who
have made enormous intellectual contributions, special acknowledgement must go to Fiona Murray (who
co-authored the paper on innovation-driven entrepreneurship that I reference and paraphrase in the
introduction and has provided hours of feedback on this book), Ed Roberts, Scott Stern, Charlie Cooney,
Matt Marx, Catherine Tucker, Eric von Hippel, Jim Dougherty, Katie Rae, Reed Sturtevant, Elaine Chen,
Peter Levine, and Brian Halligan, and of course my colleague in teaching this material for so many years,
the legendary Howard Anderson. Also thanks to David Skok, Thomas Massie, Tom Ellery, Andrew Hally,
Bernard Bailey, Marc Dulude, Jim Baum, Bill Warner, Dan Schwinn, Bob Coleman, Ken Morse, Jon
Hirshtick, Chuck Kane, Brad Feld, Marty Trust, Sal Lupoli, Joi Ito, Sanjay Sarma, and the many mentors
and collaborators I have been so fortunate to have had over the years. They all contributed heavily to the
intellectual content of the book, but I take responsibility for the interpretations on how to apply and
integrate it for practical implementation, which is the goal herein. Any errors made in this document are
mine and no one else’s.
The Kauffman Foundation for Entrepreneurship, specifically Wendy Torrance, Lesa Mitchell, and Dane
Stangler, have been very helpful in this process and have pushed me to do this book for some time. I
finally heard you and got it done. Thank you for your encouragement.
A key enabler of this book as well has been the fabulous team of pirates we have at the Martin Trust
Center for MIT Entrepreneurship including Colin Kennedy, Christina Chase, Ben Israelite, Adam Cragg,
Vanessa Marcoux, Allison Munichiello, Pat Fuligni, Justin Adelson, and Liz DeWolf. They provided
encouragement, perspective, and a sanity check every day I was in the center.
Lastly I want to acknowledge the thousands of students and entrepreneurs who I have had the privilege
to work with; you all give us such energy and hope every day. We all want to help you so much, as you are
our hope for the future.
INTRODUCTION
NEWS FLASH—ENTREPRENEURSHIP CAN
BE TAUGHT!
One of the first questions I often ask when I begin a workshop or a class is, “Do you think
entrepreneurship can be taught?” Invariably a silence comes over the group. They wiggle uncomfortably
in their seats. Some politely answer in the affirmative, telling me that is why they came to class in the first
place. After a polite back-and-forth someone will invariably say what is on the mind of many in the room:
“No, either you are an entrepreneur or you are not.” That person, once empowered, begins to passionately
argue the case.
I have to say that I tend to like this person, in large part because that person would have been me 15
years ago. But now I know that entrepreneurship can be taught. I experience it almost every week in the
courses I teach at the Massachusetts Institute of Technology (MIT) and around the world.
When we look at Richard Branson, Steve Jobs, Bill Gates, Larry Ellison, and all the other highly
visible entrepreneurs, they seem to be different from us. They seem extraordinary. But each of their
successes is a result of great products that made them successful, not some special gene.
To be a successful entrepreneur, you must have great and innovative products. Products can be physical
goods, but also services or the delivery of information. All the other factors that influence success are
nothing without a product. And the process of making a great product can be taught. This book will teach
you how to systematically improve your odds of making a great product.
In this book I present a disciplined step-by-step approach to creating a new venture. This framework is
useful both for a classroom setting and for those who want to create a new company that serves a new
market. Before we begin, though, we must tackle three common myths about the entrepreneur that often
hamper those wishing to start new companies or teach students how to do so.
Three Common Myths That Must Go
There are many misconceptions about what entrepreneurship is and what is required to be an
entrepreneur. The first myth is that individuals start companies. While the entrepreneur as a lone hero is a
common narrative, a close reading of the research tells a different story. Teams start companies.
Importantly, a bigger team actually adds to the odds of success. More founders = better odds of success.1
The second myth is that all entrepreneurs are charismatic and that their charisma is a key factor in
success. In fact, while charisma may be effective for a short period, it is difficult to sustain. Instead,
research shows that more important than being charismatic, entrepreneurs need to be effective
communicators, recruiters, and salespeople.
The third myth is that there is an entrepreneurship gene, that certain people are genetically predisposed
for success in starting companies. As the cartoon at the beginning of this chapter suggests, such a physical
gene has not and will not be found. Some believe personality traits like flamboyance or boldness are
correlated with successful entrepreneurship, but that line of thought is misguided. Instead, there are real
skills that increase the odds of success, such as people management, sales skills, and the topic of this
book, product conception and delivery. These skills can be taught. They are not genetically gifted to a few
lucky souls. People can adapt and learn new behaviors, and entrepreneurship therefore can be broken
down into discrete behaviors and processes that can be taught.
For evidence, we need look no further than the one magical square mile that is MIT. Students who
attend MIT start companies at an absolutely prolific rate. In fact, as of 2006, over 25,000 existed, and 900
new ones are started each year. These companies employ over 3 million people with aggregate annual
revenues of approximately $2 trillion. To put that in perspective, the total annual revenue from MIT
alumni–founded companies taken together would make them the eleventh-largest economy in the world.2
What Explains MIT’s Success in Entrepreneurship?
Why is MIT so successful at turning out entrepreneurs? The first response people often have is that the
students at MIT are extremely intelligent. MIT’s students are no smarter than those at other top-flight
institutions of higher learning throughout the world (Caltech, Harvard, and the like), but none of them,
other than Stanford, come close to producing entrepreneurial alumni like MIT. So MIT’s success must be
attributable to something else.
The second response is that this success comes about because MIT students have access to leading-edge
technologies in the laboratories, and thus it is easy for them to start companies. Again, this is a
measurable hypothesis. Because of the outstanding Technology Licensing Office (TLO) at MIT, there are
numbers on how many companies are started each year with technology out of the labs because they have
to be licensed through this office. This number is 20 to 30 companies per year, which is very impressive
when compared to the stats at other universities. Yet this number seems small when we consider that MIT
alumni as a whole start 900 companies per year.3 While the companies started with MIT-licensed
technology have great strategic importance and can be very impactful (e.g., Akamai4), they are only a
small part of why MIT is so successful at entrepreneurship. Well over 90 percent of the companies started
by MIT alumni are started without MIT laboratory–produced technology.
The real reason why MIT is so successful at creating new companies is a combination of spirit and
skills. At MIT there is a culture that encourages people to start companies all the time and everywhere,
much like in Silicon Valley, Israel, Tech City in London, and Berlin today. Role models are everywhere,
and they are not abstract icons, but rather very real people no different from you. An aura of possibility
and collaboration so pervades the very air at MIT that students quickly adopt the mindset that “yes, I can
start a company too.” They become infected with the “entrepreneurial virus,” believing in the benefits of
launching a new venture.
Students are galvanized by the atmosphere of ambition and collaboration. The work of developing
entrepreneurial skills comes from classes, competitions, extracurricular events, and networking programs,
and the teachings available both in the classroom and outside are extremely relevant and immediately
valuable to the students so that in this environment they attack the subjects with a greater level of interest
and commitment. This is also amplified because every student in the class is fully engaged. A class taught
in such an engaging environment is far more productive for students and instructors.
A major contributor to this virtuous cycle is the social herding mentality. As the students are learning
and working on entrepreneurship, they are also collaborating with fellow students. They talk about their
work when they are in social situations, and they naturally start to push one another with subtle or not-sosubtle competitiveness. Not only do they learn from one another, but that learning becomes part of their
individual and group identity.
These are the factors that create the environment where entrepreneurship is so successfully “taught” at
MIT. It is a positive feedback loop (see Figure I.1).
Figure I.1 Positive feedback loop.
Distinguishing Two Distinct Types of Entrepreneurship
Entrepreneurship is about creating a new business where one did not exist before. That definition seemed
clear until my colleagues Professors Fiona Murray and Scott Stern and I spent a good deal of time talking
to various organizations about how to promote entrepreneurship in different regions of the world. We
found that when we said “entrepreneurship” to people, it could mean at least two extremely different
things—a discrepancy that had important ramifications, because each type of entrepreneurship has
dramatically different objectives and needs.5
Small and Medium Enterprise (SME) Entrepreneurship
The first type of entrepreneurship is small and medium enterprise entrepreneurship (SME). This is the
type of business that is likely started by one person to serve a local market and grows to be a small or
medium-size business that serves this local market. It is most often closely held, likely a family business,
where close control of a small business is important. The business “rewards” for these founders are
primarily in the form of personal independence and cash flow from the business.
These businesses generally do not need to raise as much money, so when money is injected into these
businesses, the resultant increase in revenue and jobs created is relatively rapid. Such enterprises can be
geographically dispersed and the jobs they create are for the most part “non-tradable” in that they cannot
be outsourced to someplace else to reduce costs. Frequently these businesses are service businesses or
retailers of other companies’ products. The key distinguishing factor is their focus on local markets.
Innovation-Driven Enterprise (IDE) Entrepreneurship
Innovation-driven enterprise (IDE) entrepreneurship is the more risky and more ambitious of the two. IDE
entrepreneurs are aspiring to serve markets that go well beyond the local market. They are looking to sell
their offering at a global or at least at a regional level.
These entrepreneurs usually work in teams where they build their business off some technology,
process, business model, or other innovation that will give them a significant competitive advantage as
compared to existing companies. They are interested in creating wealth more than they are interested in
control, and they often have to sell equity in their company to support their ambitious growth plans.
While they are often slower to start, IDE entrepreneurs tend to have more impressive exponential
growth when they do get customer traction (See Table I.1). Growth is what they seek, at the risk of losing
control of their company and having multiple owners. While SME companies tend to grow up and stay
relatively small (but not always), IDE companies are more interested in “going big or going home.” To
achieve their ambitions, they have to become big and fast-growing to serve global markets.
Table I.1 SME vs. IDE Entrepreneurship Table
Source: Bill Aulet and Fiona Murray, “A Tale of Two Entrepreneurs: Understanding Differences in the Types of Entrepreneurship in the
Economy,” Ewing Marion Kauffman Foundation, May 2013, www.kauffman.org/uploadedfiles/downloadableresources/a-tale-of-twoentrepreneurs.pdf.
SME Entrepreneurship
IDE Entrepreneurship
Focus on addressing local and regional markets only.
Focus on global/regional markets.
Innovation is not necessary to SME establishment and growth,
The company is based on some sort of innovation (tech, business
nor is competitive advantage.
process, model) and potential competitive advantage.
“Non-tradable jobs”—jobs generally performed locally (e.g.,
“Tradable jobs”—jobs that do not have to be performed locally.
restaurants, dry cleaners, and service industry).
Most often family businesses or businesses with very little
More diverse ownership base including a wide array of external capital
external capital.
providers.
The company typically grows at a linear rate. When you put
The company starts by losing money, but if successful will have
money into the company, the system (revenue, cash flow, jobs,
exponential growth. Requires investment. When you put money into the
etc.) will respond quickly in a positive manner.
company, the revenue/cash flow/jobs numbers do not respond quickly.
IDE entrepreneurship creates companies that have “tradable” jobs that may well be outsourced if it
makes the overall business more competitive. These companies are much less likely to be geographically
diverse and instead are concentrated around clusters of innovation. It is also generally the case that any
injection of investment or money requires a much longer time to show results in terms of new revenues or
jobs.
In the short run, the SME model will be more responsive; but with patience, the IDE ventures have the
capacity to produce profound results as we have seen with companies like Apple, Google, HewlettPackard, and other publicly traded companies.
Our Focus Is Innovation-Driven Enterprise
A healthy economy consists of both types of entrepreneurship and both have their strengths and
weaknesses. Neither is better than the other. But they are substantively different enough that they require
different mindsets and different sets of skills to be successful. Therefore, in this book, rather than teach
“entrepreneurship,” I will teach IDE entrepreneurship, because this is what I know best, having cofounded two companies (Cambridge Decision Dynamics and SensAble Technologies) based on an
innovation.
What Is Innovation?
Innovation has become an increasingly clichéd term, but it has a simple definition, which I have adapted
from MIT professor Ed Roberts6:
Innovation = Invention ∗ Commercialization
I modify Roberts’s definition, which involved addition, because innovation is not a sum of invention
and commercialization, but a product. If there is commercialization but no invention (invention = 0), or
invention but no commercialization (commercialization = 0), then there is no innovation.
The invention (an idea, a technology, or some sort of intellectual property) is important, but the
entrepreneur does not need to create the invention. In fact, the inventions that lead to innovation-driven
companies often come from elsewhere. Such was the case with Steve Jobs, who identified others’
inventions (the computer mouse created by Xerox PARC is the most famous example) and commercialized
them effectively through Apple. Likewise at Google, which has made most of its money through AdWords,
the text-based, keyword-driven advertisements on their search results pages. A different company,
Overture, had invented such advertisements, but Google was successful through its commercialization of
Overture’s invention.
These examples show that the capability to commercialize an invention is necessary for real innovation.
An entrepreneur, then, serves primarily as the commercialization agent.
I very consciously do not use the term “technology-driven” entrepreneurship because innovation is not
limited to technology. Innovation can come in many varieties including technology, process, business
model, positioning, and more.
Some of the most exciting innovations of our time, such as Google, iTunes, Salesforce.com, Netflix,
Zipcar, and many more are, at their core, business model innovations. They are enabled by technology,
yes—Zipcar would find it difficult to maintain its large network of cars without keyless-entry technology
for its members. But at its core, Zipcar’s innovation is treating a rental car as a substitute for owning a
car, rather than as temporary transportation for car owners and business travelers visiting far-flung areas.
Zipcar doesn’t have to understand the intricacies of its technology to be successful, but it has to
understand what it means for its customers to “collaboratively consume.”
As technology becomes more and more commoditized, you will see more business model innovations
that leverage technology. There will still be many opportunities for technology-driven innovation in areas
like energy storage, power electronics, wireless communications, and much more, but this is not the sole
definition of innovation.
1
Edward B. Roberts, Entrepreneurs in High Technology: Lessons from MIT and Beyond (New York:
Oxford University Press, 1991), 258.
2
Edward B. Roberts and Charles E. Eesley, “Entrepreneurial Impact: The Role of MIT—An Updated
Report,” Foundations and Trends® in Entrepreneurship 7, nos. 1–2 (2011): 1–149.
http://dx.doi.org/10.1561/0300000030.
3
Edward B. Roberts and Charles E. Eesley, “Entrepreneurial Impact: The Role of MIT—An Updated
Report,” Foundations and Trends® in Entrepreneurship 7, nos. 1–2 (2011): 1–149.
http://dx.doi.org/10.1561/0300000030.
4
“Success Stories,” MIT Technology Licensing Office,
http://web.mit.edu/tlo/www/about/success_stories.html.
5
Bill Aulet and Fiona Murray, “A Tale of Two Entrepreneurs: Understanding Differences in the Types
of Entrepreneurship in the Economy,” Ewing Marion Kauffman Foundation, May 2013,
www.kauffman.org/uploadedfiles/downloadableresources/a-tale-of-two-entrepreneurs.pdf.
6
Edward B. Roberts, “Managing Invention and Innovation,” Research Technology Management 31, no.
1 (January/February 1988): 13, ABI/INFORM Complete.
Six Themes of the 24 Steps
The 24 Steps are discrete and can be grouped into six themes. Each step should be done in numerical
order with the understanding that in each step, you will learn things that will prompt you to revise the
work you have done in earlier steps. These themes present a general outline of how the 24 Steps will help
you create a sustainable, innovation-based business.
Step 0
Getting Started
THREE WAYS TO START A NEW VENTURE
When I listen to my students, I hear a diverse range of reasons as to why they are interested in
entrepreneurship. Some students have worked in one industry for years and want a change. Some want to
push their skills to the maximum and have the biggest impact on the world. Some want to be their own
boss. Some hold patents and are interested in the different ways they can commercialize them. Some have
an idea about how their own life could be improved and they wonder if that idea is interesting to others.
All of these reasons can be synthesized into three distinct categories (see Table 0.1): Table 0.1 Idea
versus Technology versus Interest
What does it sound like to have an idea versus a technology versus a passion?
You should be able to sum up your idea, technology, or interest in one succinct sentence.
Idea:
Technology:
“I want to start a company in Africa that will “I have a robot that allows you to feel objects
create a sustainable business model to
rendered by a computer.”
improve life for the people there and
This statement radiates with potential. How
empower them with jobs.”
could someone benefit from being able to have a
Here, the idea is that a sustainable business
three-dimensional object on their computer
model will reduce poverty in Africa more
screen and still be able to feel it, in some way, in
effectively than charitable contributions to the physical space? I cofounded a company,
poor. This sentence is enough to move on to the SensAble Technologies, around this very
next step of Market Segmentation, though as
technology, and throughout the book, I share
you will see, you will have to be much more
SensAble’s story.
specific before you can turn the idea into a
business.
Passion:
“I have a master’s in mechanical
engineering and I can quickly
prototype most any technological
gadget you want . . . now I want to put
my skills to use in the most impactful
way possible, and be my own boss.”
This person has identified a personal
comparative advantage, the ability to
prototype gadgets quickly, which can help
a business go through product iterations
faster. The person may want to consider
a hardware-based business, as it would
line up well with the comparative
advantage.
1. Have an Idea: You have thought of something new that can change the world—or some small part
of it—in a positive way, or something that can improve an existing process you’re familiar with and
you want to implement it.
2. Have a Technology: You have come up with a technological breakthrough and want to capitalize
on it, or simply expedite its deployment to have a positive effect on society. Or, you have learned
about a technological breakthrough and you see great potential for a business.
3. Have a Passion: You are confident and you are comfortable pushing yourself to develop your
skills in the most comprehensive way possible. You also might believe that being an entrepreneur is
the way to have the biggest impact on the world. You simply might know that you want to work for
yourself and control your own destiny, but you don’t have an idea or technology yet, so you’d like to
learn about entrepreneurship while looking for a good idea, technology, and/or partner. (Read on to
learn how to find a good idea or technology based on your passion.)
I am frequently told that an entrepreneur cannot start without knowing a “customer pain”—a problem
that bothers someone enough that they would be willing to pay to alleviate the problem. But that approach
can be discouraging to someone who is unfamiliar with entrepreneurship. Furthermore, it discounts the
importance of starting a company in line with the entrepreneur’s values, interests, and expertise. In time,
they will find a customer with a pain, or opportunity, where the customer is willing to pay for a solution.
No matter how you have become interested in entrepreneurship, you need to start by first answering the
following question: What can I do well that I would love to do for an extended period of time?
Once you have answered this question, you will have taken the first step toward discovering a customer
pain—a pain that you are interested in alleviating because it is in line with what you are interested in and
have expertise in.
HOW TO GO FROM “I HAVE A PASSION”
TO “I HAVE AN IDEA OR TECHNOLOGY”
Many of my students who are interested in entrepreneurship do not yet have an idea or a technology, so if
this is you, you are not alone. By first taking stock of your personal interests, strengths, and skills, you can
more readily identify good opportunities. You can do this exercise either alone or with a group of
potential cofounders.
Consider the following:
Knowledge: What was the focus of your education or career?
Capability: What are you most proficient at?
Connections: Who do you know that has expertise in different
industries? Do you know other entrepreneurs?
Financial assets: Do you have access to significant financial capital, or
will you be relying on a meager savings account to start out?
Name recognition: What are you or your partners well-known for?
Skills in engineering? Understanding fiber optics?
Past work experience: In previous jobs you’ve held, what inefficiencies
or “pain points” existed?
Passion for a particular market: Does the idea of improving healthcare
excite you? How about education? Energy? Transportation?
Commitment: Do you have the time and effort to devote to this
endeavor? Are you ready to make a new venture your primary (or only)
focus?
If you or your founding group have strong coding and project management skills, you may be more
inclined to develop a web app. If you are a pro at rapid prototyping, you may want to consider creating a
physical product of some sort. Or if your past work experience is in education or medicine, you may want
to consider what you can create that would improve those areas.
Often, you will find an idea or technology that improves something for you personally, then realize that
idea or technology has the potential to help many others. This phenomenon is called “user
entrepreneurship”; the Kauffman Foundation has found that nearly half of all innovation-based startups
that are at least five years old were founded by user entrepreneurs.1
FINDING A FOUNDING TEAM:
ENTREPRENEURSHIP IS NOT A SOLO
SPORT
In 15.390 New Enterprises, the foundational entrepreneurship class I teach with other faculty at MIT,
students who go through the 24 Steps must form teams within two weeks, due to the time constraints of the
academic semester. This process is not an optimal way to form teams, but it is enough for the student
teams to gain experience in team formation and for teams to implement (in an accelerated manner) the 24
Steps over the course of a semester. From the ideas in the class that turn into businesses, some teams stay
intact, but far more often teams undergo a healthy reconfiguration of their membership at the end of the
semester to create a stronger, more unified team that is better suited to capture an opportunity on a longerterm basis. This is an important evolutionary process.
Your choice of cofounders is extremely important. The research at MIT suggests that businesses with
multiple founders are more successful than those founded by an individual.2
There are many resources that go into more depth about finding good cofounders. Probably the single
best and most rigorous book on this topic is Harvard Professor Noam Wasserman’s book, The Founder’s
Dilemmas. For other valuable perspectives, here are a few articles that may be helpful:
Paul Graham, “What We Look for in Founders,” PaulGraham.com, October 2010,
www.paulgraham.com/founders.html.
Margaret Heffernan, “Want to Start a Business? First, Find a Partner,” Inc., May 9, 2012,
www.inc.com/margaret-heffernan/you-need-a-partner-to-start-a-business.html.
Pejman Pour-Moezzi, “How to Find That Special Someone: Your CoFounder,” GeekWire, April 8, 2012,
www.geekwire.com/2012/find-special-cofounder.
Helge Seetzen, “5 Rules for Cofounder Heaven,” The Tech Entrepreneurship Blog, March 27, 2012,
www.techentrepreneurship.com/2012/03/27/5-rules-for-cofounder-heaven.
WHERE YOU GO FROM HERE
Once you have identified an idea or technology as the basis for your innovation-driven business, you must
rigorously test and flesh out your proposal through the 24 Steps. Your first goal is to assess the needs of
potential customers, focusing on a target customer with the goal of achieving product–market fit—a
product that matches what customers in a specific market are interested in buying. Focus is very important
because entrepreneurs have very limited time and resources and so must be hyper-efficient. Focus is so
crucial to determining your target customer that I refer to the first five steps of the 24 Steps—from Market
Segmentation to profiling your Persona—as “The Search for the Holy Grail of Specificity” (see Figure
0.1).
Figure 0.1 The Holy Grail of Specificity.
1
Ewing Marion Kauffman Foundation “Nearly Half of Innovative U.S. Startups Are Founded by ‘User
Entrepreneurs,’ According to Kauffman Foundation Study,” March 7, 2012,
www.kauffman.org/newsroom/nearly-half-of-innovative-startups-are-founded-by-userentrepreneurs.aspx.
2
Edward B. Roberts, Entrepreneurs in High Technology: Lessons from MIT and Beyond (New York:
Oxford University Press, 1991), 258.
Step 1
Market Segmentation
IN THIS STEP, YOU WILL:
Brainstorm a wide array of potential customers and markets for your business.
Narrow your list down to your top 6–12 markets.
Gather primary market research on your top 6–12 markets.
For success in entrepreneurship, there are some glasses that are better than others to view the
situation.
Once you have completed Step 0, Getting Started, you should have an idea or technology that answers the
question, “Is this something the world could benefit from, and is it something I do well and would love to
do for an extended period?” You should also have a team of co-founders. (Throughout the 24 Steps, I will
use “you” to refer collectively to your team.)
Now you will begin the 24 Steps by taking that idea or technology and brainstorming a wide array of
potential customers who might be interested in some application of it. Then you will choose 6–12 top
opportunities and do in-depth primary market research, where you directly interview potential customers
to learn more about them.
THE SINGLE NECESSARY AND
SUFFICIENT CONDITION FOR A BUSINESS
Regardless of your business, you must ask yourself, “What is the single necessary and sufficient condition
for a business?” It is not a product, a technology, a customer need, a business plan, a vision, a strong
team, a CEO, money, investors, competitive advantage, or company values. While all those are great
things for a business to have, none of them is the right answer.
The single necessary and sufficient condition for a business is a paying customer.
The day someone pays you money for your product or service, you have a business, and not a day
before. This simple truth will keep you focused on what is important. You cannot define a business as a
product, because if nobody buys your product, you simply do not have a business. The marketplace is the
final arbiter of success.
Now, just because you have a paying customer does not mean you have a good business. In order to
have a good, sustainable business, you will need to gain enough customers paying enough money within a
relatively short period of time so you do not run out of capital, but instead, become profitable. And as a
startup, you have few resources, so every action you take must be hyper-efficient.
Therefore, you will not start by building a product or hiring developers or recruiting salespeople.
Instead, you will take a customer-driven approach by finding an unmet need and building your business
around it.
CREATE A NEW MARKET THAT YOU WILL
DOMINATE
Creating an innovative product where no market currently exists is essential to the success of a startup. By
creating a new market, you will have a very high, if not dominant, market share that you can use as a basis
for future expansion. Being a “me-too” company in an existing market is a more difficult proposition
given your limited resources.
To create this company in a newly defined market space, you will focus on a target customer. A target
customer is a group of potential customers who share many characteristics and who would all have
similar reasons to buy a particular product. Focus is the most important skill for an entrepreneur, and as
you will find throughout these steps, it is difficult to focus too much. You must work hard to identify and
understand customers through primary market research, because relying on “educated assumptions” or
third-party analysis is guesswork when you are creating new markets.
Once you have established a foothold within that target group, meaning that you’ve provided that group
with a substantially superior product and they are paying you for it, you will have enough resources to
expand to an adjacent market. In an adjacent market, some customer characteristics will be the same as
your primary market, but there will be enough differences to require tailoring your strategy appropriately.
That process is covered in Steps 14 and 24.
WHEN “PAYING CUSTOMERS” LEAD YOU
ASTRAY
While paying customers ultimately determine whether your product is successful, there are two common
pitfalls you may encounter if you do not focus on creating a new market.
The first is “selling to everyone,” which is the idea that you, as a fledgling startup with little to no
resources, can make products that fit the needs of anyone you run across.
Let’s say you have invented a new polymer that waterproofs fabric better than anything on the market.
You first hear from your friend Sally, who read in the newspaper that camping equipment is a lucrative
market, so she suggests you sell tents. Your cousin Joe chimes in; he wants waterproof underwear. A
neighbor thinks that easy-to-clean stuffed animals for children would be just lovely.
To design and execute any of these products will take time and resources. If you start production on one
product, and find there aren’t enough customers to make your venture profitable, you almost certainly will
not have the resources to keep making products until you find a profitable market.
The second common pitfall is “The China Syndrome,” also known to my students as “fun with
spreadsheets.” Rather than create a new market, the thinking goes, one could choose a huge existing
market, get a fraction of the market share, and reap the rewards. After all, if you could get even a tenth of
a percent of the toothbrush market in China (population 1.3 billion), wouldn’t you make a lot of money?
The logic would go something like this: “The Internet says China has over 1.3 billion people. If they all
have teeth, the market size is 1.3 billion customers. I’ll build a toothbrush for the Chinese market, and
maybe we’ll get 0.1 percent market share in the first year. If each person buys three toothbrushes a year,
we could sell 3.9 million toothbrushes per year, and if we sell them for $1 each, we have $3.9 million in
sales the first year, with lots of room to grow.”
I call such a high-level market analysis “fun with spreadsheets,” because you have not demonstrated in
a compelling manner why people would buy your product or why your market share would increase over
time. You also have not validated any of your assumptions by learning directly from customers—you
probably haven’t even been to China. After all, if entrepreneurship were this easy, wouldn’t everyone sell
toothbrushes to China?
Big companies with lots of resources can afford to work hard to gain incremental market share, but
entrepreneurs don’t have the luxury of resources. Don’t get ensnared by “The China Syndrome.”
Take your resources and apply them to a narrow, carefully defined new market that you can dominate.
COMPLEX PAYING CUSTOMERS:
PRIMARY VERSUS SECONDARY
CUSTOMERS AND TWO-SIDED MARKETS
Thus far, I have used “customer” to refer to the entity—such as a household, organization, or individual—
who pays for, acquires, and uses your product. Within the broad definition of a customer, there is the end
user, who ultimately uses your product, and the economic buyer, who makes the final decision about
whether to acquire the product. The end user and economic buyer can be the same person, depending on
the situation. (I describe the various roles of a customer in more detail in Step 12, Determine the
Customer’s Decision-Making Unit [DMU].)
But there are two cases in which this definition gets more complicated. The first is when your business
model calls for both primary customers (end users) and secondary customers (economic buyers) in order
to make money. Often, these businesses are structured where the primary customer is charged at below
cost, or gets a product for free, and a third party pays for access to the primary customer and/or the
primary customer’s information. For instance, Google’s search engine is free to use, but Google sells
advertisements on search results pages to make money. Google’s ability to provide advertisers with
keyword-targeted ad placement and demographic information about search users further enhances
Google’s value proposition to advertisers.
You likely will not have a primary/secondary customer delineation until you have completed Step 15,
Design a Business Model, so for now, focus on your primary customer as you complete the first several
steps.
The second case is called a two-sided or multi-sided market, where you need multiple target customers
for your business to exist. eBay is a good example, because it needs both sellers and buyers (supply and
demand) to participate in its auctions to be successful.
If you have a multi-sided market, you will complete each step once for each side of the market. But you
will likely find through your primary market research that one side of the market is more critical to win
for your business to succeed; so you will want to focus there. For instance, two of my former students,
Kim Gordon and Shambhavi Kadam, started Mediuum, an iTunes-like platform for digital artwork. As
they investigated this concept, they realized that getting the demand side of customers to sign up to put
digital art on their mobile phones, tablets, PC, and TVs was not the challenge. The hard work was going
to be signing up the digital artists who create the art and having them agree to make it available. Thus,
while both supply and demand were needed for the new venture to succeed, their primary focus would be
the digital artists.
HOW TO DO A MARKET SEGMENTATION
Step 1A: Brainstorm
Start by brainstorming a wide array of market opportunities. Include even the “crazy ideas” that you think
are longshots, because they are helpful in expanding the boundaries of possibilities to where some of the
most interesting opportunities might exist.
Even at this early stage, talking about your idea or technology with potential customers will give you
clear and accurate feedback for your market segmentation. You will find them at trade shows, through
connections with fellow students and professors (perhaps some of them would have been potential
customers at their previous jobs), or, if others have heard about your idea or technology, perhaps they will
be contacting you, suggesting potential uses. The best scenario is when you are the potential customer
yourself and have a deep understanding of the problem you are trying to solve.
If you have an idea, you may think you already have a specific market and a specific application in
mind. However, as a first-time entrepreneur, you will want to carefully determine whether your
perceptions are correct. Likely, your defined market is not specific enough, but you may also find that the
market you have in mind is not a good match for your idea, or that other markets are better for starting a
business. Be open-minded and creative.
For instance, if you are expressing your idea as “I want to create an online social network for high
school teachers and parents to communicate about their children’s progress in school,” you may lock
yourself into a path that does not produce a sustainable business. Start instead with “I want to improve
education with technology.” Then ask yourself why you are passionate about that idea. If technology is
your primary passion, you probably want to consider a wider range of industries than just education. If
your passion is education, you can simply segment the education industry, but be open to other solutions
besides one involving a high degree of technology.
If you have a new technology, you probably can think of a large number of industries that could benefit
from your product. While you may have domain expertise in a certain field, that field may not have any
good applications for your technology, so be open to different industries. Later on, you will filter your
ideas to take your passions into account.
Start by identifying potential industries for your idea. Then, list who might benefit in each industry from
your idea. Focus on end users, not customers, because you will need a committed group of end users to
have a sustainable business. A school doesn’t use a textbook, or a chalkboard, or a lesson plan, but
teachers do.
For instance, if your idea is to improve education with technology, who would be your end user?
Teachers, administrators, parents, and students are all potential end users. Each category can be further
subdivided. Are you focusing on end users in universities or in grade school? What different types of
schools are these end users associated with? Which countries and regions do the end users work and live
in?
To elaborate on one example, in the grade school category for teachers, there are public school, private
school, parochial school, and homeschool teachers. Within public school teachers, there are various
levels of schooling, depending on their country and region. Within each category, there are urban,
suburban, and rural schools. In most middle and high schools, teachers specialize in a specific subject.
Even within a subject, such as social studies, there are subcategories such as history and geography. In
most schools, there are art, music, and physical education teachers, as well as paraprofessionals and
special education teachers. See Figure 1.1 for a visual example.
Figure 1.1 When you segment out your market, you will find there are a lot of segments, and that
seemingly broad categories have a lot of important differences. Segment first, and then determine
whether any categories are common enough to merge.
Next, identify the different tasks your end user performs. For a high school science teacher in a
suburban area, these tasks may include teaching, grading, preparing lessons, training, discipline, dealing
with parents, ordering chemicals, and more. An elementary school teacher in a major city may not need to
order chemicals, but may need to buy classroom supplies, sometimes out of pocket. Also, an elementary
school teacher likely teaches multiple subjects, so you would subdivide “teaching” by the different
subjects.
You may find enough similarities between certain subcategories that you can group them, depending on
what your idea is, but you will find that out during your primary market research. Do not start combining
categories without knowing more about your customer.
Sometimes, my students have an easy time segmenting end users when starting with an employee like a
teacher, but have a much harder time when the end user is a consumer, purchasing for personal or
household use. A useful question to ask is why the consumer would purchase a product in a particular
industry segment. For the education segmentation above, why would a parent purchase a product that
improves education?
Or, consider a technology such as a long-lasting battery. If you are looking at the transportation industry,
and have segmented down to consumers buying a vehicle for personal transportation, why would a
consumer use such a product? Some possibilities include environmental conscientiousness, high
performance, luxury, convenience, and value. Even within high performance, you can subdivide between
consumers looking for a low-cost but high-performance vehicle, and price-insensitive consumers whose
primary objective is high performance.
Be broad and expansive when segmenting end users for your new product. You are brainstorming now;
later, you will narrow the list as you start to analyze each segment.
Step 1B: Narrow
You have by now identified numerous potential end users and applications for your idea or technology.
Your next task is to list the top 6–12 particularly interesting market opportunities, where a market
opportunity consists of a specific end user and one or a handful of applications. As you do primary market
research, the specific application you have in mind may not be one the end user is looking for, so it is
better to focus on end users for now.
In Inside the Tornado, Geoffrey Moore identifies five criteria that the company Documentum used to
narrow down its list of 80 potential markets. I have expanded this number to seven by splitting the first
criterion into two parts, and adding one of my own to incorporate the passions of your founding team into
the discussion.
1. Is the target customer well-funded? If the customer does not have money, the market is not
attractive because it will not be sustainable and provide positive cash flow for the new venture to
grow.
2. Is the target customer readily accessible to your sales force? You want to deal directly with
customers when starting out, rather than rely on third parties to market and sell your product, because
your product will go through iterations of improvement very rapidly, and direct customer feedback is
an essential part of that process. Also, since your product is substantially new and never seen before
(and potentially disruptive), third parties may not know how to be effective at creating demand for
your product.
3. Does the target customer have a compelling reason to buy? Would the customer buy your
product instead of another similar solution? Or, is the customer content with whatever solution is
already being used? Remember that on many occasions, your primary competition will be the
customer doing nothing.
4. Can you today, with the help of partners, deliver a whole product? The example here that I
often use in class is that no one wants to buy a new alternator and install it in their car, even if the
alternator is much better than what they currently have. They want to buy a car. That is, they want to
buy a whole functional solution, not assemble one themselves. You will likely need to work with
other vendors to deliver a solution that incorporates your product, which means that you will need to
convince other manufacturers and distributors that your product is worth integrating into their
workflows.
5. Is there entrenched competition that could block you? Rare is the case where no other
competitors are vying to convince a customer to spend their budget on some product to meet the
identified need. How strong are those competitors, from the customer’s viewpoint (not your
viewpoint or from a technical standpoint)? Can the competition block you from starting a business
relationship with a customer? And how do you stand out from what your customer perceives as
alternatives?
6. If you win this segment, can you leverage it to enter additional segments? If you dominate this
market opportunity, are there adjacent opportunities where you can sell your product with only slight
modifications to your product or your sales strategy? Or will you have to radically revise your
product or sales strategy in order to take advantage of additional market opportunities? While you
want to stay focused on your beachhead market, you do not want to choose a starting market from
which you will have a hard time scaling your business. Geoffrey Moore uses the metaphor of a
bowling alley, where the beachhead market is the lead pin, and dominating the beachhead market
knocks down the lead pin, which crashes into other pins that represent either adjacent market
opportunities or different applications to sell to the customer in your beachhead market.
7. Is the market consistent with the values, passions, and goals of the founding team? You want
to make sure that the founders’ personal goals do not take a back seat to the other criteria presented
here. In the case of a company I co-founded, SensAble Technologies, we wanted to “get liquid” (go
public or get bought) within four to five years, a relatively short time horizon for the type of
technology we created, because co-founders Thomas and Rhonda Massie wanted to move back to
Kentucky, where they were from. Therefore, an important factor for us was whether we could show
results in an acceptable time frame in whichever market we chose.
Start by asking these questions at an industry level. Then, consider what the answers would be for the
end user of your product. Within an industry, if you have segmented your potential end users by branching
out into many categories, like in the education example above, ask the questions at each branching level.
For instance, consider the example from earlier of teachers vs. parents vs. administrators vs. students,
then higher education vs. grade school, then country, then public vs. private, etc.
Your limiting factor is time—you will research each of these markets in depth, and you do not have time
to consider an unlimited number of options. Six to twelve market opportunities is more than sufficient—
with a realistic number being much closer to six than twelve.
Step 1C: Primary Market Research
Now that you have narrowed your market opportunities, it is time for primary market research, talking
directly with customers and observing customers will help you get a better sense of which market
opportunity is best.
Because you are identifying a new market opportunity for a product that does not yet exist, you will not
be able to rely on Google searches or on research reports from research firms. If there is already a
market research report out there with all the information you need, it is probably too late for your new
venture. You have missed the window of opportunity—someone else has beaten you to the market.
Instead, you will gather the vast majority of your information from direct interaction with real potential
customers about their situations, pain points, opportunities, and market information. Unfortunately, there
are few shortcuts in this process. While you should find out what you can about customers and markets
before you talk to potential customers, it is impossible to overstate the importance of doing direct
customer research, as any other sources of information and knowledge are frequently superficial and
likely of minimal value.
How to Talk with Potential Customers
When you talk with potential customers, encourage the flow of ideas; don’t restrain them or try to gain a
commitment. If the potential customer senses you are trying to sell them something, they will change their
behavior; they will either say little or say things that are related to the market opportunity you seem to be
presenting them, rather than providing you with new, innovative ideas for markets. As a result, you will
get less market data, and what you do get will be biased.
Likewise, you should not count on your customer to design your product or tell you the answer to their
problems. The goal of this research is to understand their pain points, and later design a solution that will
be of great value to them. To do so, you will need to thoroughly understand the underlying issues and
sources of opportunity, whether by speaking with them or, even better, watching them as they work
(“primary observational research”). Actions are more important than words, because people sometimes
say things that are contrary to how they actually do things.
You will want to talk with as many end users as possible, but individuals who are not end users may
also give you valuable advice or may point you in the right direction. You may even find that you
misidentified the end user in your segmentation.
There are a few key factors that are integral to collecting accurate information:
You must have a high level of intellectual curiosity.
You must be fearless about getting on the phone, in the car, or on a plane to pursue this information.
You must have an ability to listen and get people to talk.
You must be open-minded and unbiased, and never presuppose a solution (inquiry, not advocacy).
You must have the ability to explain what the essence of your proposed offering might look like while
also being flexible.
You must have time and patience to devote to this important step.
There are three important caveats when conducting your primary market research:
1. You do not have “the answer” for your potential customers and their needs.
2. Your potential customers do not have “the answer” for you.
3. Talk with potential customers in “inquiry” mode, not “advocacy/sales” mode. Listen to what they
have to say, and don’t try to get them to buy anything.
Organize Your Research
The main categories you are trying to obtain information on for each market are:
1. End User: Who specifically would be using your product? The end user is often your “champion,”
who you need on board so that your product is successfully adopted. You have narrowed down your
end user some already, but as you do primary market research you may find the category can be even
further segmented. (The end user is not necessarily the person who decides to purchase the product,
as we discuss later in Step 12, Determine the Customer’s Decision-Making Unit [DMU]. If you are
making a children’s video game, the kid who plays it is your champion, because he tries to get his
parents, the economic buyer, to purchase it.)
2. Application: What would the end user be using your product for? What is the task that would be
dramatically improved by your new venture?
3. Benefits: What is the actual value that the end user would gain from the use of your new product?
Not feature or functions, but specifically what the end user gains from the product. Is it a time
savings? A cost savings? Additional profit?
4. Lead Customers: Who are the most influential customers that others look to for thought leadership
and adoption of new technology? These are sometimes referred to as “lighthouse customers” because
they are so respected that when they buy, others look to them and follow their lead, gaining you instant
credibility. Some people call these customers “early adopters,” but lead customers are not
technological enthusiasts. They must be respected by others as innovative and successful customers
who purchase because the product provides them with real value and not simply bragging rights.
5. Market Characteristics: What about this market would help or hinder the adoption of new
technology?
6. Partners/Players: Which companies will you need to work with to provide a solution that
integrates into the customer’s workflow? Sometimes, this category will tie into the “Complementary
Assets Required” category below.
7. Size of the Market: Roughly, how many potential customers exist if you achieve 100 percent
market penetration?
8. Competition: Who, if anyone, is making similar products—real or perceived? Remember, this is
from the customer’s perspective and not just yours.
9. Complementary Assets Required: What else does your customer need in order to get the “full
solution,” that is, to get full functionality from your product? You will likely need to bundle your
product with products from other manufacturers so that customers can easily buy your product and
have full functionality. At the very least, you will need to identify which other products your customer
will need to buy to use your product. For instance, if you are developing a game for the Sega
Dreamcast video-game console, your customers will need to be able to purchase the console as well.
Since the console is not sold anymore, this need will limit your customer’s ability to purchase your
product.
It is easiest to organize this information in a matrix, where each potential market opportunity is a
column header, and each category of information is a row. The SensAble example further on shows how
such a matrix could be organized.
There may be other categories that are relevant to your situation. Also, some of the rows in the example
matrix may be unnecessary for your situation; but this general format can be a good starting point for you
to customize as appropriate. This matrix has proven to be helpful for hundreds of companies; also some
have added or removed categories of information to make the matrix more valuable to their specific
context.
HOW LONG SHOULD I SPEND ON MARKET
SEGMENTATION?
Give your full attention to this research for at least a few weeks (and maybe much longer if your situation
permits). Also, make sure you are talking to customers in the target market to get good data. The amount of
time you spend will depend largely on how effective your team is at getting primary market research. You
should spend enough time so that you can fill out the matrix for all your top segments with some accuracy.
Don’t just search the Internet and debate this in your office.
It is likely you will not find a perfect market opportunity, but there rarely is one that is “perfect.” Do not
let yourself fall into “analysis paralysis.”
Do not let the market segmentation be a never-ending process. The objective is just to get an accurate
assessment of the market opportunities so you can move to the next step. After all, this is Step 1—you
have 23 more steps to go! You will likely revisit this step as you get more information from the future
steps. While the steps are presented in a sequential manner for the sake of simplicity, they are often
iterative in nature, as the overview illustration shows at the beginning of the book (Six Themes of the 24
Steps).
EXAMPLE
SensAble Technologies
SensAble Technologies started its life as a powerful but raw technology that enables people to feel threedimensional (3D) objects rendered by a computer. Based in the MIT Artificial Intelligence Laboratory
and specifically in the Robotics Laboratory supervised by the legendary Professor Rodney Brooks, thenMIT undergraduate Thomas Massie created, working with his Professor Ken Salisbury, a new device that
would give its user the sense of touching virtual objects using a stylus-like interface. The device, named
the PHANToM, would simulate shapes, motion, weight, and many other physical properties by increasing
or decreasing the resistance or force felt by a user when moving a finger or stylus as shown in Figure 1.2.
Figure 1.2 The SensAble PHANToM.
As others heard about this breakthrough idea and subsequent technological implementation, Massie
received queries from all over the world about potential uses for the technology. He started to sell
versions of the lab product. However, his “early adopters” consisted mainly of universities and research
labs—“technological enthusiasts” who will buy almost any innovative product. (Geoffrey Moore’s book
Crossing the Chasm goes into greater detail about technological enthusiasts, and says that these customers
can be a first bridge to the ultimately most desirable broader market called the “early majority.”)
When I first met Thomas, he was selling these devices to researchers under the company name
SensAble Devices. He was interested in building a much more commercially oriented business that could
have a bigger impact on the world, so we joined forces to create SensAble Technologies.
We worked hard to find a scalable market opportunity that would allow our business to reach the goals
we had set out to achieve: being a company worth tens of millions of dollars in the relatively short time
horizon of five years or less. I worked with our business development manager, John Ranta, who had
experience in previous startups identifying such market opportunities and doing the hard work of primary
market research with customers to discover their real needs. We spent weeks building out a list of
potential markets, using our current customers, trade show feedback, incoming product inquiries, and our
own imaginations as sources of ideas.
No idea was too crazy at this point: a boxing channel, fixing space stations, computer mice that
vibrated, helping to perform medical surgery, pornography, new computer games, educational
opportunities, data analysis, flight simulators, virtual worlds, museums, sports training, computers for the
blind. We did not prejudge any idea; rather, we wanted to open the aperture as wide as possible.
We discussed ideas weekly, sometimes nightly, and we discussed our core values and personal
passions, which made certain markets unattractive (e.g., pornography). Another outcome of our
brainstorming was that we saw where our product’s real value was—applications that used 3D data, not
those using two-dimensional (2D) data.
Once we had a comprehensive list of possibilities, we then systematically narrowed the field down to
eight industries, made the outline for a market segmentation chart (see Table 1.1), and then spent weeks
doing the primary market research to fill out the matrix. Somewhere around 90 percent of the data in the
chart came from direct interaction and talking with real potential customers in these industries about their
situations, pain points, opportunities, and market characteristics. Very little data came from research
reports by well-known research firms or by finding data on the Internet.
Table 1.1 The SensAble Market Segmentation Chart
Industry
Entertainment
Industrial Design
End User
Animator
Stylist
Designer
Application
Sculpt
Animation
Paint
Sculpt
Paint
Modeling
Benefits
Ease of use
Reduce cycle
Reduce cycle
Increase accuracy
Lead Customers
Disney
ILM
Dreamworks
Toyota
Ford
Rollerblade
Market Characteristics
Early adopt.
Highpriced talent
High growth
Dislike CAD & computers
Highpriced talent
Partners/Players
Alias
Soft Image
Discrete Logic
PTC
Alias
Imageware
Size of Market
Competition
40,000
Watcom
X00,000
None yet
Platform
SGI
Windows
SGI
SUN
Complementary Assets Required
NURBS
Stylus
Dynamics
NURBS
Stylus
Industry
Medical Visualization
Surgical Simulation
End User
Radiologist
Surgeon
Med Student
Surgeon
Application
Segmentation
Navigation
Surgical planning
Diagnosis
Training
Surgical planning
Benefits
Ease of use
Increase accuracy
Increase use of new tech.
Increase accuracy
Lead Customers
Brigham & Women’s
German Cancer Rsrch
U. of Colorado
Penn
BDI
Market Characteristics
Mainstream
Highpriced talent
HMO
Mainstream
Highpriced talent
HMO
Partners/Players
GE
Siemens
Picker
Smith & Neph
Heartport
Ethicon
US Surgical
Size of Market
Competition
X0,000
None yet
Platform
SGI
SUN
Complementary Assets Required
Voxels
Stylus
VRML
Industry
Micro Surgery
X0,000
Immersion
?
6 DOF
Custom devices
Geophysical Visualization
End User
Surgeon
Geophysicist
Application
Opthalm. Surgery
Neurosurgery
View enhancement
Drill plan
Benefits
Reduce cycle
Increase accuracy
Reduce errors
Increase yields
Lead Customers
Dr. Ohgami
Ottawa Eye
BHP
WMC / CSIRO
Market Characteristics
Early adopt
Highpriced talent
HMO
Not computer automated
Late main.
Oligopoly
Partners/Players
Toshiba
Hitachi
Landmark
Fractal Graphics
Size of Market
Competition
X,000
None yet
Platform
None
Complementary Assets Required
Industry
X,000
None yet
SGI
SUN
3 Finger scaling
Non Visual C.H.I.
Voxels
Stylus
Prototyping
End User
Blind Person
Engineer
Application
H.U.I.
Design review
Model evaluation
Benefits
Increase access, “mainstream”
Reduce cycle
Improve designs
Lead Customers
Certec
U. of Delaware
Volkswagen
Stratasys
Toyota
Market Characteristics
Late main.
No money
Gov’t sponsor
Mainstream
Pressure to reduce prod. cycle
Partners/Players
IBM
Apple
SUN
HP
PTC
Solid Works
Microsoft
Size of Market
Competition
X,000,000
X00,000
None yet
Platform
Windows
SUN, HF
Complementary Assets Required
Windows I/F
P300
NURBS
VRML
Dynamics
Each of these market segments were legitimate candidates for our initial market, and each was
distinctive with different sets of customers, end users, and applications. For example, “Entertainment”
was chosen as a potential market because of the strong interest we received from computer animators
making 3D movies like Toy Story. Our tool would make it easier for them to design on the computer
without their design intent being compromised. They could also do it in a much more productive manner
than was available at that time.
Similar to what we learned in the digital entertainment industry from an application standpoint, the
“Industrial Design” industry was selected based on feedback that product designers wanted to create 3D
shapes on the computer in a way that was as easy as working with physical clay.
Likewise in each group—Medical Visualization (of 3D data), Surgical Simulation (and training), Micro
Surgery (robotic-controlled operating room procedures), Geophysical Visualization (analysis of 3D
seismic data), Non Visual C.H.I. (Computer Human Interface for the blind to use computers), and
Prototyping (virtual prototyping of CAD/CAM files to see how they worked together; for example, to
check to see assembly feasibility)—we had enough evidence to know that the market satisfied well the
seven key questions presented earlier in this step.
For each of these segments, we then had to do primary market research to fill out the matrix.
We had the luxury of already selling to technological enthusiasts, which gave us enough of a revenue
stream that we could spend over three months on the market segmentation analysis. You will want to
spend at least a few weeks, but you are unlikely to have the good fortune to be able to spend several
months.
Our matrix included a line for “platform,” which referred to the computer operating system and
hardware that our technology would require for it to be adopted by that particular market segment. This
may or may not be relevant to you but it was to us at the time because there was a big difference from
running on dedicated graphics computers (Silicon Graphics Incorporated—SGI—at the time) versus much
lower-cost personal computers.
Our row labled “Complementary Assets Required” depended on which industry we would target. For
us, the row labeled “Complementary Assets Required” varied quite a bit depending on the industry we
would target. For the animator in the entertainment market segment, we included a NURBS (which stands
for Non-Uniform Rational B-Splines) geometry engine so it could output the data files to the Alias
Wavefront visual rendering animation suite. This software program was used by animators worldwide to
create three-dimensional animated images rendered in color to make the captivating scenes you see in
animated movies today. The device would also have to include a stylus because the animators loved to
sketch in 2D and were very accustomed to this. The last piece that we needed to include was a dynamics
engine so that the figure could move in a realistic manner. All three of these items were generally
available through other vendors so they were not critical parts. However, it was important to have a very
specific understanding of what our end users were using, to know what else was needed to make our
system complement existing systems, and to have access to this information or technology through other
vendors.
For our partners and customers, NURBS was a very specific requirement that we needed to fulfill
because it was the required data format to fit with the significant investments already made. In other
words, we needed to understand what data was upstream of our solution, how we would receive it, what
was downstream from our solution, and how we had to output files.
SUMMARY
The market segmentation process identifies multiple potential market opportunities. Once you have a list
of potential markets, direct market research-based analysis on a finite number of market segments will
help you determine which markets are best for your idea or technology. The goal of the research is not to
provide a perfect solution, but to present a wide spectrum of market opportunities as you start to think
about where you will focus your business. Primary market research, which involves talking directly with
customers and observing them, is by far the best way to identify good market opportunities. This research
will help you select a beachhead market in the next step.
Step 2
Select a Beachhead Market
IN THIS STEP, YOU WILL:
Analyze your top 6–12 market opportunities and choose one to pursue.
Further segment that market to determine your beachhead market.
Selecting a beachhead market is part of the critical process of narrowing your focus and attention to
one critical area of attack.
In the previous step on market segmentation, you built a matrix based on your primary market research on
your top 6–12 markets. Now, select just one market opportunity from the matrix to pursue as your
beachhead market; ignore the other markets.
Almost all first-time entrepreneurs find that ignoring market opportunities is difficult and even painful.
They doggedly hold on to the idea that more markets increases their odds of success and that they are best
off hedging their bets until one market takes off.
In fact, such thinking will decrease your odds of success, because you and your new enterprise will lack
the necessary focus required to succeed. A key determinant of success for entrepreneurs their ability both
to select a market and to stay disciplined by deselecting the other markets.
Focus can be difficult, especially for entrepreneurs. People keep options open even when it is not in
their best interest, according to former MIT professor Dan Ariely, who discusses the topic in his 2008
book, Predictably Irrational. According to his research, when people are given what appear to be
multiple paths to success, they will try to retain all the paths as options, even though selecting one specific
path would have guaranteed them the most success.
By choosing a single market to excel in, your startup can more easily establish a strong market position,
and hopefully a state of positive cash flow, before it runs out of resources. By focusing in this way, you
will position yourself to most quickly achieve the all-important positive word of mouth (WOM) that can
be the source of success or failure for entrepreneurs.
HOW TO CHOOSE YOUR BEACHHEAD
MARKET
In military operations, if an army wants to invade enemy territory with water access, the army may
employ a beachhead strategy, where the army lands a force on a beach in enemy territory, controlling that
area as their base to land more troops and supplies, and to attack other enemy areas. The 1944 invasion of
Nazi-controlled Europe by the Allied forces is one of the most famous examples of a beachhead strategy.
The Allied forces established beachheads on the shores of Normandy, which allowed them to gradually
capture all Nazi-controlled territory on the European mainland. Without conquering the beachheads, they
would have had no starting point for their invasion.
Likewise, your beachhead market is where, once you gain a dominant market share, you will have the
strength to attack adjacent markets with different offerings, building a larger company with each new
following.
In many cases, there are multiple paths to success, so it is not imperative to choose the absolute best
market. (SensAble is a good example of a technology that could have been successful in any number of
market segments.) Therefore, get started doing, rather than getting stuck in “analysis paralysis.” Your goal
is to start a company, not become a professional market analyst. Action will produce real data that will
tell you quickly if the market will or will not be viable. If the one you have selected is a viable market,
great. If not, you will still hopefully have time and resources because you acted quickly and efficiently, to
allow you to return to your matrix and attempt a second market.
The seven criteria I mentioned in Step 1 for narrowing your market opportunities are also useful in
choosing your beachhead market:
1. Is the target customer well-funded?
2. Is the target customer readily accessible to your sales force?
3. Does the target customer have a compelling reason to buy?
4. Can you today, with the help of partners, deliver a whole product?
5. Is there entrenched competition that could block you?
6. If you win this segment, can you leverage it to enter additional segments?
7. Is the market consistent with the values, passions, and goals of the founding team?
It is better to avoid selecting the largest or very large markets, even if they seem like the “best”
segments. The first market you attack will be a significant learning experience for you, so you are better
off learning in a smaller market where you can quickly get high exposure among the base of potential
customers. This principle is similar to learning a sport—you will learn a lot from playing against
someone slightly better than you. If you start by playing against a top professional, you will learn only that
the professional is very good at the sport—you might as well be watching from the sidelines. Choose a
smaller beachhead market—for example, if you live in a small geographic region, start there before trying
to launch in a larger region. Large companies do the same thing; they test-market new products in lowerexposure countries and regions before rolling them out worldwide.
YOUR BEACHHEAD MARKET STILL
NEEDS TO BE SEGMENTED FURTHER
As you begin to focus on your beachhead market, you will quickly recognize that it almost surely can be
segmented into smaller markets. This is standard good practice. You should not worry about being
focused on too small a market (we will check the Total Addressable Market size in a later step) as I have
yet to see an entrepreneur focus too much—it is always the other way around, where the entrepreneur
doesn’t focus enough. You want to start in a market where you have great ability to dominate in a
relatively short time period; a narrow, focused market is the best way to do so.
How do you tell if your market is targeted enough? You want to continue segmenting until your market
opportunity matches the three conditions that define a market. This definition expands on one that Geoffrey
Moore presents in Inside the Tornado.
Three Conditions That Define a Market
1. The customers within the market all buy similar products.
2. The customers within the market have a similar sales cycle and expect products to provide value in
similar ways. Your salespeople can shift from selling to one customer to selling to a different
customer and still be very effective with little or no loss of productivity.
3. There is “word of mouth” between customers in the market, meaning they can serve as compelling
and high-value references for each other in making purchases. For example, they may belong to the
same professional organizations or operate in the same region. If you find a potential market
opportunity where the customers do not talk to each other, you will find it difficult for your startup to
gain traction.
These three criteria for defining a market mean that you will get efficiencies of scale in the market and
you have a good chance to do that magical thing that all startups want, “to go viral.”
EXAMPLE
SensAble Technologies
After much deliberation, we chose the industrial design industry as our beachhead market based on the
seven criteria above, but we had not segmented the market any further, so after choosing the market, we
discovered that industrial designers could and should have for our situation be divided into three distinct
groups. One group handles rectangular shapes with sharp edges, incorporating a lot of simple geometry. A
second group handles highly stylized shapes with smooth surfaces, best represented by mathematical
equations. A third group works with highly organic and sculpted forms, often designing with clay.
Our product was most appropriately suited for free-form designing, so the third group was the optimum
market for us to focus on. The customers in this group were primarily toy and footwear companies with
extensive clay studios and many sculptors among their designers (Figure 2.1).
Figure 2.1 The toy and footwear markets were our primary focus. The next adjacent markets were
likely animation and jewelry, but we would need to do more research when we prepared to scale.
Much to our surprise, we were able to group toy and footwear companies as one market, because
industrial designers in the toy and footwear industries acted so similarly that they completely met the three
conditions of a market presented earlier in this step. They both used lots of clay to sculpt highly organic,
3D art shapes that were shipped to China on a very tight schedule. They would buy the same design
products and use them in the same way. The pressures they faced were the same. The sales processes and
value propositions were identical. Further, in a very telling sign, the desig...
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