Single-minded focus is the key to startup success
If a startup with a single revenue stream is considered a good investment, you might think a startup with four possible revenue streams would be four times better.
Many early-stage pitches show the startup planning to sell their technology to the aerospace industry, then the transport sector, then move on to uses in construction, before finding their biggest opportunity in heath care.
Or they’ll sell their devices directly to consumers and offer it in packages to large enterprises, then later sell the data they collect to governments and investors.
Or their app will make money from freemium features, from in-app advertising, from a referral service, and from an app-based marketplace.
If investing in one startup is one shot on goal for a big exit, these founders are offering four shots for the same price. If one of their revenue streams fails to materialize, there’s always three more to sustain growth. If something goes wrong with Plan A, there’s Plans B, C, and D already in play.
Founders expect more revenue streams to mean more opportunities and more growth. Investors look at it differently.
Why is 4
Building a successful startup is among the most difficult undertakings imaginable. You have to succeed at building a new product and a new market in a short period of time with a tiny team and an extremely limited budget.
Building one startup is tough. Building 4 startups simultaneously (or in quick succession) is not 4x easier but 4x more difficult. A single-minded focused on the single strongest opportunity is the best chance for success.
Selling to businesses and selling to consumers require two very different business models. Selling to aerospace and to health care at the same time requires building two very different companies.
Even if the product is nearly identical, different markets require separate sales teams, a different website, a different go-to-market strategy, different partnerships, and different advertising.
Can it be done? Certainly. Big companies do it all the time. Microsoft, Oracle, Google, and Apple sell related products to different users all day. Wells Fargo Bank serves consumers, small businesses, and multinationals without blinking. But they have separate divisions to support each customer base. The IT department of Goldman Sachs doesn’t walk into the Apple Store for support.
But as an early-stage startup, you’re not Apple or Wells Fargo. Each new market requires time and money to build. As the CEO of a startup, you’ll struggle to focus on one market much less four. You’ll struggle to hire and manage one sales team much less four. And the product will require modifications to optimize for the different customer bases, creating trade-offs between the needs of different users, often resulting in a design-by-committee product that fails to resonate with anyone.
It also complicates the exit strategy that convinces investors that the startup is a good investment. Unless you’re shooting for an IPO, the exit that provides a return to investors is a strategic acquisition by an industry leader. If you’re crossing multiple industries or have a variety of revenue streams that doesn’t fit into potential acquirers’ own business structure, a high-multiple acquisition becomes less likely.
Does that mean you can never branch out into different markets? Of course not. At some point, you’ll have built a successful business in one market and be ready to turn your attention to a second. But that’s at least 5 years away. Something to keep on your radar rather than a key component of the current strategy.
The Beachhead Market
Startup founders are always advised to begin sales in a beachhead market before going after the larger opportunity. Many founders misunderstand that to mean going after a smaller market before attacking the larger one that is the real goal.
But the beachhead market needs to be a subset of the bigger market, not a separate market. On D-Day in the defining battle of WWII, the Allies didn’t land their troops in Iceland, which would have been far easier than Normandy. They landed in Normandy because that was a defendable beachhead to get their footing and consolidate their troops on the mainland of Europe on way to Berlin.
The beachhead market is called a beachhead for exactly this reason — it’s the first point of attack with a defensible position before gathering forces to take over an entire market. The beachhead market is not a small separate market but a submarket of the larger market that is your strategic goal.
Start by finding the most desperate customers in a small niche of your target market who the giants of the industry are overlooking. Make them happy before gearing up for the bigger battle where you’ll have to dislodge the incumbents.
Investor Pitch
When pitching to investors, focus on a single business and show how you’ll dominate the opportunity starting with the beachhead to break into the market.
Somewhere in the long term plans mention that once you’ve become the market leader, you’ll be able to continuing expanding into new markets and have additional ways to monetize the product. But those extra markets are a bonus, not the fundamental strategy.
And if it turns out Plan A doesn’t work, then you’ll be ready to pivot to Plan B— not adding a second business on top of the first but throwing away the first attempt to focus solely on the next.
Investors expect the business model to evolve and adjust over time. It’s not unusual for the seed raise to be for a substantially different business than the pre-seed. But as investors, we need to be convinced that you’re single-mindedly focused on the best opportunity instead of trying to manage 4 opportunities at once.
If you built a teleporter, should you focus on replacing long-distance air travel, local transportation, space travel, or movement of goods? The startup, SüprDüpr, decides to do all of the above. That means they’ll need a lot of capital to build a lot of teleporters quickly. And in their rush, perhaps they cut a few corners. Read what happens in my Silicon Valley novel, To Kill a Unicorn.
