Four Kinds of Startups

4/19/11Follow @joechung

Since part of my job at Redstar Ventures is to meet as many entrepreneurs as possible who might want to co-found a startup with us, I’ve swilled plenty of coffee at Voltage and Peet’s swapping ideas with many a bright, passionate, and inventive entrepreneur. Somewhere into my second gallon of cappuccino, I began to notice a simple pattern emerging in the fundamental approach entrepreneurs have to their ideas. Grossly speaking, the ideas and entrepreneurs that go with them tend to fall into one of four quadrants of the following matrix (with deference and apologies to the BCG Cash Cow)

Let’s look at the left half of the chart below first. A great example of the Technology driven / Me market quadrant (lower left) would have to be the entrepreneurs behind Rockmelt, who are building an integrated web and social media browser for, well, twenty-something hipster tech guys. In their homepage “what is it” video, the narrator and prototypical user is “a recent college grad who moved out to California to join the Rockmelt development team.” Can’t be any clearer than that—their initial target market is their own employees! I have no first-hand knowledge of Rockmelt’s early ideation, but it feels like a pretty classic tech-driven concept in the sense that it takes something people are doing already (web browsing, Facebook, Twitter) and tries to make it easier and more efficient through a unified, integrated user interface.

An example of the Technology-driven / Others quadrant (upper left) would be Radianse, a startup that uses RFID tags to track patients, workers, and pharmaceutical containers in a hospital to make sure that the right patients are being given the right drugs. The headline of Radianse’s very first press release is “Indoor Positioning Systems reach Tipping Point: Reduced cost and complexity expand application potential for healthcare.” What typifies a Technology / Others Market is that the founders are usually taking their expertise in a technology and exploring what new markets might exist for that technology. They might be completely indifferent to the market itself other than its profit potential.

Opportunity-driven concepts, on the other hand, tend to start with an identified exploitable gap, such as a new law (or loophole), economic shift, or simply an insight into a market opportunity that some other incumbent player has left open. My favorite example of a lower right quadrant company is Facebook. If we believe what was depicted in The Social Network, Mark Zuckerberg, through the Winklevoss twins, became aware of the market opportunity for social networks that were exclusive—in their case, restricted to the ivy walls of Harvard and its peers. The opportunity itself was left open by the dominant player, MySpace, whose lack of restrictions and encouragement of extremes in tackiness built a sort of unwashed masses environment that lacked appeal to the better-heeled denizens of higher education. By definition, Facebook was targeting Zuckerberg and his fellow undergraduates themselves, only pushing to other universities and ultimately the broader public once they had successfully dominated their initial market.

Lastly, the upper right quadrant in my chart belongs to Opportunity-driven concepts that again target markets that the entrepreneur is not a member of. The best example I can think of here is when Andrew Mason took his social motivation site, The Point, and pivoted some of the pieces into launching Groupon. According to Mason, he carefully studied the original group buying site, Mercata, identifying a major market opportunity in selling services as opposed to hard goods, particularly in the depths of a recession where bookings in almost every restaurant, spa, and event had plummeted. In terms of target market, choosing a name and visual design that could not allude more appealingly to weekly circular coupons strongly points to a service laser targeted towards women. And indeed, Groupon’s Female to Male ratio is an astonishing 3.3-1!

But, it’s hard to find lots of upper-right quadrant examples—mainly, I think, because there are simply fewer startups that fall into this corner. The reason behind that is fairly obvious: it’s much easier for entrepreneurs to solve problems for people like themselves, because they can use their own opinions, emotions, and reactions as a proxy for their market. Similarly, it’s a lot easier to take an existing tool and find new uses for it than it is to figure out what tool should be invented in the first place. As the proverb goes, when you are carrying a hammer everything looks like a nail. But unless you know what a nail looks like and understand that there’s money to be made in smashing them into things, it’s pretty hard to imagine inventing the first hammer. In more concrete terms, developing startups in the upper right quadrant favors entrepreneurs who have access to more sophisticated insights about market trends, demographics shifts, latent demands, and consumer motivations across a broad spectrum of industries and population segments.

Note that unlike most four-quadrant charts, it’s not at all clear that being in the upper right quadrant is the most desirable. But, with the flood of new Internet startups hitting the space, accompanied and sometimes assisted by the flood of new startup incubators (full disclosure—including Redstar!), there are clearly some conceptual areas that are seeing ridiculous amounts of overlap and repetition. The downside of the incredible connectedness of the global Internet startup community is the tendency to swarm around the same ideas at the same time. Most markets shake out to two or three “winners,” with all the other also-rans ending up as venture industry statistics. While there are huge success stories in all four quadrants, personally, I’m most interested in startups in the upper right, if only because there’s a lot more white space there and will likely continue to be for the foreseeable future.

Joe Chung is Managing Director at Redstar Ventures, a company that creates companies, taking them from the earliest stages of ideation and growing them through their first institutional funding rounds and beyond. Joe tweets from @joechung. Follow @joechung

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  • http://nevients.hostoi.com/ Nevie

    Hi Mr.chung, glad to read your article here. i just agree about your opinion about facebook and they initial market targeted. I thin zunkenberg have known how to make they market can be optimized even they targeted in first project is in small scale such as the community of college and around them

  • http://www.redstar.com Joe Chung

    I just noticed that Rockmelt took down their “what is it” video from their homepage — coincidence, I assume :)

    Here’s a link to the video on YouTube: http://www.youtube.com/watch?v=bAPKPhoTqFY

  • Mike F.

    Hello Joe-
    Forgive my late comments/question on your article, but after hearing about Redstar elsewhere on the web I was led to Erin Kutz’ piece and just found this and your other entry, “How to Hire an Entrepreneur”. With Redstar decoupling the entrepreneur from the idea, are you using this matrix as a tool in trying to match entrepreneurs with prospective businesses? From your opening paragraph it sounds like the genesis of this concept came after the founding of Redstar and I was curious to know whether or not you have been able to incorporate it in your work there.
    By the way, as a semi-recent MBA grad I thought I had had enough of matrices like BCG’s Growth-Share, but I must admit it’s always interesting to see how many concepts can be explained with four boxes and two axes. Thanks!

  • Gabor Borjan

    Hi Joe,
    After reading your blog entry, i can categorize our startup and our project to the upper right corner.

    We solved a problem, that is not ‘me’ , but can hear, read, see others, who really cannot establish the required security for their communication /for example between the small office network and the workers at a remote location/. We can setup VPNs etc, without problems, but the average small business owner or individuals cannot, without expert help and continuous support.

    We clearly see, there is a need to establish secured communication channels, but because the lack of proper knowledge, this is problematic and expensive at the same time. /and the typical problem in case of security, existence a 3rd party/.