Finding Your Category: Are You Viable?
Scott D. Clary | Mental Models, Performance, Business & Entrepreneurship
Here is my weekly email with some insights and ideas pulled from conversations I had on my podcast.
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Finding Your Category: Are You Viable?
There's no doubt in my mind that the job of a startup entrepreneur is often romanticized. The lowly company starter is pinned up as a creative genius who gets to bring their innovative new product to the world and change everything.
But here's where I think we do entrepreneurs a disservice; by making the startup life seem whimsical and energizing (as opposed to hard and risky), we set aspiring entrepreneurs up to believe that any idea is a viable one. And that's unfortunately not the case.
When starting a company, there's something called the "product-market fit" that you have to worry about. This is basically when your company has a product that people want and are willing to pay for. And believe me, your category is not easy to find – but it's entirely possible if you know where and how to look.
For today's newsletter I'm drawing on my interview with Dave Fink, a revenue-focused entrepreneur with a passion for creating disruptive business models and unique monetization strategies. Read on to hear his thoughts on finding the right category for your startup, whether you need experience, and the possibility of starting new categories.
Dave Fink's Sensational Startup Career
Dave was incredibly humble in his interview, but let me tell you – this guy has really been around the block. He fell in love with the energy of startups from the moment he began selling to Fortune 500 companies. He loved the fast-paced urgency and excitement that came with solving problems.
“In this technology startup world, you can recognize that you may have a solution to your problem, get that to market, and very quickly create trajectory and momentum. To me, that was eye opening.”
There was a sense of drive and passion that he wanted to be a part of, and that led him to get involved with companies like Dollar Shave Club, Intelligent Beauty, and Beachmint.
During the early part of his career, he created performance-marketing platforms helping brands as diverse as Walt Disney World, Proctor & Gamble and The Gap adapt to the rapidly changing digital media strategies available in the internet world.
Why Dave Got Involved
Ultimately, I get the sense that Dave found his groove in the startup world. He recognized – as so many of us fail to do – that his mind worked in a particular way, one incompatible with the traditional career path.
“There's a career trajectory where it's a series of jobs, and you develop very specific skill sets, and you work through a very rigid structure and chain of command. And that's a great fit for many people. But for me, I think my brain always worked more entrepreneurially in being able to recognize an opportunity or recognize that there's a problem.”
Dave's creative, yet data-driven approach to marketing and monetization has generated hundreds of millions of dollars in revenue for ad-tech, lead generation, and commerce companies. And get this – over the last decade, Dave has launched and scaled over 20 consumer-internet businesses.
“It's taken me a lot of time to learn and develop skills and put it all together successfully. But it fits the way that my brain works. And so I was smitten from pretty early on.”
So, yes; you can see why I was keen on asking Dave about all things startup. I wasn't disappointed!
What's a Category in the Startup World?
Before diving in, let's talk about categories and what they mean. I'm sure you can guess – they're essentially a way to group startups together based on what they do. This is important because once you know your category, you can start to better understand the competitive landscape, target market, and what's been done before.
But it's not just about categorizing the things you sell or do. As it turns out, categories are most helpful when you're trying to come up with a business idea; you want to get clear on the problem you're solving before anything else.
Otherwise, Dave explained in our interview, you'll be wandering in the dark with a product that no one wants.
“If you do everything right, and you put in all this effort and time, you're testing your way through this advertising channel, and you succeed, is it scalable? Is it big enough? Is it worth your time?”
These are the questions you end up with when you don't have a focus, so it's super important to find your category early on.
Examples of Startup Categories
The way I've explained categories is a little vague, so let's talk specifics. What does a category actually look like?
Categories are often sorted broadly, like these:
- eCommerce. This is a broad category that includes startups that sell physical or digital products online.
- SaaS. Short for software as a service, this category refers to companies that offer cloud-based software applications to their customers.
- Social Media. This encompasses startups that are focused on building social networks or providing tools for users to interact with each other online.
- Mobile Apps. As the name suggests, this category is for companies that have developed mobile applications.
After talking to Dave, though, I think there's a better way to think about it. Categories should be sorted according to the problem they're solving. For example:
- Sustainable clothing. The problem this category solves is making it easier for people to find and buy eco-friendly clothing; it's a lot more specific than simply “ecommerce” or "fashion".
- Food delivery. While this is still broad, it's focused on solving the problem of getting food from restaurants to people's homes.
- Task management. This category describes companies that have developed tools to help people manage and complete tasks more easily.
See how this makes it easier to understand the competitive landscape? You can immediately start to see which companies are competing against each other and where there might be room for innovation. A category like "SaaS" is far too broad to be of much use; call it "task management", though, and you immediately have solid footing.
Why Your Category Is So Important
It's easy to underrate the importance of your category. It's just a word, after all, and you're building a company that does X, Y, and Z. Why should you care what category you fall into?
Remember, though, that your category isn't a label. It's a means of deciding whether or not your idea actually has legs.
Let's look at Uber as an example. When the app was launched in 2011, around two years after the business itself was founded, it could have been considered a taxi or luxury car service. Other services in the category were companies like taxi cabs, hire cars, or chauffeur services.
As Uber grew and expanded, it became clear that it was doing something new. The company wasn't just a taxi service; it was a technology company that happened to use cars as its medium. As such, it did something completely original within its category and ended up disrupting the entire industry.
By understanding that their target market came from the taxi category, they found a problem to solve (taxi affordability) and created an app to corner that market.
See how a category is so much more than a word? It's the lens through which you view your business and its potential, and it helps you to think about how to differentiate yourself from the competition.
How to Choose the Right Category
In speaking with Dave, I learned some pretty valuable lessons about what entrepreneurs should look for when choosing the category for their startup. Because it's not something you can pick out of a hat; it can mean the difference between success and failure. Dave's seen both sides of that coin.
“There's no shortage of things that didn't work, and I'm proud of them. Lots of them are on my LinkedIn profile – because those were all steps to a constant journey of trying to get better and creating value," Dave explained.
So yes, you might try and fail a few times before finding the right fit – but how can you give yourself the best chance from the get-go? I'll walk through some of Dave's advice.
1. Look for a return-on-investment.
The best startups are never born out of a desire to get rich quick – but still, it's important to think about whether the category you're choosing will offer a good return-on-investment. And I don't just mean money. If you give up your day job and put hours into your startup, you want to be fairly sure there's a payoff down the road.
“You want to be focused on things and spending your time in areas where you're going to get a disproportionate return from them," Dave said.
To me, that means looking at other startups that have gone before you within your category of interest. If you're experienced in SaaS and trying to start a new company in that space, where are the most lucrative opportunities coming from? What are people demanding? What are the pain points yet to be adequately solved?
2. Think about consumer behavior.
This one's on a similar note: you also need to think about how people behave when it comes to your category. What platforms and services are people flocking toward?
The reason you need to spend plenty of time observing is because, in order to be successful, you need a sizeable customer base. And not just to pay for your product or service, but to interact and give you feedback along the way.
“You have to look at, are these channels optimizable? Are our prospect consumers spending time on those platforms? Do they have the tools and the data and the measurement to be able to give us the feedback we need to make those channels successful?”
Remember that you're part of many consumer bases, so your own perspective can be enlightening as to how people are spending their time. Don't plan a social media platform like Facebook when you know people are moving toward more photo and video-based platforms. (Obvious example, but you get the point.)
3. Keep tabs on your TAM (total addressable market).
For all my talk of solving problems, I know that there's more to launching a startup than that. Dave really drove home the importance of finding a niche audience that is still big enough to warrant your efforts.
“You might uncover a huge challenge, and that challenge you might have a really interesting solution for. You might realize you can build technology or software infrastructure to solve that problem. And then you look at what investors call TAM or total addressable market, and you realize like this is a tiny little market.”
Your TAM can be found by researching not just the size of your category, but also how many people are looking for a solution to the problem you're solving. And if you think you've identified a sizeable market that's underserved, even better.
If not, it's time to ditch the idea – no matter how attached you've become – and start looking for a more viable category.
“To me, that's almost the number one gating factor; you're going to work just as hard to build a business that serves a really small niche, as you are to build a business that can be big and scalable. Why not focus on something that doesn't have that same ceiling?”
4. Sometimes, it just won't work out.
Here's the harsh reality of being an entrepreneur: you can take all of the precautions above, and it still might not work out. You'll notice that many of the most successful companies ever also had luck and serendipity on their side.
“It's got to be the convergence of timing and brilliance to build something extraordinary, like Google," Dave said. "That company wouldn't have been that company if they weren't as brilliant and capable as they were. But they had to hit timing, right?”
I don't put too much time into dwelling on this, because I think we can change our circumstances and create the conditions needed for success. But it's worth being humble about the role luck plays in any business; without it, even the best laid plans can go up in smoke.
“A little bit of timing and luck is absolutely critical when you're talking about building one of these completely new, game-changing Titans. It doesn’t happen that often.”
Do You Need Categorical Experience?
I was interested to ask Dave about this, mostly because I know quite a few successful entrepreneurs who started out with next to no experience in their chosen category. Is experience necessary, or isn't it?
While logic says that experience should be the most important factor of all, Dave shared a perspective I found really interesting – that sometimes, too much experience can lead a person to have incremental thinking instead of breakthrough thinking.
“When you take someone who has deep domain expertise and has been playing in a system for a long time, they've been trained to think in terms of ‘Let’s operate the way that things have always been operated," Dave explained.
“These people have some idea of how they're going to disrupt the industry that they've spent 15 years in. You start talking through their process, and realize that they're they're thinking incrementally.”
Where Lack of Expertise Helps
I know what you're thinking – that's totally counter-intuitive, isn't it? How can a lack of experience actually help an entrepreneur?
But according to Dave, it's precisely this inexperience that can lead founders down a more novel path. They're not constrained by the same rules that people who have been in the game for a long time are – they're willing to try things that those with more experience might not consider.
“Oftentimes to disrupt something, you need a complete fresh perspective. You can't be saddled down with all the reasons why things have to be done the way that they've always been done.”
This makes sense to me. I guess it also explains why big companies like Apple and Amazon have side companies designed specifically to innovate and experiment – they need that fresh perspective in order to stay ahead of the curve.
“There are times when you take an entrepreneur who doesn't have direct domain expertise, but has applicable expertise. And that person is more likely to be successful, because they're coming in with completely fresh eyes.”
Where Experience Fits In
Dave did acknowledge that there's a role for deep industry expertise. Though it's not necessarily required for the innovative side of things, like finding a category, it's important for the operational side of a business – and Dave is well aware of this in his own business.
“There are ideas where, if you don't have that domain deep domain expertise, no innovation in the world is gonna make you successful. And so in our company – at the executive level – we have a blend of creative thinkers, disruptive thinkers, and those individuals who have deep domain expertise.”
Having a variety of experience levels gives you the best of both worlds; you can use your innovators to break through in new and disruptive ways, whilst drawing on the experience of industry Titans to steady your path.
If you're starting to think about a new business endeavor, I'm glad you've stumbled upon today's newsletter. Finding your category is super important to think about – not just as a brainstorming tool, but as a measure of how viable your business is. So many businesses never make it off the ground because they miss this vital step.
Keen to hear more from Dave Fink? I don't blame you; he's pretty epic. Check out the full interview here for more wisdom from one of the tech startup greats.
As always, thanks for reading. I really value my audience (that's you!)
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