Founders Ask Whether They Should Start Up In A Familiar Domain

2022-10-07 original Startups

It’s worth considering this by looking at how you would answer the “common questions thrown at startups.”

【Question 1】Why do you think you (or your team) can win in that domain? 【Question 2】How do you plan to differentiate yourselves from other companies? 【Question 3】How do you plan to validate your needs hypothesis?

Suppose you happened to be a renowned researcher or inventor in some field. If you started a company in a specialty area you know extremely well, the answers to the questions above would be very clear.

【Answer 1】Because I am the top specialist in the industry 【Answer 2】Because the 〇〇 I developed has industry-leading performance that no other company can match 【Answer 3】I have been running hypothesis validation for over ten years now. I have strong conviction about market needs

And that’s it. It’s a confident pitch, almost saying “anyone who has a complaint, step forward.” But as long as it’s true, no one can say anything about it.

Now suppose your situation is more like “I have a few years of experience in that domain.”

【Answer 1】I have ◯ years of experience in this domain, and I’ve seen most manufacturers stumble because they couldn’t solve 〇〇. In fact, my previous company also failed to scale its service sufficiently because of 〇〇. But the ×× we’ve developed this time is expected to solve that problem. 【Answer 2】The ×× we developed this time requires material △△, which only one manufacturer in China can produce. We have signed a limited supply contract with that manufacturer through 202X, and we intend to use that to gain a first-mover advantage. Competitors will eventually appear, but we plan to address that by locking in users before that happens. 【Answer 3】As I mentioned, I have ◯ years of experience in the industry and direct contact with promising prospective customers. We already have PoC plans set up with several companies, and we intend to finish the hypothesis validation phase by the end of this year.

The impression isn’t bad. Each answer presents a reason that is logically sound and reasonably convincing.

Finally, suppose you’re trying to start a business in a domain that is completely outside your expertise.

【Answer 1】I certainly have no work experience in the 〇〇 domain, but I’m confident that no one loves 〇〇 more than I do. I’ve been building up experience because I always wanted to start a 〇〇-related business someday. My main specialty is ××, but this is in fact a set of skills that is almost entirely transferable to 〇〇. However, no one in the 〇〇 domain seems to think this way — it even appears to be treated as taboo in the industry. So I intend to boldly bring my experience in ×× to create △△, and by doing so bring about a revolution in the 〇〇 domain. 【Answer 2】As I just mentioned, there isn’t even a single company currently considering introducing △△ in the first place. Also, using △△ requires experience in ××. We have both, while our competitors currently have neither. We can secure a definite first-mover advantage. 【Answer 3】This is actually the point where I feel the most risk. I’m not optimistic enough to believe that no one has ever considered introducing △△ before. That means there must be some reason within the 〇〇 domain that prevents active adoption of △△, and we already have several hypotheses about that reason and are working on solving them. That said, there is a mountain of very real challenges — the risk of unexpected reasons surfacing, whether a smooth workflow can actually be achieved, and so on — and we believe these risks should be eliminated as early as possible. Fortunately, one of the portfolio companies of our existing shareholders is in the 〇〇-related business, and we intend to use that connection to build a scheme for validating our hypothesis.

Hmm, these answers aren’t half bad, are they?

The answer itself doesn’t matter. Every one of these people managed to give a reasonably good response. Good enough that an investor might think “maybe I could invest in this.” Good enough that, in a hiring or executive recruitment scenario, someone might think “maybe I could join this company.”

This is a common trick, but the person asking the question is almost always trying to see the entrepreneur’s character through “how they answer.” Especially the earlier the stage, the more this is true.

For example, there is significant risk in someone who is actually in Case 2 but behaves as though they were in Case 1. That’s because they are misjudging themselves. Confidence is a fine thing, but overconfidence can erode humility, cause people to stop listening to others, and lead them to keep marching down a death road even when the situation is already hopeless.

Likewise, someone in Case 3 who doesn’t anticipate any fragility in their hypothesis might also be a bit overconfident. Conversely, someone who is clearly in Case 1 by any measure but is drawing up a plan like Case 2 may lack the drive and speed to act, and might fail to hit the accelerator exactly when they should. Personally, I wouldn’t join a company like that, nor would I get involved with it.

As long as someone can look at themselves and the market objectively, build a legitimate plan in response, and take action, which domain they choose to start a business in is, frankly, a minor issue.

The content of this post is an excerpt (original text) from the following book. If you’re interested, please pick up a copy.

The Shape of a Happy IoT Startup

Originally published in Japanese at https://clazytech.com/2022/10/1261/. Translated with LLM assistance and reviewed before publication.