Necessary and Sufficient

OnStartups has an interesting list of things that you don't learn doing an MBA

My favourite is #2: Startups are a continuous exercise in deciding what not to do.

Say you have what you think is a great idea - perhaps something that nobody else is doing, or doing well, in a particular vertical. The business model looks promising and sustainable and your SWOT analysis paints a picture that just begs you to throw in your day job, or put your MBA on hold, and pour all your efforts into the new venture. Well one thing that entrepreneurs need to consider is timing the entry to market. So ask yourself: is it the right time to launch your new product/service into the market? In the illustration below, taken from renown consulting firm A.T Keaney, the question can be restated as: is T_Launch the optimal time to be entering the market?

If you enter the market too soon you might have the space to yourself, well at least for a little while, or share it with only a few incumbents but you'll also bear the brunt of promoting that space and be a pioneer in finding out if that space is a good place to be profit-wise. If you are the first entrant into the space then congratulations - you've attained first mover, or pioneering advantage, but if it is a profitable space others are likely to follow you. Of course, if you have a highly innovative product/service and your business model is defensible via patents, protected intellectual property, exclusive arrangements, or some other barrier to entry then you probably don't care if you are first, second, or tenth to market! A superior product which has such protection, combined with good marketing will eventually prevail. However, many products/services do not have such a defence but instead rely on subtle product differentiation, superior execution and/or the established goodwill in their brand. In such cases the possibility of being too quick to market needs to be foremost in the minds of the entrepreneurs.

On the flip side, if you wait too long to enter the market you might lose ground to competitors, and you risk seeing your window of opportunity close before your very eyes, but you might also gain valuable insights from observing the incumbents as well as benefiting from the marketing efforts of others who are growing the market in that space. The obvious trade-off that needs to be made is the value of observing the incumbents versus the benefit of an earlier market entry.

Conventional wisdom suggests that it is better to be first rather than 5-th to market but there are an awful lot of come-from-behind victories in the world of high-tech that would seem to contradict this notion. Word Perfect was a market leader for a long while until it was killed off by Microsoft Word. Lotus 1-2-3 was the best spreadsheet on the block until it was killed off by Microsoft Excel. Netscape Navigator was the first big browser on the scene but it's no where to be seen these days. Google was not the first search engine built - Yahoo, Overture and others came before it - but it is the dominant search engine today by a considerable majority. Of course, these market entry timings may not have been deliberate strategic decisions - Microsoft for one openly admit they under-estimated the importance of the internet, the browser and searching tools - but they do give evidence that first mover advantage is not as valuable as many people assume it is. So it seems obvious that it's a strategic decision to be taken by the entrepreneurs but the question is - what framework of reference, if any, can be used to make this critical decision?

On this topic I recently came across an academic article by Moren Levesque et al. Moren is a professor of Management Science/Operations Research, a field I'm a little familiar with, who took an extremely analytical approach to this problem. The full citation of the paper is:

Lévesque, M., Minniti, M. and D.A. Shepherd. 2009. "Entrepreneurs' Decisions on Timing of Entry: Learning-By-Doing and from the Experiences of Others." Entrepreneurship: Theory & Practice, 33(2), 547-570.

You can read it here or buy it in printed form from here.

To quote the paper, "the study focuses on the irreversible entry decision of a single entrepreneur given the information available to her at a specific time and the hostility of the learning environment." The authors note that, unlike other decisions that entrepreneurs make, the market entry timing is "an irreversible decision that does not have the characteristic of an updating process." They build a complex mathematical model that reduces to a constrained optimisation problem which can be solved by standard mathematical techniques once all the parameters are identified. They then go on to give observations applicable to the real world from what the insight their framework revealed. The key take-aways are:

1. "Our framework also suggests that how long she should wait to enter depends on the "hostility" of the learning environment. That is, on how much the entrepreneur can learn to begin with, on the speed at which she can learn new information directly and from others, and on whether the value to her performance of information provided by others increases relatively to that provided by information she can gain by participating."

2. "A high-velocity industry may indicate an environment where the opportunity to learn vicariously before entry is relatively low and therefore it is unlikely that an entrepreneur can benefit from delaying entry to learn vicariously and use that information to improve performance."

3. "Our results prove that delaying entry is more sensible the less hostile is the environment. Yet, the entrepreneur cannot wait forever"

4. "One's level of industry expertise is significant when evaluating the hostility of the learning environment.... Thus, our model would suggest that the novice entrepreneur should be an early entrant as the gains from learning from participating in the industry would overcome the gains from learning from others."

Fancy mathematical models aside there are some relevant insights in this paper. The problem now becomes assessing your degree of industry expertise and assessing the "hostility" of the market. Whilst not easy to accurately predict, at least we can take comfort in the fact that once you have a handle on those issues the most appropriate course of action should be more transparent. Hmmm. Food for thought!

This is one of the most accurate summaries of start-up environments that I've seen. You are in a smaller organisation, small enough that your good work will get noticed and your ideas can quickly have a big impact, and unlike a larger organisation where people are specialists, start-up technical personnel need to be multi-skilled. If you are an individual with an insatiable desire to learn things and push your own envelope such an environment is extremely beneficial because technical staff are faced with a stimulating variety of issues and, by necessity, a fast-growing company with limited cash will often make room for your ideas and ambitions so long as the task gets done.

If you've never worked at a start-up have a read of The Siren Song of Startups.