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Timing the Market - for Entrepreneurs

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 TLaunch 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!

Leadership

The Decision Making Process - pt1

When asked about assigned tasks as the delivery deadline approaches, I've heard more than one developer reply with the mantra "You can have it done right, or you can have it done right now". What they are telling you is that the quality of the technical work they are doing is going to be greatly diminished if the time window they have to complete it is not sufficient.

If you think about it, the same logic applies to business decisions. Those making the decisions can weight up the risk associated with a bad decision and take a view as to how much thought process needs to go into the decision process. If the risk is minimal, because the work done to effect the decision made is easily reversible and not destructive to the product's or company's established goodwill, then a quick decision is warranted.

If the ramifications of the decision are significant and not easily reversible then more time and effort can be afforded to the decision making process. It may be necessary to expend resources to test the waters with a new feature, or prototype an application, or consult outside specialist help. Whatever it is you need to do to gather more information and reduce the risk you should do it - but don't let the process drag on for ages. Any company or manager can be decisive and make decisions and form opinions quickly but the companies that beat the crowd are, more often than not, the firms that ultimately make the "right" decisions more often. Of course, if you can do that quickly you're already one step ahead. After all, you won't know you've made a bad decision until you've actually made a decision and moved forward with it!

Management

Going through the Greeks

Time to Market is seen as an important factor when building out the technology underpining a startup environment. Although there have been some spectacular contradictions to the "1st mover advantage" notion (Microsoft's C# language vs Java, ... ), I certainly agree with this idea as even the best business plan is going to find it harder to get traction and exposure in the market place if your competitors have beat you to it. The VC community is well aware of how much harder it is to complete in well-established market places which is why it's in your best interest to get out a version of your product or service as soon as possible if you are indeed in a well-established market. (Side note: you will find it significantly harder to raise capital if you are entering into a crowded, mature market. In that case think differentiation and market niches.) I also believe that the ability to constantly innovate and update your product, without significant distribution costs or end-user hassle, is one of the main factors driving the popularity of Software as a Service.

Rather than spending years developing your product before bringing it to market, out of necessity many startups use a highly iterative approach. Because of this you often see startups labelling their services with terms used by engineering teams to describle interim versions of a product: "alpha", "beta" and "gamma", a practice I refer to as "going through the Greeks". The idea being that this labelling indicates to the consumer that the product is still undergoing a significant degree of development. Although, to be honest, you would need to be familiar with software development terminology to make this connection!

Conducting progressive releases has it's pros and cons. On the downside:

  • it give your competitors early access to your product allowing them to copy it;
  • it gives your competitors a glimpse into your longer term strategy; and
  • you risk losing appeal with your target market if the product is not feature complete to an extent that appeals to your target market.

On the positive side:

  • you get earlier exposure in the market place allowing you to glimpse the likelihood that your business model has merit;
  • you are effectively announcing your presence to your customers and potential suitors;
  • you get early feedback from your initial users which can help you refine further development and marketing efforts; and
  • once the core architecture has been implemented, your engineering team can focus on smaller chunks of development and refinement (aka "phased development and release").

Naturally, it is a management decision to decide what can be released in beta for strategic purposes but it's prudent to be prepared for this phased development and release process, and to establish internal procedures that allow you to "release early and release often".