Weekly Briefing Note for Founders 1/2/24

31st January 2024
CATEGORY:

This week on the startup to scaleup journey:

  • Finding your beachhead market is a time-critical mission



Finding your beachhead market is a time-critical mission

The Seed to Series A transition presents a unique set of challenges for any startup. These are often associated with navigating 'the chasm', the major discontinuity that separates the early adopters from the mainstream market.

For B2B businesses in particular, the chasm is an uncertain, high cash burn phase as they search for product/market fit. The biggest question is how to avoid getting stuck there.

Quickly finding the beachhead into the mainstream market becomes a time-critical mission. How can founders accelerate this transition?


Different Mindsets

Regular readers will be familiar with the concept of 'the chasm', first espoused by Geoffrey Moore. Through our own work we have shown how this maps closely onto the Seed to Series A transition. In doing so, we have found a powerful correlation that helps explain why founders often underestimate the scale and urgency of this challenge.

The chasm exists because the mindset and behaviours of the early adopters (Moore calls them the "visionaries") are very different to those of the mainstream market (the "pragmatists"). The visionaries eagerly embrace disruptive technology. They are risk takers. The pragmatists wait until people like themselves go ahead. They are conservative. Until others jump on board, adoption stalls.

Moore says that the goal of crossing the chasm is to ignite this second cohort of adopters by targeting an urgent problem specific to a particular market segment that cannot be solved by conventional means - and to use the disruptive technology to solve it for the first time.

To move through the chasm quickly, we must first understand the roles of each cohort and their different buying dynamics. Then we must find the accelerant that will trigger the pragmatists to start buying.


Different Roles

The 'visionaries' are vital because they:

  1. Road test the initial product and willingly provide feedback. i.e. The product may not yet represent a complete solution, although it must possess the core, game-changing functionality. The startup often makes up for deficiencies elsewhere by using a services 'wrapper'.
  2. Help startups understand the degree of fit between the product they are developing and the market category they are seeking to 'win'.
  3. Generate early revenues that demonstrate the sales flywheel can turn (albeit slowly), e.g., from lead generation => engagement => sale => ship => invoice => payment.
  4. Put the company 'on the map', especially if one or two big marquee accounts can be secured.

The pragmatists in the beachhead are vital because they:

  1. Represent the first market segment where the business can truly start to scale.
  2. Confirm that the startup has solved the big problem for this particular category of user by providing a complete solution.
  3. Provide references for other pragmatists.

Of course, customers don't go around with signs on their heads saying they are "visionaries" or "pragmatists". The best way to tell them apart is by understanding how they make buying decisions.


Buying Dynamics

The early adopters are truly independent thinkers. They make their decisions based on their own analyses. They do not look to others for corroborative support. On the downside, they typically won't have the budget set aside for your solution but will be strongly motivated to 'find' the money from elsewhere.

Pragmatists do the opposite. They seek endorsements (word-of-mouth is best) not only about what to buy and when, but also from whom. They evaluate extensively and usually have lengthy internal processes, often based on consensus building. On the plus side, they may well have budgets aligned with the problem - although not for your specific solution.

Most pragmatists rely on 'herd dynamics' to make their calls. When enough of the herd have signalled the safe way forward, they move with the herd. Prior to then, they wait - unless they are put under duress.


Fear of being left behind

Moore says that the whole crossing-the-chasm playbook is based on targeting a segment of pragmatists under duress, getting them to adopt ahead of the herd, then getting adjacent herds to follow their lead, building more and more momentum until a tipping point is reached. Then the whole herd stampedes, and the market takes off.

This beachhead group of pragmatic customers is essentially being forced to adopt because they are under severe pressure to act. Unlike the early adopters, it is not that they buy into the vision of how the startup will change the world. It is because their own future is under threat.

Fear of being too early gets replaced by fear of being left behind.


Examples of duress

The history of Tech is full of examples where companies - both established as well as startup - have accelerated across the chasm by leveraging macro-market forces to create a 'pull' effect in the beachhead.

Take cloud computing. The early pull effect was "No need for your own data centre". But the initial stages were very risky for the pioneers, e.g., Amazon was ridiculed for thinking that it could lead the cloud computing market. But they landed a marquee early adopter - the CIA - and then identified their initial beachhead - independent software developers.

Similarly, Salesforce was ridiculed for thinking any rational customer would put their business data in the cloud. Their marquee early adopter was Merrill Lynch and the beachhead was high-tech sales teams. The cloud is now mainstream to the extent that it's all that some young founders have ever known.

Then there was Covid. This provided a unique accelerant on a global scale. In Moore's words: "The pandemic created a flotilla of chasm-crossings because it unleashed a very real set of existential threats.", such as the work-from-anywhere, future-of-work scenario.

There are currently huge macro forces at play across a whole range of markets that are either being created or reengineered. These include Agriculture, Artificial Intelligence (AI), Aviation, Climate, Mobility, BioTech, Quantum Computing, Robotics, and Space, to name just a few.

AI is such a force that some investors are now very wary of any software startup that doesn't have some form of AI strategy or capability.


Finding your beachhead

There are a number of key insights that enable a speedy journey to the mainstream market:

The early adopters who 'share the vision' are crucial partners. They play a central role in providing early product feedback, an initial income steam, and most importantly, market insight. They help identify where the ideal beachhead may be located.

Securing marquee customers at this early stage grabs market attention and boosts credibility with investors. But lingering in the chasm is deadly as it is often a period of high cash burn and limited resources. It is impossible to find enough traction here to drive a sustainable growth strategy, so the pressure is on.

Founders must leverage macro forces to accelerate the crossing to the beachhead and then expand beyond it. For mainstream customers, these forces are why the fear of being too early gets overtaken by fear of being left behind.

And for investors, they are the very same forcing functions that will be used to answer the classic question: "Why now?"



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