How does classic marketing differ from the marketing of a startup? Which tools to use to test the hypothesis? Where to take the information which will help to convince an investor, even if a startup does not have resources for the scale research?
Alexander Drobyshevski — the author of market evaluation methodology on the Rocket DAO platform — answered Andrew Miroshnichenko’s questions about markets of disruptive technologies and disruptive products, ecosystem-based approach to the market and evaluation criteria used in his author methodology.
— Tell us a little bit about your experience as a marketer, why did you become interested in startups and venture?
The important thing we need to understand is that classic marketing and marketing in the modern venture market or a startup community are completely different. Classic marketing as a business function is one of the fundamental and permeate functions; on their basis, the company builds up its work and makes business decisions. On a startup market, the concept is narrower: “we pumped in the market” = we invested in the advertisement, in other words only half of the function is used (payable traffic, offline-adverts). Accordingly, I have been working in marketing as in a business function for a long time (more than 17 years) in various industries, and have experience in evaluating various working businesses and internal undertakings. As for startups — nothing new happened — all the internal undertakings of companies were also called startups and did the same things: formed teams, wrote a business plan, defended it, carried out market analysis, built a financial model, etc.
I was interested in building the infrastructure for a startup, the ecosystem (where it came from). By the way, it is interesting what came first — the ecosystem solution (incubators, accelerators) or a startup itself. If you recall the history, many companies organized competitions between projects with a prize for the winner — these are also essentially startups. The only difference is that they did not form an ecosystem. And as soon as the ecosystem began to develop, then the market became interesting. I am interested in new technologies: in management, in building small teams, in testing the market. There is a technique in marketing — market testing, when you make a product, even if it’s damp, and roll out to a small geographic market. Depending on the result, it is being developed and rolled out to the following regions. The same principle will apply if to compare with a startup prototype.
— Which approaches to the evaluation of the startup market perspectives are the most widespread among professionals who specialize in market analysis? As for you, which of them are the latest?
As soon as the prototype comes out, itis an active market analysis on the finished/semi-finished product. All other manipulations are a preliminary refinement of hypotheses. In general, marketing analysis itself is a preliminary hypotheses refinement.
There are 2 approaches on the market:
— What is the philosophy of your approach to the evaluation of the startup market? Why did you choose such a variant, not another one?
The classical approach is not only to the startups: market is market, whether for the already existing companies or for the new startups, the conditions are the same. The basis of the approach is to describe the market itself, as in details as possible. We have a market type, its size, the competitiveness level and rules with barriers, which have to be followed. If an existing business or a startup, which is launching on the market, doesn’t know these characteristics and rules — it is unacceptable. First of all the rules — that’s where it all starts.
— If a startup does not have resources to conduct a scale marketing research, what is the sufficient minimum, that will give the analytics an understanding that a startup has perspectives? Where to take the information about the market type and other characteristics, and how to convince the investor that this data is valid?
Today this information is more available, than it was before: there are competitors, there are overviews of consulting agencies and current market players — it is possible to find information (of course, if not to take the format of the highly protected markets, when you need to find primary sources — people, who work on those markets).
There are two sources of information: primary — from the market players, secondary — the one, that was gathered for special purposes, most likely, different from your research, but this information exists. On different pitches, experts always can ask you — “have you ever talked to your customers?”. Actually, it is the first thing a startup should do — to talk with customers: they do know for sure what companies they work with, what existing products and services they use (this relates to the information sources).
From the evaluation point of view — we proceed from what the startup represents on its pitch deck. There is always a mandatory slide about the size of the market and the sources where these figures come from. The second mandatory slide is a comparison with competitors. A startup should make a comparison with at least 2 or 3 main competitors in its niche. To assess the quality of the comparison, there are always parameters in the presentation, they must be adequate for the target audience of this service, this is already one of the parameters of the quality of the analysis conducted.
The next thing that will be required at different stages of investing and developing a startup is a promotion program. When a startup clearly understands which channels to use for promotion, and especially if it includes channels not only for the final users but also for the infrastructure as a whole, it means that startup understands what are the rules of the game for the market that it is entering.
Also, one of the required slides is the financial model. There is a section “Expense part”, if it is disclosed correctly, the entire ecosystem of this market will be easily disclosed there as well.
— Tell us in details about your criteria of market evaluation, what is considered as a good market perspective for a startup, according to your methodology?
Let’s have a look at all the sections.
Market type. If a service or a startup product has all the prospects to go global (that has no prejudice restrictions on religion, countries, regions) — it is a potential. It is especially interesting when it is calculated: for example, if out of 7 billion people, 1 billion are market users — that’s awesome. The market growth rate is another important, but more complex parameter. If you see that the market is growing by more than 10% per year, then this is a good signal that you can “fit” into this market. Of course, there are large and successful startups that were pioneers on the market, but this is rather an exception to the rule.The point is that when startups go to the growing markets, investors realize that now is the right time to invest in projects in this market.
Market size. It is important to understand that the market size is measured in people or in money (quantity of people multiplied on the average purchase cheque, and multiplied on the quantity of purchases at a given period). The startup has to understand its audience: not only its demographic characteristics, but more important factors: psychographic and behavioural ones. For instance, “women aged from 27 to 45, married, with 2 or 3 children, who take care of their appearance and health” — this is a clear audience definition: globally, we can count how many people of such category are in the given countries. If a startup says “Our audience are people, who are interested in cryptocurrency” — it is hard to estimate how many of them are there in reality.
Level of competitiveness. On the slide with comparison concerning competitors, any startup will exalt itself above others. They do not always take the strongest competitors for comparison — this is a big mistake. The level of competition is one of the most important factors in making an investment decision for both an existing business and a startup. If you are “pushed” from all market sides (that are more than 3 in the market according to Porter), and you cannot control them, then it is better not to go to this market — there will not be enough experience or resources for effective work.
Market access. It is always very useful for the investor if a startup has a certain competitive advantage that will last a considerable time (patent, agreements with suppliers, consumers, legal protection, etc.). This is important in the long term, as copying the solution is a simple thing to do: any existing market player can copy the solution of any startup with a difference of no more than six months or suffer on their own, and then buy the same startup with this technology. Accordingly, if a startup wants to sell the technology, this parameter is not that important. Also, if a startup plans to develop further as a business, raise several rounds of investments and become a public company, this must be taken into account.
— There is a concept that a startup is a business with the untested business model. How to evaluate disruptive technology or disruptive product markets? As there are no prototypes on the market. What should a startup do to convince a specialist in evaluating its market prospects that it has these prospects if it focuses on disruptiveness?
In my methodology, the last parameter works for this — unique competitive advantages. But the methodology cannot predict disruptiveness as the disruptiveness comes out from several conditions:
A startup should think about it but the question is whether a startup is competent enough to think about it. When we evaluate the level of competition according to my methodology — not only existing ones but also rookies, suppliers, substitute goods, competitors — with a deeper analysis of these factors, we can come across some kind of disruptiveness and some problems of existing interactions.
— Let’s assume that we have two startups: one is “masterminding” some technology and do not think about its usage, second — a team of great professionals, who decided to create a project regarding the knowledge of their market, and according to this niche, they are looking for a product or technology. Who, as an investor, are you more willing to invest in? How do you think a startup should move on — to identify a niche and “mastermind” technology for it or to make technology and seek its application?
Unfortunately, there is no better approach — everyone will act in a certain way, based on their experience and competencies, and it is difficult to remake a person with his focus. As for investments, in both cases, it can be profitable. A team of businessmen and marketers will achieve the result faster, but I wouldn’t reject the approach from the point of view of technology — the thing is that such a team should have a person who will be responsible for the commercial area.
— In startup life, there are various disciplines related to the promotion or testing of hypotheses (growth-hacking, tracking, unit economics, lean startup, the formation of value proposition according to Osterwalder, etc.) that allow you to test the relevance of the product on the market. Which of these tools are best to use by a startup to formulate and test market hypotheses?
All of these methods are classically rephrased. I adhere to the traditional approach — I distinguish several stages.
The first stage for a startup is an idea. The idea must be materialized, i.e. one must create MVP. Based on my experience of attending various events, I see that at first they “do something”, and then they are taught everything that you listed. I think differently: first, you need to implement what you can show (MVP, mockups, etc.). Even at this stage, you need to undergo basic training in classical marketing (consumer, needs, marketing complex, segmentation, positioning, etc.), go through elements of design thinking, and only after that reach some value.
After that, the startup should clearly understand the business model. Yes, we use Osterwalder — so that the startup itself understands how this “wheel” will spin. Often he understands that he did something, but how to connect other market players — he does not understand who will help him and who will hinder him, too. Another important thing according to Osterwalder is the monetisation zone and the expense part. Only after that, understanding how the business (and not the technology) will work, a startupper (a project leader) can come to the formation of a light version of the financial model.
— You are known as one of the authors of the concept of a disruptive, ecosystem-based approach to the market, where the main idea is a global idea. Please, tell us about this approach and explain, what can we consider as a strong startup according to this approach?
All evaluative things that can be evaluated (models, approaches, scales) are evaluated more on the correctness of the hypothesis and the adequacy of the way of thinking of the project leaders. There are 2 things that are not in the evaluation as it is quite difficult to evaluate it technologically:
— Is there something else you want to add at the end of our conversation?
I would like to tell about the ecosystem. Often project leaders give up on the analytical part, especially on the market and consumers analysis and on the comparison with competitors. It’s difficult. At this moment, mentors need to be very carefully prompted or even assisted, show how this is done so as not to put them in a state of hatred to the process. As the function of marketing analysis is constant for business: you need to periodically monitor what is changing, what new items are coming out, track the changes in social layers, the appearance of new barriers and much more.
— Continue the phrase: “Startup, remember that…”
The idea is what will drive you further on.
Author of the article: Andrew Miroshnichenko, Head of Experts, Rocket DAO
Editor: Valeria Laskova
Translated by: Dmytro Basok