December 20, 2005 4 Rules for the Practical Entrepreneur There are two types of entrepreneurs in this world, visionary and practical. The visionary entrepreneur has a grand vision for a product. They most likely found this vision while climbing in Huascaran National Park (Peru) or shopping in Calcutta. This type of entrepreneur needs no advice other than follow the dream. They’ll doggedly chase it until they succeed or they end up in the gutter. The practical entrepreneur is a much different beast. This article is for you! Most likely you know you want to do “something”. You long to be your own boss and determine your own fate, but you don’t have a grand vision to pursue. Instead, your looking to put your skills to work in a project that has a good chance at success. Millions would be great, but replacing your salary is just as appealing at least as a first step. This description fits me completely. Before I came up with the idea for HelpSpot I looked everywhere for ideas on what I could do. I had the talent to succeed, but I didn’t have any good ideas. Even worse, I wanted to give myself the best chance to succeed, but how do I find a good market to enter? With HelpSpot off to a good start I thought it might be a good time to share the criteria I developed for picking my product. These 4 rules have done well by me and would be a good basis for other practical entrepreneurs looking to figure out a focus for a new venture. 1. Fragmented Market This is my most critical factor and something I almost never see discussed anywhere else. A fragmented market is the practical entrepreneurs best friend. It’s simple the most important thing to look for in your market research. A fragmented market is one where there are lots of small to mid size companies and where even the big players have stiff competition. There should be no dominant company. No company should have a double digit percentage of the market or at worst low double digits. The reason this is the most critical factor is because of what it represents. First, it indicates that there are customers for this type of product. If you want to give yourself the best chance to succeed you need to enter a market where there are already customers looking for a solution. You don’t want to have to spend a lot of time and money explaining to potential customers why they need a solution for problem X. You want a market where they already know they have a problem and are looking for solutions. Creating markets is the province of the visionary entrepreneur not the practical one. Second, while there is lots of competition there is no competitor who is dominant. There is no competitor who you will always be compared against and have to stand up to. For example, building a piece of presentation software means you will always be compared to PowerPoint, building an image editor means going up against Photoshop, building a search engine means being compared with Google. These comparisons put you in a severe disadvantage. Those are dominant companies with dominant positions in the market. Potential customers already have a clear idea in their head about what those products do and why they’re the best which means you’ll need to do a lot more work to explain why yours is better/different. Third, lots of other companies talking about the market and advertising in the market helps you. It creates awareness for potential customers all without you having to spend a cent. A rising tide raises all ships, etc. Finally, in a varied market there’s sure to be several companies which you compare very favorably against. Hence, you become a best of breed product when compared to these lesser alternatives. Since there’s no obvious product to choose, potential customers will end up taking a somewhat random sampling of the market and you’ll have a better chance at being seen as a best of breed option when compared to a random set of alternatives. 2. Business Before Consumer In general, I would lean towards a B2B model over B2C. Primarily because I think early success is easier in a B2B market. When selling to businesses you’re free to charge more for your product this means you need to attract less potential customers early on to start being profitable. Business customers also have more opportunity for future growth. For example if a business buys 5 licenses to your product and in 6 months they’ve expanded their operations and now need 5 more these additional 5 licenses cost you exactly $0 to acquire and are pure profit. These scenarios are very common in business and much less common in consumer products. Consumer products are also much more dependent on “being a hit”. If you make a utility that sells for $20 then you need to sell at least 4000 licenses to cover your previous $80,000 year salary. While not a huge number it’s still 4000 individuals you need to reach and convert. There’s also little chance of hitting a home run by finding someone who wants 500 licenses at once, which is very possible in a corporate scenario. 3. Clear and Simple Revenue Model You should be able to explain your revenue model in a sentence. “We’re going to sell per seat licenses for $100 a seat and a 15% yearly maintenance fee”. If the product you’re researching would require special pricing then you need to avoid that market. Micro-transactions and the like are the domain of the visionary not the practical. Beyond just being simple to explain you should have a complete understanding of how you would sell the product and your gross margins before you write one line of code. If it’s unclear what approximate price you could charge or what your costs would be in this market then it’s not a good market to enter. It doesn’t have to be down to the dollar but you should know if you can charge $50 a person or $150. Clear and simple revenue models can also provide a competitive advantage over your competition. Older companies tend to have their pricing “evolve” over time into multiple tiers often separated by versions with unclear definitions like “pro” vs “enterprise”. Making your pricing simpler to understand means customers can figure out your pricing at a glance rather than using a calculator and reading 5 pages of marketing hype to figure out the differences between versions. That’s a lot of extra work for the consumer and we all know how people feel about extra work. 4. Dog Food When you’re a small shop there’s not a lot of time for all the functions you need to perform. There’s programming, marketing, testing,PR, and so on. One part that often gets left out is product research. Not just does the product work, but how can it be better. What features would make the experience of using this product superior. When your time is tight, avoiding these issues is an easy way to free up more time. One way to help ensure that at least some of this gets done is to make sure you build a product you’ll actually use on a daily basis (“eat your own dog food”). This way there’s at least some time built right in to your normal day. What features frustrate you, where could you do something better. Because you’re getting the true customer experience you’ll gain more insight into the product than if you just sat down and brainstormed about a product you don’t use yourself.