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The 3rd conflict in every entrepreneurial company: Market opportunity vs. execution

By Robert Hacker

Robert hackerThis is the third post in a three part series on the natural conflicts in the objectives of every entrepreneurial company. The first post in the series discussed the conflict between revenue growth and cash flow. The second post in the series discussed the conflict between customer versus shareholders.

 Market Opportunity versus Execution

 In a previous post  on The Starting Gate I explained that to successfully scale a startup depends on two factors:

  1. 1. The size of the market opportunity
  2. 2. Execution

Execution determines the speed of revenue growth and the efficiency with which capital is used. The first goal of execution is to achieve product/market fit. Product/market fit is that wonderful moment when a company realizes that there are a meaningful number of real, paying customers in the target market. However, this realization frequently leads to a lack of consideration of possibly more customers in a different, larger target market, wherein lies the conflict between market opportunity and execution.

Execution has become a popular theme in the world of entrepreneurship, in part because it has been re-branded as “business model”. Every writer on business model stresses the importance of product/market fit and provides techniques to achieve it. The most important technique is to meet and talk to real customers about the new product or service. Another popular technique is to “use test” the product with real people and observe how they use the product and compare it with the original product concept. Both are very good techniques to achieve product/market fit, but each technique has an important assumption. The techniques are used with the assumed target market customers. If these techniques produce positive feedback there is a tendency to stop evaluating target market and perhaps miss a larger market opportunity.

To avoid the possibility of prematurely determining the target market and missing the larger market opportunity, some observations may be helpful:

  • * Beware of early adopters. Early adopters are the geeky technophiles who buy products and have the ability to work around any problems they find. A typical customer does not have a “work around” they can use and will not buy the product. Early adopters are great customers but only if the product is ready for the larger market of regular customers.
  • * Products have sales patterns. There is much information available on the web that shows the growth and growth rates of revenue for different types of products, such as successful social media sites, SAAS software and computing devices to name a few. While the order of magnitude of sales may be different because of, for example, different promotion budgets, the slope of the revenue growth curve should be the same. If the slope of the revenue growth curve is different from a large successful company with a similar product, perhaps you have not found the target customer for the big market opportunity.
  • * The 100% rule. I am sure a mathematician could explain this, but every successful company I have seen that has product/market fit in a market of large opportunity grows revenue at 100% or greater for a prolonged period. Perhaps the growth is week-on-week or month-on month or this quarter compared to last quarter or year-on year, but every startup that has found the large market opportunity has a period when growth is explosive and 100% or better. Perhaps if the company is not growing at 100% the company has not yet found the large market opportunity.

To avoid misunderstanding, I think execution and business model are critically important. However, entrepreneurship is really about building large companies, which requires a large market opportunity. Be careful about prematurely determining product/market fit at the expense of missing the large market opportunity.

Robert H. Hacker is the Managing Partner of GH Capital Partners, a Miami-based consultancy specializing in growth strategies, acquisitions and turnarounds for entrepreneurs since 2005. Also, he is an Adjunct Professor of Entrepreneurship and Social Entrepreneurship at Florida International University and previously taught at the MIT Sloan School of Management. He is the author of "Billion Dollar Company: An entrepreneur’s guide to business models for high growth companies" and has blogged for six years at Sophisticated Finance

 

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