Growth Startups–where is the market and how to take over and win the race?

We are all after growth Startups. We keenly desire that customers will rapidly switch to the magical innovations of startups, resulting in skyrocketing revenue, profit, and valuation. Unfortunately, most startups do not experience this dream growth; 90 percent die before celebrating their 3^rd birthday. However, one in a million shows such a dream pattern, growing your investment by more than 10x over ten years. From humble beginnings, they surpass incumbent behemoths, making their markets far bigger than those high-performing behemoths used to serve. Consequentially, their revenue, customer count, profit, and market capitalization surpass records of the industry’s best performers by many folds.   Hence, there has been an intense search for this rare species when investing in startups.   

What has empowered Sony, Apple, GE, Microsoft, TSMC, and Spotify to join this rare species group? Did they burn billions of dollars of investment funds to subsidies for alluring customers to buy their innovations? Unfortunately, No. Ironically, there has been a new doctrine of increasing valuation through subsidies without detecting and following reoccurring patterns. Billions of dollars in investment are being burned in offering subsidies for showing skyrocketing growth of startups—creating loss-making unicorns.

In creating growth startups, the focus has shifted from managing the Innovation life cycle and diffusion through different market segments and gaining market power through sustaining innovation to raising funds. Hence, the growth stages of startups are now wrongly defined by the source of funds for buying customers; for example, FF&F and Angel funds are for the early stage, and the Venture Capital Funds are for ramping up. Such a fund-burning approach to defining startup growth stages appears to be a highly toxic growth thesis. Consequentially, in search of growth startups, investors and entrepreneurs are being wrongly guided with the agenda of raising funds for giving subsidies to expand the market of startups’ products. Hence, this article attempts to shed light on the reality of creating growth startups by attracting an increasing number of customers and gaining market power through leveraging technology and innovation possibilities.

Key takeaways

Three growth stages—(i) developing technologies and penetrating the nonconsumption market, (ii) taking over the mainstream market from incumbents’ matured products and facing fierce competition, and (iii) winning sustaining innovation race for monopolizing the market and innovating for the overlooked market segment.  

Moving away from funding-centric stages—growth stages from the perspective of funding sources like the early stage are funded from FF&F and Angel fund, VC funds the ramping up stage, and operating profit takes care of slow growth of matured stage deviate focus from advancing and leveraging technology possibilities, meeting varying customer preferences and dealing with competition to raising fund for expanding market—often, through subsidies.

Preparing for appropriate responses—knowing where you are along the continuum helps you understand varying product requirements, technology advancement needs, competition responses, cash flow situations, and funding requirements so that you can prepare accordingly.   

Questioning frequently given suggestions for forming growth startups

Turn the spark into high-value innovation

It’s well understood that, invariably, all growth startups begin the journey with a flash of insight. Hence, the suggestion has been to undertake extensive development to turn the idea into a solution to a meaningful problem, ensuring product-market fit. Research suggests that lack of product-market fit (PMF) is the top cause of startup failure or slow growth. According to some studies, 42 percent of startups fail due to this cause. Their offerings are not superior alternatives to enough people to get their jobs done better. Of course, that makes sense.  However, here are a few pertinent questions:

1. Do latent potential and maturity of technology core play a role in improving PMF?
   1. Do all customer segments demand the same level of maturity of the innovation?
   1. Is it realistic to target product-market fit to mainstream customers at the beginning?
   1. Does the availability and access to the market for the initial offering, which will likely be rejected by mainstream customers using matured alternatives, play any role?
   1. What are the primary customer groups of the products of growth startups? Is there a typical pattern to identify them?
   1. Is there a coupling between the growth of an idea or innovation lifecycle and adoption by different customer groups?
   1. Is there a role of competition response affecting the life of PMF?  

Begin with a scalable idea that attracts funding

For attracting funding, the standard advice has been to start with scalable ideas. However, to demonstrate scalability, the initial flash should be refined; preferably, a prototype should be developed to assess product-market fit. As outsiders are not interested in providing risk capital to demonstrate scalability, the suggestion has been to marshal the savings of founders, family members, and friends (FF&F). However, here are a few pertinent questions to demonstrate scalability:

1. As scalability depends on ensuring PMF to different customer segments, is demonstrating that the product fits all related market segments feasible?  
2. As scalability depends on refinement and fusion of technologies, is FF&F good enough?
3. Upon showing PMF to the nonconsumption market, is there a risk of suffering from misleading early progress and getting caught in a chasm?   
4. Does early progress in demonstrating scalability run the risk of fueling hype?
5. Does apparent non-scalability at the early-stage risk avoiding future scalable growth potential?  

Hitting sale milestones for raising venture capital funds to scale up growth

Upon showing the sign of scalability through FF&F, the suggestion has been to raise VC Series A funds. The primary focus is to expand the production and sales capacity to meet sales milestones. However, such an approach raises the following questions:

• As sales depend on increasing the willingness to pay through continued refinement of the products, does the expansion of sales drive run the risk of premature scaling?
• Due to the pause of technology progression and the advancement of externalities like infrastructure, is there a possibility of getting caught in a chasm, resulting in wasteful investment for scaling up production and sales?
• Does focusing on hitting sales milestones through sales team expansion run the risk of offering subsidies for creating a customer base to show scale?

Late-stage financing for growth startups—showing the growing profitable revenue

The time has come for the growth startups to show scalable, profitable revenue. It’s preferable that upon showing demonstration with FF&F and developing infrastructure and sales team with Series A financing, growth startups should be financing part of the growth with profit. There is increasing pressure to show a highly profitable revenue growth trend for securing Series B VC financing. At this stage of developing growth startups, we face a few questions:

• how far has the potential growth startup developed the capacity to fend off competition by releasing successive better versions and patent portfolios?
•  how far has the barrier been created to switch attempts of incumbents to the rising wave of reinvention pursued by the growth startup? 
• how far do growth startups succeed in winning the race and gaining market power?
• how far is it feasible to overtake the mainstream market of matured products and make the innovation suitable and affordable to previously overlooked market segments?      

So far, conventional suggestions focus on raising funds from different sources and expecting that the hard work of the founding team will lead to growth startups. However, the reality appears to be far more complex than raising funds. Here is a snapshot of growth startups’ major market segments and the challenges of exploiting them to make growth startups.

Market segments for growth startups

Growth startups have been on the journey of offering alternatives to matured products by reinventing and changing matured technology cores with emerging ones.  There are three major market segments for growth startups to penetrate and scale. The risk-based innovation diffusion model is inappropriate for figuring out how reinvention diffuses through different market segments. Although risk perception and management abilities of varying customer groups create time-dependent responses to adoption, the main factors are economics and varying requirements of various customer segments.

1. Nonconsumption segment—irrespective of the greatness, invariably, reinventions appear as a primitive alternative to matured products. Hence, the mainstream market will reject them at the early life cycle stage. However, due to their uniqueness, such primitive alternatives could be attractive to the nonconsumption market segment. For example, in the 1970s, digital imaging products were interior to matured film. However, satellite imaging platforms found them better alternatives to film due to the possibility of radio transmitting images in real-time, saving days and the cost of retrieving film cameras from midair or ocean. For early-stage growth, the presence and access to nonconsumption are essential for growth startups. Unfortunately, startups from all countries do not have equal opportunities in the nonconsumption market to support their growth at the early stage of reinventions. As, often, the military market forms the nonconsumption, American startups experienced higher growth during the early stage of the life cycle of their reinventions.

• Mainstream customers using matured products—to be a better alternative to matured products for attracting mainstream customers to switch, growth startups must overcome the quality and cost barrier. For example, although satellite imaging platforms started switching to digital imaging in the mid-1970s, it took another 20 years of technological advancement to make digital cameras attractive enough for individuals and households to begin replacing their film cameras. Hence, technological advancements in improving quality and reducing costs are critical to showing high growth in the startup market. Unfortunately, instead of through technological advancement, many startups in the 21^st century have been trying to take over the mainstream market by giving massive subsidies to their inferior alternatives. Hence, there has been exponential growth in the VC funding needed to create growth startups.

• Market segment unreachable or overlooked by matured products—the last phase of growth shows up from the success of making reinventions suitable for the market segment, which matured products could not penetrate due to quality, cost, and other barriers. For example, billions of people have adopted digital cameras instead of millions of customers for film cameras due to the uniqueness and amenability of the progression of the underlying technology core and the offering of the digital camera as a feature of mobile phone handsets. Consequentially, digital cameras have far higher market size than their older film counterparts.  

Managing technology possibility and uncertainty

As explained, a growth startup faces the challenge of finding a nonconsumption market and making its reinventions attractive for that market segment. By the way, no technology became suitable for powering reinventions to serve the nonconsumption market right after its invention. Hence, growth startups face the challenge of refining inventions and finding and penetrating the nonconsumption segment to create the market in the early life cycle of their reinventions.

Besides, contrary to the risk model-based perception about how innovations diffuse, the mainstream market will not adopt the reinventions that the nonconsumption market happily adopted. Reinvented products must grow in quality and cost to make them suitable alternatives to matured products used by the mainstream market. Hence, the growth startups must progress the technology further to fuel the advancement of their reinventions. However, not all technologies show typical S-curve-like growth patterns. In some cases, technologies may pause and require significant scientific discoveries to progress. Besides, multiple competing technologies have been reinvented to take over the mainstream market. Hence, growth startups must succeed in dealing with technology uncertainties to experience growth by alluring mainstream customers to switch from mature products to reinventions.          

Dealing with hype and facing the crossing the chasm challenge

Due to early success in the nonconsumption market and potential big mainstream market, invariably, growth startups suffer from hype. On the other hand, there has often been a very high requirement and willingness to pay gap between the nonconsumption and mainstream market. To overcome it, technology maturity serving the purpose of the nonconsumption market needs to experience a big jump to make reinventions suitable for the mainstream market. Due to this reality, growth startups face high technology development barriers to expand in the mainstream market, creating a chasm in market penetration or innovation diffusion. Growth startups must focus on technology assessment, internal R&D capacity development, technology acquisition, and ecosystem formation to overcome it.

Winning the race for succeeding as growth startups

The underlying reason for the success of growth startups in diffusing their reinventions in all three potential market segments has been due to the scope of improving technology cores in making reinventions increasingly better and cheaper simultaneously. Such an opportunity fuels the entry of competitors and race among them to generate a Flow of Ideas, creating the sustaining innovation challenge. Hence, growth startups must anticipate this reality, take necessary preparations accordingly, and succeed in releasing successive better versions. Besides, such a race leads to the winner taking it all due to the winner’s success in offering the highest quality at the lowest price.

As explained, the success of startups to be growth startups depends on these critical factors: (i) the size and nature of market segments and the likelihood to be served with the reinventions of matured products, (ii) the amenability of the technology core to progression for improving quality and reducing cost, and (iii) ability to sustain innovation and winning the race. The uniqueness and latent potential of technology cores and their exploitation in improving the quality and reducing the cost simultaneously fuel the diffusion of reinventions, thereby, powering growth startups. Unfortunately, instead of advancing technology core to fuel diffusion, there has been a focus on offering subsidies to premature reinventions to create growth startups—giving them unicorn titles.