Venture Capitalist at Theory

About / Categories / Subscribe / Twitter

3 minute read / Jun 16, 2021 /

The Great Game of Risk Played in Category Creation, and Why the Winning Strategy is Aggression

Suppose you’ve started a company that’s creating a category. Most buyers in your target market haven’t heard of your business or the kind of software you sell. There’s no budget line item, no Magic Quadrant, no G2 High Performer Award, no conference.

You have an idea, a vast blue ocean in front of you, and a pile of greenbacks stashed in a bank account from your last financing. Do you spend aggressively to create the category or conserve capital, knowing education will take time?

Parsimony is prudence. New categories form at unpredictable rates because each market has distinct nuances. But is frugality a winning strategy in any of those spaces? In this fundraising environment, I’ll argue probably not.

There’s no time to wait. The company that develops the greatest of customer relationships in the first few years is often the winner. While it’s apparent that customer relationships provide product feedback and revenue, and more of each is better, there’s another critical reason customer relationships are so key.

The first company to reach a prospect frames the buyer’s lens for a long time. The features that matter, the price point and pricing model, insufficiencies in competitors’ offerings. Each subsequent bidder for the business must either conform to that mental model and spar for position within its confines, or exert enough energy and spend enough money to challenge and subvert the first framing. That’s a tall order, and exactly the position a startup should wish upon its competitors.

I’ve watched buyers in new categories. They prefer the best known brand, the one synonymous with the category. They will work with the leader for a few years before deciding to re-evaluate if things aren’t going well, justifying a change with the attitude: “I’m working with the leader in a new category, let’s see how things evolve.”

Imagine a big map of customers, a huge game of Risk. Each time a customer buys software, its color changes and it’s off limits for 3 years. Marketshare in the first 1-3 years dictates marketshare for years 4-6 at least.

The more customers you convert to your company’s color, the stronger the brand, the greater the awareness, the more reference customers, the more capital to raise, the easier to hire and grow. There’s a flywheel spinning in the background that isn’t obvious until the latter stages of category creation. The winner takes most of the spoils.

Product matters. It has to work and deliver value. Distribution is at least equally and probably more important because of this Risk-territory dynamic in new category creation, especially in a market environment with so much cash available.

Read More:

The Productivity Implications of Working from Home Across 150,000 Employees