Strategic Startup Scoping
Recently I was chatting with a founding team who had been asked by their investor to broaden their business scope to span several vastly different industries as customer targets. Their questions reminded me of how critical and challenging it is to determine the right strategic scope for a high-potential startup.
The very beginning of a high-potential startup always starts small (for example, remember that today’s nearly $2T Google started out as a search algorithm). One or a few co-founders develop an idea they believe is worthy of becoming a company. Then a step at a time, they grow the idea into a company. Sometimes they can bootstrap it with their own resources. Sometimes they need investment to achieve their goals. What is ultimately required depends on the idea’s nature, scope, and ambition, the hurdles that must be overcome to bring it to market, and the resources the founders have available. This is the essence of the strategic startup scoping problem.
Choosing the right scope for a given business opportunity involves finding the right balance points along several dimensions. For example, one dimension is often determining who to target as customers. Deciding to narrow one’s focus to particular industries or subsets of industries will often enable a startup to focus on the distinct needs of a specific group of customers and strive to excel in meeting those needs. Expanding the focus to multiple industries or broader groups of customers often means being forced to find a common unmet need across distinctly different customer groups and raises the potential for failing to delight any of the customer groups.
Another dimension might be where to draw the line around the elements of the solution your startup chooses to supply versus perhaps leaning into industry standards or market leaders to deliver some product component. A simple example of this scoping problem is the choice that most designer lamp makers make to use standard light bulb sockets so that their customers can buy the consumable portion (the light bulb) from a “light bulb maker” and allow the design-intensive lamp makers to focus on making spectacular lamps without worrying about supplying bulbs. Of course, some lamp makers might choose to craft and sell a specialty bulb to go with their lamps to create an unusual effect as well as a consumable revenue stream. The choice to scope the business to include both elements of the value proposition will narrow the potentially interested customers and increase the manufacturing and business complexity as the company needs to be able to build, sell, and distribute both lamps and bulbs. The choice to leverage industry standard light bulbs is simplifying both for customers and for the business. Hopefully, these examples begin to highlight some strategic scoping questions that high-potential businesses must tackle to find the best position for their particular opportunity. The one thing I know for sure is that a startup’s strategic scope is a big question and often drives both the scale of the opportunity and the amount of risk and investment required to realize it!
Because the strategic scope often impacts the amount of investment required to build the business, investors often form strong impressions about what they consider to be the types of strategic scopes they think will become the kinds of successful businesses they want to back. Especially if the founders choose to raise venture capital, eventually, there will be discussions about the size and scale of the idea, typically with investors pushing for something that will be a “platform” of some sort or a “portfolio” of related products that can support a big, high-growth business. For investors looking to fund high-growth, potentially large-scale businesses, these preferences make sense, but they also come with costs.
Decisions about the scale and scope of what the team is trying to build are critical. Biting off too much too soon can drive the burn higher than the rate of progress can fund and kill the company. Focusing too narrowly can mean an idea can never gather the resources or address customer needs sufficiently to become self-sustaining. Expanding the scope of what the team is seeking to deliver beyond what the target market demands can mean wasting a lot of investment capital to build something ultimately not valued by either the customers or future strategic acquirers.
Case Study A: Back when I was building Accuri Cytometers, a life science tools company that developed a better, faster, cheaper flow cytometry instrument, many were the conversations I had with various potential and actual investors about the merits of developing our instrument to only use proprietary reagents that we would develop. Many investors advocated for such a razor plus razor blade business model. In this classic model, the razor is a relatively expensive one-time purchase (like our instrument) that also locks customers into purchasing consumable razor blades over time (like proprietary reagents). This approach had been tried unsuccessfully by a previous attempt at developing a personal flow cytometer that could only be used with proprietary regents offered by the instrument manufacturer. While it seems like a great business model (look, everyone, recurring revenue!), it was not because the proprietary reagents presented an enormous issue for the initial target customers. When you asked potential customers about their needs, you quickly learned that most of these research scientists had developed a considerable body of research based on a set of protocols using standard reagents they had created and validated over the years. While not impossible, asking them to change their protocols risked the continuity of their research as they would have to develop and validate new methods. The customers did not want to commit to an unproven startup’s proprietary reagents, and sales were anemic. Ultimately, the company failed to gain much traction and sold for less than one times revenue.
At Accuri, we faced investor pressure to pursue the same razor plus razor blade (instrument plus consumable proprietary reagents) business model. I even had some investors decide not to invest because we decided to build a powerful, easy-to-use, individual lab affordable instrument that used standard reagents. It was the right strategic call, however, because using generally accepted reagents available from several providers of such made the adoption lift for our novel instrument much lower and the sales process much easier by allowing us to quickly and clearly demonstrate that our less expensive tool could deliver at least the same performance as our competitors’ much more expensive analyzers in a head-to-head same sample on-site comparison. Part of the strategic decision was opting out of the expensive, lengthy, and risky undertaking of developing an expansive library of proprietary reagents. It would have taken years and millions of dollars to build an extensive enough reagent portfolio, delaying our product launch and reducing our addressable market to only those willing to change their science methods. And while investors loved the idea of a recurring revenue stream, many of the most likely strategic acquirers were unlikely to value adding new proprietary reagents that competed with existing standards and did not have wide adoption. Ultimately, the market leader who acquired Accuri for 10x revenue already had an enormous existing library of reagents and was looking for a general-purpose flow cytometer to leverage their investment in building and maintaining that library. They were not looking to add a proprietary system to the mix that complicated customers’ lives or their own inventory management. So, while razor plus razor-blade is a nice concept in some businesses, it needs to be evaluated against the specifics of the market opportunity or it can prove to be a waste of investors’ dollars and the startup’s time.
Case Study B: Fast forward, and now I am building a healthcare clinical analytics tech startup, and the same core question is being examined. This time it is a software term (a “platform”) that embodies the idea of creating a broadly-scoped product. The platform concept is popular among investors because it implies that a startup can collect and monetize many different value streams. Examples like Amazon and Facebook quickly come to mind as startups that started as narrow concepts and evolved into platforms now supporting billions of dollars in business. If you have an idea that lends itself to going public and building a business of massive scale, then architecting a platform makes good sense – and requires significant investment resources.
In our case, the general idea seems to be to gather a whole bunch of analytics and combine them into a singular clinical analytics “platform.” The challenge is that clinical analytics are used by doctors and nurses who are specialized. For example, some address problems in the brain. Others address issues in the heart. Still others address problems in the gastrointestinal system. Naturally, the clinical analytics that can be applied to these different body systems are different just as the similarly specialized clinician-customers are. Combining a bunch of analytics that do not target the same body system and, therefore, the same target clinicians makes little sense to the customers, even if it seems like a good idea to bundle more “things” into the product scope in an attempt to create a general-purpose platform. Furthermore, most large medical device companies who are potential strategic acquirers also target specific body systems for the same reason, aligning with the customers’ interests.
For us, since we are targeting a specific unmet need, providing an early warning of patient deterioration with a clinically valuable lead time as an improvement upon vital signs, perhaps it is more important to play well with the other systems and platforms already in use within the hospital so that we can achieve wide deployment and minimize the barriers to adoption of our novel analytics. While our business strategies are still evolving, I am keeping my eyes on the twin goals of being laser-focused on what our users and customers are telling us would be valuable to them and thinking about what our likely future potential strategic partners already have (typically an integrated set of hardware and software products that already form a platform of sorts that they want to increase the value of). Does investing in assembling and building a competing platform make the most sense? It requires replicating many existing capabilities to become a viable alternative and then convincing customers to abandon their current investments and switch, which is a tall, expensive order on many levels (investment dollars, development time, switching costs, etc.). And, even if you did it, are the likely strategic acquirers going to value the duplication, or will they be looking for the unique assets that burnish their product offering in the marketplace? A coherent set of customer-valued analytics coupled with a capital-efficient, integration-friendly system is perhaps the best balance for now. We shall see as we grow.
All of this background was brought to mind when I recently talked to a founding team whose investor was encouraging them to take their artificial intelligence technology and demonstrate its applicability in other industry verticals to demonstrate that the technology represents a “platform.” They already have manufacturing and retail customers and valuable use cases. The investor is pushing for exploring the development of a healthcare-targeted product, which has a very different and demanding set of requirements. My recommendation to them was to engage their investor in considering future potential strategic acquirers and examine whether their businesses include the full scope of target applications under consideration or not. If not, then it is unlikely that a potential acquirer will place great value on applications that do not fit into their own strategic scope. Of course, a now wide-ranging tech company like Google might value several different applications of a technology platform, however, there are very few potential acquirers that are so broad. Therefore, you must decide if it is worth risking such broadening investments. Good luck, founders!
