Nov 07, 2019

Choosing the Right Startup: Market Disruption and Competitive Advantage

Mike Sienkowski
Choosing the Right Startup: Market Disruption and Competitive Advantage

In my last blog, I shared my view on the nine characteristics that great startups often share. I wanted to pick up on that theme and dive deeper into the first two, market disruption and competitive advantage, in my continued effort to help job seekers find the right fit for their career and personal goals.

Step one, find a start-up that is attacking a large existing market with a differentiated product. That is my advice.

Even better, find a start-up attacking a large existing market that is ripe for disruption. Disruption creates an opportunity to break out ahead of the flat-footed established players. Many great companies over the years have been created with this formula. Think Palo Alto Networks, Arista and Snowflake. Mike Speiser, Managing Director at Sutter Hill Ventures, created a great chart that can help you identify and compare the underpinnings of a successful B2B company using ‘technical risk’ and ‘demand risk’. You can find it in the Clumio launch blog written by CEO and co-founder Poojan Kumar.

When looking at start-ups, particularly in the enterprise space, it is important to identify the competitive advantages of a company in a large market and to evaluate if those are impactful enough to change that market.

Take Snowflake, for example. Founded in 2012, a team of data experts saw an opportunity to disrupt the data warehouse market. That market was dominated by established players like Oracle Exadata and Teradata but no one had yet figured out how to leverage the elasticity, scale, and economics of the public cloud. Snowflake was created with the vision to reinvent the data warehouse bringing together all data, users, and workloads in a single service. That was its competitive advantage and they were able to attract large numbers of customers that could use Snowflake to make better and quicker business decisions using SaaS – effectively disrupting the larger, more established players.

Figuring out if a startup is on a similar path as Snowflake requires the job seeker to do some homework and ask some hard questions. Ultimately, what we want to avoid are what I call “science experiments” and “me too” companies. The former are companies that are building something technically amazing, but they struggle to find viability in the market. The latter are companies that enter into a market without offering any real distinguishing competitive advantages. They tend to stick around but never hit that next level of growth.

The reality is that the startups that are going after a large existing market and that can offer disruptive competitive advantages represent a very small percentage of the startups that are out there. I don’t have any hard math here, but I would ballpark it at <2%. So, do your interviews, ask the founders what market they are going after, how large is that market, do they offer a product which is truly disruptive, and why are they uniquely qualified to win?

If the founders cannot answer all of these questions to your satisfaction you may want to walk away, no matter how interesting the technology.

If you do find a startup that is going after a huge market and has unique competitive advantages versus the competition, you may have hit gold. If your goal is to join an earlier stage startup and be integral during its rapid ascendancy, you may have just hit the motherload. It’s rewarding both professionally and financially and it is a heck of a lot of fun. Of course, you want awesome technological challenges to solve, and wickedly smart people to solve them with, but you have to start with the basics.

Check out this video of new hires at Clumio sharing their experience choosing a startup and why they believe they have hit career-gold.

There is certainly more to it than this, but these are some signals which can help choose the right startup. In my next blog, I will talk about the importance of the founders, the investors and the quality of the early engineering teams.