Startup 101

Find Your Business Niche

Instead of building a generic, do-everything product, find a niche that fits your personal and business goals.

Deep down, most startup founders dream of creating the next facebook or twitter – or Microsoft. While it's great to aim big, too often founders wind up not "aiming" at all. Deciding to create yet another Customer Relationship Management (CRM) system and competing head-on against Microsoft Dynamics CRM and salesforce.com (and many, many others) is probably not going to be successful.

Same with creating yet another Content Management System (CMS), to-do list manager, accounting system, or micro-blogging platform. It's really hard to succeed in a market with so much entrenched competition. If you want to increase your chances of success, you should focus your solution more and find your niche.

What Do YOU Want?
Before determining your niche, you first need to decide what you want out of building a business in the first place. There's no "right" answer here -- your goals aren't the same as mine or Mark Zuckerberg's or anybody else's.

On one end of the spectrum is a desire to build the most valuable company you can possibly build as fast as you possibly can build it. Get covered on TechCrunch. Go through Y Combinator or TechStars. Hit up Silicon Valley for your first round of funding. You might not think of your "exit" every day (when you're going to get paid a ton of money for your company), but you certainly know the potential for a big exit is on the horizon.

On the other end of the spectrum is a desire to build a small company that makes some extra money on the side. You don't have plans to quit your day job -- you just want to build something a few people use and like. You want a cool project to work on nights and weekends. A lot of mobile apps fit into this category, since marketplaces lower the barrier for getting a product to customers.

In the middle of the spectrum is a desire to build a stable company that's profitable enough to let you quit your day job. You don't need outside funding (maybe you're even a bit intimidated by it). You love building great software. You want to build a product that customers love and are willing to pay for. You understand how business works (or are willing to figure it out), and you're focused on profitability more than growth for its own sake. You don't mind growing a small team, but you're trying to avoid the "corporate culture."

These are not cookie-cutter templates. Every company is unique, but it's useful to understand where your personal style and goals fit in this continuum as you attempt to identify your niche. There are countless examples of companies that fit in each category, both successes and failures.

Real-World Examples
I recently spoke with Bo Fishback, the founder of Zaarly. He presented an idea at the LA Startup Weekend in May 2011 and raised $1 million in funding within three weeks. He has a rockstar team behind him that has grown the service to more than 400,000 users in about eight months. The sky's the limit for this incredibly fast-growing company.

Zaarly's niche is name-your-price selling with an emphasis on local geography. Think of it as the opposite of EBay or a less-creepy Craig's List. It's a niche, but it's a huge niche. Only time will tell if Zaarly takes its place alongside eBay and Amazon as a key e-commerce player, but it's easy to see why investors are excited about it.

Patrick McKenzie did something amazing at the opposite end of the spectrum. A few years ago, Patrick spent a week building a product that allowed teachers to hold educational Bingo games in their classrooms. It was a tiny business, but he executed it exceptionally well. He refined the software a bit over time, but more importantly, he got really good at selling it. His techniques for Search Engine Optimization (SEO) were so good that Google even asked him to write a whitepaper.

Because Patrick was consciously building a side business, he chose a very small niche with Bingo Card Creator. One benefit of having a small niche is that he knew exactly who his target market was (elementary school teachers) and how to reach them (AdWords and SEO marketing). Over time, Patrick learned a great deal about his customers, and Bingo Card Creator became successful enough that it allowed him to quit his day job. Now it's an asset that mostly runs itself, and Patrick is focused on new business ideas.

Peldi Guilizzoni was working at Adobe when he started planning his business. He wanted to build a small company that would let him work for himself and make a decent living. He chose to make a wire-framing tool, because he didn't like anything else on the market. It was big enough that nobody could copy him overnight, but it was small enough that he could write it himself. It was valuable enough that people would pay for it, and the market was fairly large but targeted (software developers). In short, it was just the right size niche for his goals.

When he quit Adobe to launch Balsamiq, it was successful right out of the gate, but he wanted to keep it fairly small. Balsamiq now has several employees and thousands of happy customers, but Peldi has no desire to get outside funding and has no plans for an exit. A bigger challenge is reigning in customer expectations so that he can maintain his "family business" vision.

Three different companies created with three completely different goals in mind (which one resonates most with you?), but they all share something in common -- each focused on a niche that was appropriate to their personal and company goals. In its own way, each created a product for a specific kind of customer, instead of trying to be all things to all people.

Be Specific
That's the bottom line: be specific. Don't just build a CMS -- build a CMS for churches or lawyers or music teachers. Don't try to build an end-to-end hotel management system -- build a solution that solves one specific problem that hotels have -- you can always grow from there. Don't duplicate Twitter -- build something on top of Twitter that helps companies make money.

Venture capital firms make big bets in the hope of big returns, so startups that get funded tend to have a big niche. Creating a new payment network or a 3D replicator -- these are the types of ambitious bets that generally get funded, because they require a lot of upfront investment before becoming profitable, and they have the potential for big returns. If you have a big vision and are motivated by big markets, then go for it, but recognize that there are benefits to narrowing your vision and going after a more modest market.

A Tale of Two Zs
Zipments has a name-your-own-price model, just like Zaarly, but Zipments (which came first) is more focused -- it's simply about getting stuff delivered. They're innovating on the traditional business model of courier services. Since Zipments has a smaller niche than Zaarly, they probably won't get the level of funding that Zaarly got,  but they don't need it, either. Zaarly might have a bigger upside, but I suspect Zipments will have an easier path to sustained profitability. They have a simpler story that should be relatively straightforward to execute and maintain. One business isn't better than the other; they're just different.

How to Find Your Niche
So, how do you find your niche? In general, you look at a space you're interested in and talk to customers until you find something people will buy. If you're a consultant, you might look at your custom work for product opportunities. Keeping in mind your personal goals for the kind of company you want to build, here are some specific ways to take a broad idea and focus it to find your niche:

  • Target business customers or consumers, but not both. This is a basic product decision: will most of your customers be paying with a personal credit card, a company credit card, or will they expect an invoice?
  • Focus on a vertical market (a specific industry or type of customer). If you're bent on making a better CRM, consider making a better CRM for a specific kind of person like drug reps or a specific industry like health clubs or political campaigns.
  • Focus on a smaller slice of a horizontal market (across a wide range of industries and customer types). Sticking with the CRM example, consider focusing on pipeline management or data scrubbing or high-value professional users.
  • Build on a platform, especially one that has a marketplace. Building on a platform helps you focus on the value you provide to customers instead of "plumbing." The obvious platforms from Microsoft all have Windows in their names, but Office and Outlook are platforms as well, as are SharePoint and the Dynamics products. And of course, there are many competing platforms.

Building for a marketplace makes customer discovery and distribution easier, which is why building a Windows Phone app is a great way to start a business -- the form factor itself forces you to focus. Windows has always been a great platform, and the Windows Store will make it even more compelling for Windows app developers. Windows Azure is the platform I'm focused on in my day job (if you're building a business on Windows Azure, please let me know!); you might not know, but it has a marketplace as well. And there are hundreds of companies that offer vertical solutions on top of Dynamics CRM and SharePoint and Office 365 or augment them with key horizontal functionality (and both have marketplaces).

Evolving Your Niche
Over time, your niche will evolve as your company grows. IDV Solutions built its flagship product, Visual Fusion, on top of SharePoint. Instead of building all the plumbing that SharePoint provides, they focused on their niche -- making business intelligence light up with great visualizations (and whenever IDV sells their solution, they're also "selling" SharePoint, which makes them a valuable partner). They started with a horizontal product, but as they've grown, they've introduced solutions for vertical markets and highly targeted problem areas, essentially targeting several niches with more specificity than their horizontal product. They've also introduced completely new products in their space (targeting new niches), including Fetch on the Windows Azure marketplace. But they started with one.

You have to start somewhere. Whether you want to be big, small, or somewhere in the middle, find a niche that fits your personal and business goals.

Next month, I'll talk about pricing.

What about you -- do you want to aim big, get funded, and grow fast? Build a project on the side? Or bootstrap a stable, profitable business that you can run for the next ten years? After you decide that – what space are you most interested in and how are you going to find your niche within that space? Let me know in the comments, on twitter (hashtag #startup101), or by emailing me at Patrick.Foley@microsoft.com.
(Note: I've interviewed Peldi from Balsamiq and Bo Fishback on the Startup Success Podcast with Bob Walsh)

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