What Kind of Business Are You Starting, Really?

I meet a lot of entrepreneurs and hear a lot of ideas and business plans from all across the board. Most have -- at the very least -- a kernel of a good idea in them. But many don't know what kind of business they are. There are an unbelievable number of entrepreneurs focused on technology when their entire business model is predicated on the success or failure of a marketing campaign, for instance. This isn't to say that technology isn't important for those businesses, but rather that it isn't the core differentiator that interests investors and makes or breaks the company. If you are running a sweepstakes business, for instance, I don't want to hear about your awesome Rails architecture. I want to hear about how you are going to acquire users for $1.50 and monetize each for $3.00. Sweepstakes (in most forms) is a marketing business, and that is really what a potential investor or partner wants to hear about.

I like to put startups in three categories as defined by the core factors driving their success:

Technology Businesses: The core differentiator of your business is your technology. Generally, your company either (a) has real intellectual property around your technology and/or (b) is founded by leading engineers in the field.

Marketing Businesses: Your business is driven by its ability to acquire and retain users/customers more effectively than your competitors.

Relationship Businesses: Your business's success or failure will be determined by your ability to forge lasting relationships with customers and/or strategic partners.

I've rarely found businesses that are truly driven by some combination of those factors. In most, one factor greatly outweighs all the others. And there are patterns behind misconceptions -- most commonly, first-time entrepreneurs overweight the importance of technology as opposed to marketing or relationships. This makes sense, as an entrepreneur's first goal is often to get a product up. But products are hard to build real differentiation around unless you are doing really innovative stuff, like building new database backends or search algorithms. In most consumer internet businesses, marketing is the most critical component. In B2B plays, relationship-building tends to make the biggest impact. And in general, progress on the core differentiator is what VCs mean when they talk about needing to "see traction."

Want to generate awesome startup ideas? An interesting trick is to identify immature industries where the leading players are focused on the wrong differentiators. My own LabApp is an example of this -- while the existing (immature) players are focused on relationship-building, I happen to believe that software commercialization is a marketing-differentiated business. As with all startups, time will tell if LabApp is on the right track, but looking at "differentiation-based" pivot points can be a great way to generate innovative and revolutionary products in immature industries. Some off-the-cuff ideas:

1) Take a relationship-based approach to marketing-driven social games to piggyback off of major brands' name recognition. This is similar to what Arkadium is doing to much success with the social advergaming concept.

2) Use a marketing-driven model to gain independent adoption to a new CRM software product from the bottom up. Almost all SaaS CRM providers are currently relationship-driven, which leaves open a massive long tail of independent salespeople.

3) Use technology differentiation to pry government IT contracts out of the hands of bloated, relationship-driven contractors. Easier said than done, but someone's gonna make a lot of money from this in the next 15 years.

Happy differentiating.