In the hyper-competitive world of startups, it is critical for startup founders to intensely focus on maximizing their growth. Without rapid growth, the ability of startups to attract continued investor funding until they achieve profitability is severely limited. Indeed, it can be a vicious cycle where slow growth startups inevitably lose investor funding which thereby reduces their ability to make technology upgrades needed for growth.
As such, when startup founders identify a customer segment that has a willingness to purchase their product or service, they need to capitalize on that product-market fit. Without it, they may not be able to achieve the profitability required.
In many respects, startup founders’ laser-like focus on an identified paying customer segment is one that has been time tested to work. Without a sufficient customer base, a fledgling startup is bound to fail. However, with that laser-like focus, there comes a cost, particularly after a startup has achieved profitability and a sizable customer base.
While many would point out that today’s startups have adopted the “growth at all costs” mindset, that mindset has taken a hit recently thanks to the downturn. Thanks to the changing downward economic conditions, startups are now focusing on traditional financial metrics such as profitability and cost optimization. Critical metrics in these uncertain times.
Many would wonder how a laser-like focus in these uncertain economic times would be detrimental to a growing startup headed towards IPO. The reality is that while a laser-like focus on the core customer base is crucial at the beginning of a startup’s lifecycle, too much of a focus on the core customer base later on during a startup’s lifecycle may be extremely detrimental to their growth and sustainability.
If one looks at the total addressable market (TAM) of a startup, while for many startups it may look like a homogeneous amalgam, the reality is that the homogeneous amalgam is highly fragmented. Indeed, if one truly thinks about the inception of a startup’s total addressable market, the reality is that it is, at best, an estimate versus a concrete truth. As such, startups need to be cognizant that as they determine their true core customer base, it may be made up of many different customer segments?
So what does this have to do with the classic 80/20 rule? Otherwise known as the Pareto principle, it states that 80% of the outputs results from 20% of all inputs for any given event (https://www.investopedia.com/terms/1/80-20-rule.asp). As startup founders must determine how to manage the thousands of decisions that they need to make at the inception, the reality is that as they start seeing success, they sometimes forget about the Pareto principle and how it must be continuously applied and updated.
Why is this a topic of criticality now? While many could state that the growth of startups is being disrupted by the unsettled socio-economic conditions that civilization is encountering at the moment, the reality is that startups are failing to effectively apply the Pareto principle as they attempt to achieve their total addressable market.
The perfect example of this failure is the cryptocurrency industry. While on one hand, the cryptocurrency industry has applied the Pareto principle perfectly, it is facing a reckoning as to whether it wants to further achieve its total addressable market or stay content with its current core customer base.
There is no doubt that the core base of the cryptocurrency industry are in many respects “true believers”. It is from these evangelists that we have unique cryptocurrency terms such as HODL (“Hold On For Dear Life”) that not only signals the fast and loose nature of the cryptocurrency industry but also the exclusive nature of the “club”.
Indeed, if you talk to those in the cryptocurrency industry, it is an industry at a crossroads. That crossroads isn’t only due to more regulatory and government scrutiny but also whether or not it wants to address the needs of the other 80% in its total addressable market.
There is no doubt that since its inception, the cryptocurrency industry has found its core customer base. These individuals wholeheartedly believe in the value proposition surrounding cryptocurrencies even in the face of the massive declines that have occurred. The question now though is whether or not wants or even desires to pursue the other 80% of their total addressable market.
Whether it is a startup or an industry, the desire to pursue the other 80% of a potential total addressable market isn’t as clear cut as it may appear. While investors and advisors may desire the pursuit of the other 80% for purely financial reasons, startup founders and their core customer base may not for a variety of reasons.
Some startups and industries may be able to draw a greater and greater portion of the total addressable market because the other 80% isn’t that different compared to the core 20%. In many respects, this is the most desirable state as it doesn’t require major modifications to either technology or business model to attract the other 80% and it satisfies the value proposition of both the 80% and the 20%. However, the reality is far from this desired state.
Just as the cryptocurrency industry is experiencing, attracting the other 80% may require significant technology and business model modifications. In the case of the cryptocurrency industry, it can range from greater centralization for regulatory and governmental reasons, simplification of technology and a fundamental change in business models.
There is no right or wrong answer for the cryptocurrency industry just as there is no right or wrong answer for startups as they consider pursuing the other 80%. The reality is that it is a difficult choice for a startup or an industry to make. Focusing on the core 20% may or may not allow a startup or an industry to thrive. Indeed, the other 80% may join the core 20% thanks to a relatively good value proposition fit. Or it may not.
Leave a Reply