The riches are in the niches

Yes, this is a total oversimplification, but there are 3 broad buckets of companies in my experience:

  • Those that are Rocket Ship successes early on (within 1-3 years)
  • Those that fail reasonably quickly (within 1-3 years)
  • Those that somehow limp-along for many years, perpetually saying “we’ve made X change/ addition, next QTR its going to realy turn”. Narrator: “it doesn’t”.

Early rocket ship successes have attributes that are so special they very hard to analyse and straight out copy. If it were easy, everyone would do it. There are just a whole range of ingredients coming together and within a few years it just takes off. But in the mix you find a great niche where they get strong product market fit quickly.

Fast failures happen when you can’t generate cash greater than expenses organically, and/or can’t raise capital past the 3 F’s (Friends, Family, Fanatics), generally because you can’t demonstrate the opportunity to more professional/ sophisticated investors.

But the “limp-along” crew are the most painful, for obvious reasons. They are hard-working founders, that give it their all. Cleaver people that are not stupid. Whist investors put their hard-earned capital into the company, that is all we lose. For founders, they lose a big chunk of their life, and it can be hard to watch as good people struggle.

What I have learnt for this “limp-along” group is that if there is to be an exit from this situation, the exit is when they start doing less for less groups of people.

 

Less is more

Here is the pattern that I see emerges for a good percentage of these “Limp-alongs”:

Phase 1: Many of the businesses that end up in the limp-along group were born trying to do multiple things for multiple people. Or at least they are seeking to do one thing, but for many different markets and/or ideal client types. They could start focused, but that is not the entrepreneurial impulse. 

Phase 2: Things do not go as easy as they planned, and the impulse is to resolve revenue/ growth by seeking new markets and client profiles. They seek to add new customer groups or solve different problems in new markets. To a certain extent this is normal part of the very early journey- try and test a range of markets, verticals and ideal client profiles whilst trying to find product-market-fit. 

Phase 3: They start to focus and learn the value of “no” because either they start to realize that focus is going to achieve a better outcome (less than 10% I would say), or they start to run out of runway where bankruptcy becomes a greater than zero chance. Investors start to make it clear that without improved results, there won’t be any more capital- it sharpens the mind. Either way some energy occurs where they start to focus their go-to-market strategy. 

Phase 4: If they do not run out of investor support and need to close the doors (the majority), and they focus on “good” niche, magically things start to change. They find “the riches are in the niches after all!”. It may have taken years, but by going narrower and putting all the energy into a product-to-market combination that they can win, they start to build momentum and generate cash. They start to produce cash which and they can reinvest in tech, team, etc. 

Phase 5: With “power” and cashflow from owning their niche, they can either organically expand, or get investors excited to finance their expansion.  New products, new markets, new geographies. This strength gives them the ability to go back to markets and customers they previously said no to, now able to say yes given the stronger base.

“In hindsight, I’m really glad we delayed the decision to focus and stop allocating time and resource to resource conflicting, poor performing, lower margin, highly competitive markets”
– Said no founder or investor ever

To be a rocket ship, it usually needs to look more like the chart below. Test various combinations but on a tight basis. Then double down on your niche and own it. The goal- skip phases 1-3 and the risk of becoming a “limp-along”.  

Why is this the case? 

Every additional product, ideal customer, market etc divides up resource, focus and time. Complexity can multiply almost exponentially in some cases. The entrepreneurial impulse has difficulty seeing this. Energy and time are infinite don’t you know? 

Your homepage and website more broadly become more complicated as we need to have words and pictures that try and resonate with all the different markets, verticals, and ideal client profiles. The messaging becomes broad and generic. 

The operational processes become convoluted accommodating different markets and customers. Development resources get pulled left and right, and key features take too long to come to market. 

It hurts the entrepreneurial brain to say, “less is more”. “More is more!”. But once you find yourself in the limp-along desert, it rarely is. 

The power of 5 “ones” 

Time and time again we see the fastest way to success, assuming the market is big enough to create a real business is: 

  • One market
  • With one ideal customer 
  • That has one big problem they will pay to have solved  
  • Through one product/ service you provide better than anyone else 
  • You find through one channel that you own

Like I said at the beginning, this blog will be oversimplified, and yes, the above lacks industry/ product nuance. Some customers are identical, so it can make sense to combine and have multiple. As an example, for some products, SMBs across a very wide range of industries is appropriate because what you are doing for those customers is exactly the same. Your features are the same, your messaging is the same, the outcome is the same. Employment Hero, Xero, and HubSpot are prime examples of this. 

Where a company has both B2B and B2C customers in their early phase, this is almost a guaranteed path to failure I have come to realize. You can do both when one becomes incredibly profitable allowing them to expand from a position of strength, but until then, chasing both is a ticket to mediocrity and generally insolvency. Its like the saying “in life you can have everything you want, just not all at the same time”. 

When you have focus you get to know customers reaaaallly well. You get to create messaging that is amazingly engaging to them. You develop operational processes that create really power that others can’t replicate. You create scale economies with these customers, so you serve them better than anyone else. There is just nowhere else they would go if you were one of these customers.  

Every additional customer, every additional problem you solve, and every additional product you provide, is more and more resource and focus being divided up below a critical threshold. 

 

Yeah, yeah, I know, you are different. But success leaves clues.   

Entrepreneurs in the limp-along cohort generally push against this. Every reason under the sun is provided:

  • It’s such a big opportunity doing this additional market/segment/user.
  • There’s leverage between these two. They will help each other.
  • If we ignore this market/segment/user, we will lose X% of revenue (usually a small %) 

And maybe you are right. 

I’m just an investor, standing in front of founders, asking them to learn from others as Success leaves clues. Let’s have a look at some examples: 

Here’s a personal example: I started an insurance claims management business that focused only on domestic building claims in the sub $10k range in QLD. I also started a SaaS business that sold workflow management SaaS to the builders focused on these small claims.  

Do you know how big the insurance claim market is? 1000 times bigger than this little niche! I could have gone after so much more of it! And guess what? I did in the end. We went from managing zero to hundreds of millions. From a small private company to listed on the ASX. But only when we had millions of dollars of profits from our tight niche that I reinvested into going into new verticals. Larger quantum residential claims. Commercial property claims. Motor claims. Liability claims. Investigations. Then around Australia, then international. Had I had tried to go broad and wide at day one, no chance. 

I was not smart enough to be this intentional when I started, it was just a pattern I realized in hindsight. I got lucky. 

Facebook had one type of social network for one type of university. It saturated that niche and got critical mass, and then went wider like a weed. 

Google had a very simple but effective search function.  

Amazon started only with books. 

Microsoft had one operating system. 

I could go on and on. 

Look at those companies now. If they tried to solve all the problems they do now, with all the products they provide now, for all the customer groups, little chance they would be where they are today. 

The TAM isn’t not big enough.

A common complaint is that each niche is too small. Ok then, we have a different/bigger problem to deal with. Building a great business needs a certain size TAM but understand the issues with too broad too soon. Entrepreneurs tend to sometimes forget that TAM can expand with success- if you own a smaller TAM, you can then go bigger in time.  

I’m focused, the TAM is big enough, but I’m still struggling.

This often means the problem that you are solving just is not as big problem to the customer as it is to you. It looks like the TAM is big, but your customers just don’t care that much to want to solve it, or willing to pay enough to solve it. Adding more markets and customers usually just makes it worse. Customer apathy is a hard one to change. 

The cost to acquire customers (CAC) can be a killer for some verticals and hard to create a scalable and sustainable business. Sometimes this can be fixed, sometimes it can’t and you need to move on. One pattern we are seeing emerge is smart video creative in put onto various digital channels can help find cost effective CAC.

Finally sometimes the value you provide in terms of features and outcomes isn’t at a level that will cut it. Adding features and services that increase the value and ease of dealing with you can be the ticket to success. 

New geography before new market 

If you do find a niche, the impulse is often to go then into new markets, sectors and verticals within you home market. This may well be a good strategy.  

But for some businesses, expanding the same problem-product set into a new geography can be the better way to go if the new geography as similar attributes as the home base. This can also be a solution for your home TAM being too small. Think bigger. Plan to Own the small home TAM and very quickly move international from a base of success  

The market messaging and sales process can often scale easier into new geographies than they do into totally new markets/ customers. 

Where the new market has similar attributes, your existing processes can be easier to move into new markets than it is to create new processes, training, resourcing for a totally new market. 

The back-office resourcing can often be handled from the home based for a fair amount of time before needing back office in multiple countries. 

You get the drift. 

The risk: it becomes too late

When battling the entrepreneurial urge to cater to everyone and say yes to everything, I’m reminded of the Churchill quote about Americans. “You can always count on Americans to do the right thing – after they have tried everything else”. there’s an inevitability to what the right things are in the end, but entrepreneurial energy that gets stuck in the limp-along trough tends to want to try it all first. And this would be ok if the only risk were running out of investor support and money. 

The bigger issue is a smarter competitors come and take the opportunity from you. You then either cannot get into it at all once you realise it, or now you’ve got to price compete your way into it and that creates a whole set of other issues. 

Yeah but I just can’t kick the habit

I know some entrepreneurs will read this and intellectually agree this sounds right, but like someone that is addicted to the ciggies (even though they know it’s not good for them), it can be hard to give up. If this is you and your addicted to saying yes to all the things, one idea to give you some small chance.  

Once you have your niche that you believe is big enough and viable enough to create a sustainable business, but you don’t want to give up the others, create a clear roadmap that leaves the “distractionary” things your brain tells you are too good to let go still on the map, but only after every initiative required to fully execute of the core niche are completed. Make it clear you will fire anyone if they work on their items out of sequence, and just accept the unfair dismissal consequences. Give your team some embarrassing photos or video you and tell them to release it if they find you working on it as well.

Or just get with the program and learn from others. 

For consideration 

You may be special and can get out of the limp-along desert by staying wide. But if you have been slogging at something for years and years, and nothing you do seems to make “the big difference”, AND you have more than one market, customer, and product; there could be something here for you to consider. 

 
About the Author

Portfolio Support & Co-founder

Don brings extensive experience as a founder and investor to lead our hands-on support for portfolio ventures.