Vijay Anand | The Startup Guy.

The Law of Startups.

Posted on: April 24, 2008

I think I have figured something. It goes something like this.

Markets and Companies are neither created nor destroyed. They just transform from one form to the another.

I’ll give you some examples. Amazon.com when it started in 95 was a very ambitious project. A few years later, they were raking in 30million dollars as revenues. But where did that money come from? Very few people think about it, but customers are a finite set. God isn’t growing customers on trees yet. So essentially what happens is that since the need hasn’t exemplified, just found a better solution, people switch from one service to another. The year that Amazon.com announced its $30mn revenue stream, the music and bookstore industry had lost close to 2billion dollars. Disruptive? Yep, if you are a startup and on the growth curve, very much so. Scary? Absolutely. Especially if you are three days old and even have a handful of customers.

I think this is a very basic understand that we need to have. Markets are not created. All this talk on Markets, and blah is just a segmentation process that economists and entrepreneurs have to work with to figure out how to shape their product. The truth is that there are consumers and consumers or clients are essentially people. And People are finite. if you work backwards, then so are markets.

It is also important to understand that whenever there is a drastic shift from one trend to another, millions of businesses die. The chain stores of Walmart put out thousands of Mom-and-pop corner shops and there are enough stories about how retail bookstore chains put family-owned bookstores out of business in the US. Take our own case. It will not be too long before the reliance retails, and the Subiksha’s start threatening our friendly neighbourhood stores – if it hasnt already.

In the web world, Orkut defined the success of a Social network, along with Myspace. Both of them are losing steam now – which is because they are losing their active users. I very rarely login into my Orkut account these days and have been in Facebook for most of the time. I wouldn’t be surprised if OpenSocial, with its applications will give me another option to choose from, not too far from now.

So Lets come even closer to home. India enjoys 4.2 million users online. Quite a shameful number, but thats what it is and we cant do much about it. Fropper and BigAdda, both claim that they have about a million users+ signed up. Where does that leave things? If we do the statistics that 50% of the Indian population is below the age of 25, and I assume that this is the group which will want to “socially network”, along with the active business community, I’d break the 4.2 million into half and say I can guarantee half of it to have the craving for social networking. That essentially brings it down to the sum that Fropper and Bigadda seem to claim. So, who’s left? Anyone who has to get into that space now, essentially will have to shave off people from one of these two big guys. If you want to get into that space, you tell me what your strategy is for survival and it better be good.

This applies in a whole lot of other places. For example, In India we have very few Product review sites for Startups. Webyantra was one, and Pluggd.in is another. Now that Amit is lately busy building Slideshare, if you do look at Alexa, it is quite evident that Pluggd.in is enjoying the traffic from Webyantra and the number are slowly sliding on one end and adding up to the other. Once again, it seems as much as we all do keep an eye on multiple things, there is one preferential location we visit over and over again – our prima interface.

If you want more examples, look at the case of IE vs. Firefox. More Firefox users essentially translate to less IE and Safari users. I could almost live without IE on my computer if there was a way to make it all go away.

Lets make it more personal and recent. When it came to Microblogging, I was dragged into Pownce because a whole lot of others were using it. And as much as Twitter was making a lot of noises, I stayed away from it cause I don’t want to create so many accounts (Someone needs to enforce openID in all services). I did realize lately that the tables had turned and there are more folks that I know who are on Twitter, compared to Pownce. The choice was inevitable. All I had to say was Goodbye Pownce and Hello Twitter. And Yes you can click on the link and “follow” me, if you’d like.

Perhaps even Bush was right. When it comes to a consumer, there is no this “and” that. The customer is either with or against. Either with you fueling your growth, or helping the other one put you out of business. Eventually it comes down to one strong alliance. It’s better to figure out what your strategy is going to be, to ensure that you are your market’s first preference.

Update: Ganesh Rengaswamy, a friend, made a comment that while markets transition, they also improve. While the traditional bookstores lost a lot of money and amazon.com snatched away those consumers, there were new ways of doing things that were established. I do agree with him.

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8 Responses to "The Law of Startups."

Read “Only the Paranoid Survive” by Andrew ’10x’ Grover. You will find it insightful.

Market as a segmentation process??

Think Internet, think nuclear technology, semiconductors…
think.. umm.. basically any new market.

Markets can either be born out of gradual change say, from Web 1.0 to Web 2.0 or it can arrive with a blast and boom, think nuclear technology or semis.

Soham,

I’ve read that book. Fabulous read. I still dont agree that markets are “born”. Just created… destroying another.

Just heard another news that thanks to friendfeed, Socialthing is experiencing a slowdown.

Nuclear and such scientific breakthroughs are just technology disruptions. Markets are on the business side of it. I think you are probably mixing the two.

yeah.. true when I meant nuke.. I meant basically the business of creating the plants…

As you point out to transformations, there are always new players getting in where old one move on to other things.

“Markets and Companies are neither created nor destroyed. They just transform from one form to the another.”

Companies are a subset of markets. Markets are a subset of wealth. Wealth is a subset of …..? It is related to more than just the number of people, even if they grow on trees.

Over time wealth is governed by the productive application of energy into products and services that people are willing to pay for. If on balance people saved more then markets would decline. This is what a recession and depression are. Hording is a form of saving that doesn’t even transform into the purchase of a substitute market like financial services.

Over further time, markets are governed by sustainability. For the last 100 years global wealth and its markets have been driven increasingly oil (saved energy from living things in the distant past). Today we find this resource is becoming more expensive and scarce. We also find that its overuse is having negative wealth effects too (among other negative effects).

Thus, markets (and the companies that go with them) can be created and destroyed.

Steve: Pretty interesting thought. I assume you must have written a paper on this 🙂

I know in pure economics, a lot of things make sense. But in economics (just like game theory), we assume that the markets react in a certain way, whereas in reality they dont. Most of the time, the markets react with the most obvious, dumb response throwing away everything planned in a turn.

What you are saying, makes sense theoretically. I wonder how much it aligns to reality.

Given that in most blogs, comments are as insightful as the post itself, why would you keep the comment font so unreadable? I had to strain my eyes.

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