Category Creation: Building Businesses That Turn Entire Industries On Their Heads

As an entrepreneur turned VC, I’ve never been particularly interested in incremental, evolutionary improvements to an existing business model. Yes, sometimes a better mousetrap is what’s truly needed, and from that need springs improvements in technology, products, or services that lead to a very viable business. But it’s not what gets me up in the morning, or what keeps me up at night.

But this isn’t about sleep deprivation. It’s about fundamental, revolutionary innovation—creating an entirely new category of product or service that didn’t exist before, or disrupting a category in a way that completely changes the game moving forward. All of the companies I’ve helped start, and most of the companies I’ve funded, have fallen into this distinct category, because it’s both the most challenging and rewarding way to build a business.

It’s no small feat to fuel the transformation or genesis of an entire industry. Great ideas can become great companies, but that’s the exception rather than the rule. In fact, about 90% of the time, they don’t even become good companies.

So what do those breakout companies, the ones that thrive and ultimately define an entire business category, do differently? On the surface it can seem pretty serendipitous... it’s about timing or market receptivity or other largely unpredictable but crucial factors. Yet as an entrepreneur turned VC, I’ve seen people nail it time and time again. As Nassim Taleb says in his book Fooled By Randomness, wild success is random, but sustained success is not accidental.

For example, legendary entrepreneur Jim Clark epitomizes this type of streak—across a dizzying range of sectors from 3-D imaging (Silicon Graphics) to web browsing (Netscape) to health care technology (Healtheon/WebMD). All of these companies—and others in a long list of startup successes—effectively created a new category of product. Steve Jobs did it many times within Apple and also as founder of Pixar.

So what’s the magic sauce? Of course it starts with vision, and it takes strategy and values to sustain that vision. But thousands of companies have lived (briefly) and died on a vision. Jack Welch rightly says that charisma adds speed to the execution. But charisma unaccompanied by vision, strategy, and values is very dangerous! From my time on both sides of the table, here’s a short list of other vital ingredients for creating a category...and building a successful startup while you’re at it.

Play the Name Game

When you have an adjacent category that is well established, the differentiators for your category must be clear. The importance of positioning cannot be overemphasized. How you communicate what sets your business apart must be an integral part of your market strategy, and naming your category—especially in the enterprise space—is a key part of that strategy. It must be worded to conjure the possibilities and capture the imagination of your target customers. Try to make the elevator spiel as short as possible. It is better to create your own sandbox and establishing yourself as the leader, instead of playing in an existing sandbox.

For example, we work with a recently launched startup called Euclid that dubs itself “online analytics for the offline world.” In this case, it’s immediately clear what the value proposition is for retailers and how it’s differentiated. Get it right, and you can work a good category name all the way to the point where the term and the category is so ubiquitous that it’s devoured or absorbed the adjacent categories (i.e. cloud computing). 

Another aspect of the "name game" is making sure the right people are saying it...influencing the influencers, as Malcolm Gladwell puts it in The Tipping Point. Getting incumbents, third-party analysts, and industry thought leaders to elucidate your category’s place or value in the technology ecosystem is incredibly validating and can lend great momentum to your cause, and your company.

Turn On the Customer Channel

Your customer base will ultimately be your most influential influencers. Turn your best customers into spokespeople for the product by making them delighted evangelists for your vision—whether it’s a service, a product, or a transformation within a sector. Box is a company in NEA’s portfolio that’s doing this to great effect. They are intensely customer driven and, as CEO Aaron Levie put it, they "always sweat the small stuff," especially when it comes to how a user experiences their product. And their approach resonates strongly with key customers.

Play Well With Others

It’s an incredibly risky move to stake your startup’s success on an entirely new category. It’s even risker if you’re bringing game-changing disruption to an established category with powerful incumbents. So how do you carve out a niche—inspire, delight and build a loyal following—without inciting the predatory characteristics of adjacent players?

One approach is to create a go-to-market ecosystem that involves key technology partnerships. In most cases, your product will be part of the solution, but not all of the solution. Determine what it will take to build it out, and recruit other vendors who can participate. Form alliances so you can interoperate with those vendors and those products. Create partnerships to leverage sales channels, like OEMs or value-added resellers—these can be very effective marketing partners (e.g., joint webinars, bundled promotions).

Should you partner with established incumbents or complementary startups? In many cases, absolutely. If you are providing a new source of revenue, it may not matter who the partner is—any vendor, large or small, will want to work with you. One of my companies, Climate Corporation, has done a terrific job of working well with an existing ecosystem of agents in bringing a supplementary crop insurance product to farmers across the country.

Be Your Brother’s Keeper (Sometimes)

It sounds counterintuitive to suggest that you should toss around a competitor’s name in conversation. But in a nascent category, there are occasions that call for exactly that. (To be fair, I have never had this point conceded by a VP of marketing, but as an entrepreneur, the point seems clear.) Sometimes it is more important to promote and evangelize your category than your company. Sometimes you even have to give a nod to the competition. Why? Because the sandbox looks more interesting if more than one person is playing in it. 

In the long run, the market best rewards and is best rewarded by businesses that can create new categories for its products and services. There is plenty of merit (and profit) in building on and improving existing models, and I’ve worked with countless companies who have done just that—often in incredibly innovative ways. And attempts at iterative business model improvement do sometimes leads to incredible pivots or breakthroughs that define or disrupt an entire category. But whether the opportunity comes from a creator’s vision, sheer trial and error, or a by-product of your core offering—and I’ve seen all of the above—I believe the true spirit of entrepreneurship and the true drivers of economic and technological progress are rooted in category creation. It was my focus as a founder, and continues to be my inspiration as a VC. 

If you’ve got a category story to share, I’d love to hear it. Put it in the comments below, email me at kittu@nea.com, or find me on Twitter @kittukolluri

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[Image: Flickr user Andrea De Poda]

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4 Comments

  • Krisna,

    Great insights. The example of getting 3rd parties to adopt the category name is crucial. Sometimes competing analysts will choose different names to distinguish their areas of expertise, but in the end the market decides. In the example of Euclid, "online analytics for an offline world" is a great tagline, but is too long for a category name. I always my clients to keep the category name to no more than three words.

    Mark Cavender @MarkACavender Founder and Manager @ChasmInstitute

  • Brian Hodgson

    Great post. Totally new markets are pretty rare, but exciting. More often it is a twist on a older markret http://wp.me/piOvI-94. Positioning is the KEY. As Al Ries outlined you have to create a position in the prospect's mind that did not exist before.

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