The Serial Killer of Startups: Bad Strategy

AI generated artwork in the style of a painting of an explorer standing on a hill surrounded by mountains.

The most closely held advice inside the startup network state is to always be building. Derivative mantras include: Ship at all costs, move fast, and break things; ideas don’t matter; execution is everything; and startups are just a series of small experiments and iterations.

What’s noticeably absent from these sacrosanct words is any semblance of deep thinking, of planning your course to win a market. From my seat, directionless building without sound strategy is a serial killer of startups.

The obituaries will read that they struggled to raise money, couldn’t overcome the cold start problem, never found PMF, the timing wasn’t right, had supply chain breakdowns (for a hardware company), burned out, or had founder disputes. These are all downstream of the real problem: a key strategy error occurred in the idea stage.

A good startup strategy requires understanding history, technology theory, analogous successes, and direct experience. Balaji S. calls this trait the idea maze:

A good founder is capable of anticipating which turns lead to treasure and which lead to certain death. A bad founder is just running to the entrance of (say) the “movies/music/filesharing/P2P” maze or the “photosharing” maze without any sense for the history of the industry, the players in the maze, the casualties of the past, and the technologies that are likely to move walls and change assumptions.

From Chris Dixon on the subject:

Imagine, for example, that you were thinking of starting Netflix back when it was founded in 1997. How would content providers, distribution channels, and competitors respond? How soon would technology develop to open a hidden door and let you distribute online instead of by mail? Or consider Dropbox in 2007. Dozens of cloud storage companies had been started before. What mistakes had they made? How would incumbents like Amazon and Google respond? How would new platforms like mobile affect you?

Starting Moves

Every startup needs an advantage to grow from 0 to 1. There are only two ways to build an advantage: product differentiation and distribution.

True product differentiation means you have no direct competition. You have invented a new product that’s early to a new technology wave (Netscape), created a brand new category that sits on top of existing technology (Satoshi via Bitcoin), or have built a 10x-100x better product than any adjacent competitor (Facebook, Tesla, Amazon).

True differentiation is obvious to the eye; it’s a breakthrough. If you have to explain your differentiation, it’s a signal that you often don’t have enough, and it certainly doesn’t need to be pointed out through a competitive matrix.

A distribution advantage refers to your ability to get your product to market in a significantly better way (cheaper, faster) than your competitors. Think Facebook’s university strategy or Netflix’s DVD mail distribution model that was perfectly counter positioned against Blockbuster’s expensive brick-and-mortar approach. Good distribution advantages are often created by being early to a market or distribution channel or by being early to a new technology wave. By law, if you are distributing your product in known existing channels (SEO, paid ads), you likely have no advantage.

The Strategy Quadrants

Differentiation and distribution advantages can be visualized on a spectrum (see the quadrant graphic below) ranging from low to high, generating four distinct quadrants:

  • DEAD: Low Differentiation, Low Distribution
  • DORMANT: High Differentiation, Low Distribution
  • POLLINATING: Low Differentiation, High Distribution
  • THRIVING: High Differentiation, High Distribution

The game's rules are straightforward: All startups start in the dead zone with no advantages and no one lands in THRIVING out of the gate. You must get to THRIVING through one of the corners, and they’re both fraught with painful tradeoffs. It’s a game of pick your poison. At the outset, your advantage might be theoretical, but that’s ok.

Let’s visit each quadrant and dig in further.

DEAD: Here, startups suffer from both low differentiation and low distribution advantage, resulting in a minimally distinctive product (a low cost) and high customer acquisition costs. Survival is nill without swift strategic moves to either build a distribution advantage or significantly differentiate the product. It’s worth mentioning that 95% of software startups today are not actually differentiated.

"All failed companies are the same: they failed to escape competition. While all successful companies are different: each one earns a monopoly by solving a unique problem.” – Peter Thiel

DORMANT: These startups possess products that stand out from competitors but grapple with profound distribution challenges. To thrive, they must achieve radical superiority—often 10x-100x better than alternatives—to counterbalance steep distribution hurdles. However, despite the product differentiation, trouble lurks because it’s still very expensive to acquire customers. Worse yet, there’s doubt that the market even cares about your product. Competitive risk looms large. If an incumbent at a higher level in the stack (platform) bundles a competitive product, they take your profits. Survival is possible in a greenfield market, provided there are compelling reasons why others have steered clear, but the entire value chain must be considered.

Examples: Early Tesla, Early Anduril, Early SpaceX, Oculus, ICON

"The Engineering Question: Can you create breakthrough technology instead of incremental improvements? - Peter Thiel
"To make something 10 times better than what already exists, you have to explore the frontier. Only by risking the unusual can you achieve the extraordinary."
"Startups don’t win by attacking. They win by transcending." - Paul Graham

POLLINATING: Startups in this quadrant have a robust distribution advantage but low product differentiation. However, a distribution advantage can cure many sins, including a lack of product differentiation. This advantage might manifest as high growth with an objectively inferior product, low CAC, and modest to low retention. These startups are in a better strategic position than dormant startups, as they have more demand than they can manage, but their advantage won’t last forever without deepening product differentiation.

Examples: Dropbox’s referral strategy, Uber’s growth hacking team, Robinhood’s mobile experience and “zero commission” play, Hubspot via marketing automation, Twitter’s focus on acquiring celebrities

“When a great product meets lousy product distribution, a competitor wins. Teams launching new products tend to focus far too little on creating cost effective and scalable distribution systems. Lousy distribution is a leading cause of death via indigestion.” - Tren Griffin
“Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a ‘viral marketing strategy’ … a16z is a sucker for people who have sales and marketing figured out.” - Marc Andreessen
“Most businesses actually get zero distribution channels to work. Poor distribution—not product—is the number one cause of failure.” - Peter Thiel

THRIVING: Startups that achieve high levels of differentiation and distribution find themselves in an enviable position, dominating their category. To maintain this status, they must continually ensure they do not lose their crown by protecting both dimensions.

Examples: The Hyperscalers (Nvidia, Microsoft, Meta, Amazon, Google, etc)

Strategy Field Notes

  1. Making Something People Desire: A great strategy is worthless if you forget to create something people actually desire.
  2. Adaptability: Your initial strategy will likely be incorrect; it’s crucial to adapt quickly when the market changes. Use the quadrants as your compass to assess the quality of your plan.
  3. Differentiation is a Design Choice: Differentiating is the easiest design choice for a startup. Distribution advantages are harder to build.
  4. Illusions of Differentiation: Most founders believe they have differentiation when they do not. 98% of software startups aren’t differentiated.
  5. Distribution > Differentiation: A good distribution strategy beats superior differentiation in the short run. But if differentiation finds distribution, you’ll be in a world of hurt. (Ramp vs. Brex)
  6. B2B vs. B2C Distribution: B2B distribution advantages are harder to find than B2C. There is less surface area to search for them.
  7. Marketing Misunderstandings: “Marketing is one of the most misunderstood functions in business. Founders think they have a marketing problem when they actually have a product problem. Companies say ‘my competitor is great at marketing’ when they actually mean ‘my competitor is great at strategy.’” - Katherine Boyle
  8. Product Differentiation as Distribution: Radical product differentiation can be a distribution strategy (e.g., ICON’s 3D-printed home aesthetic and Apple’s Rolodex of products).

Now that a sound strategy is set, it’s safe to let the mantras fly.

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