As modal B2B software investors we frequently see entrepreneurs struggling with the drag of table stakes. How do you focus resources on an innovative or novel approach to the market when customers keep asking for table stakes? An example of this problem: Let’s say a company, Resu, is developing a software that reads knowledge worker resumes and culls an applicant pool to the best 20% using AI. It’s simple, you dump 1000 resumes in, set some basic preferences, feed in the job description, and voila, you end up with the 200 best for a human to read. The entrepreneur goes to sell it and hears the following:
Enterprise: “Hmmm, not sure our HR people will trust this and whether legal will be okay with it given fair employment laws. Also, do you have admin controls, workflow for recruiters to track everything and single sign on?” ⇒ DEAD END! (for now)
Medium business: “Hey this is pretty cool. I could see us using it since our resume volumes for postings are nuts. But I really need it to integrate with our ATS, or offer the same functionality. We’d be open to switching.” ⇒ Promising, but still need to meet table stakes.
Small business: “Wow, I’d really like to try it.” ⇒ Seems like a great fit, but welcome to small contracts and churn.
Hourly worker business of any size: “We don’t really get resumes, but could you use social profiles and other data sources to do the same culling if you have an applicant’s email address?” ⇒ Did we just stumble on a new market?
In each of these conversations, table stakes play a different role in the customer’s perspective on adoption of innovative and differentiated capabilities as follows:
For enterprise, table stakes contribute a significant part of product value when new technologies become available. Process continuity, organizational inertia, need for integration and controls (eg, barriers to change management) are all high, and a desire to do things different and better are lower. In other words, don’t fix what ain’t broke. This often changes with time after a new innovation is introduced and becomes more market accepted. Medium sized businesses are a bit different. They are more flexible and open, but still need to meet table stakes – at least in terms of integration, or alternatively to match the features of any system that will be replaced.
Small (often non-consuming) businesses are different. A small business may not use an existing recruiting management solution, whether ATS or other, because it can’t afford or doesn’t value the core functionality enough, in-fact making it a non-consuming business. The small knowledge worker business makes only a few hires a quarter, so funnel management and schedule workflow aren’t nearly the pain that resume culling is to the owner/CEO who has to do it by hand for every hire. If Resu can solve this primary pain and ultimately bring basic ATS functionality as well, this becomes the classic “disruptive innovation” opportunity described by Clay Christensen. A small business may also already use an ATS but not get bogged down in table stakes when trying something additional in their stack since things like admin controls, single sign-on and workflow add relatively little value for very small companies.
The second type of non-consuming business here is the hourly worker company that has the general problem of credential and experience scoring but has never had inputs to do it before because resumes are less common among hourly workers. While applicant tracking systems are widely used in hourly worker business models, the value is primarily funnel management, not input scoring. What if Resu could change the way these companies hire by crunching social and other public data? That could be another type of disruptive play in the “hourly” economy… not a feature in a product, a new product in the existing HR stack, nor a classic low-end entry disruption. In a way, it’s a technological innovation that creates a new market.
Reflecting on these examples, four market entry strategies emerge within the context of innovation type (disruptive, sustaining, table stakes) and breadth of product (platform, product, feature)
The background coloring reflects the attractiveness of market participation in terms of when to enter and then exit as an entrepreneur or investor. Borrowing from Christensen’s framework, “Disruptive innovation” implies broadly the use of a novel technology or approach to make a business problem cheaper, easier or accessible to solve. “Sustaining innovation” then keeps that disruptive innovation ahead of competitors that enter with something similar, and “table stakes” means falling behind. The best companies first disrupt and then sustain. The average company goes through the full arc.
Working backwards there are four main market entry strategies:
D) Entering the market as a feature is the least attractive. What makes something a feature versus a product? A feature is something a customer looks at and says, “I like it and would use it if it were part of this other product.” Typically there is little to no willingness to pay for it as a stand alone product. Chatbots – in particular those without very strong AI – strike me as being very “featury”. They are useful as an additional form of user interface on a software product, but end consumers don’t want to pay extra or separately for privilege to use them. Most B2B software companies considering chatbots will build their own or quickly buy one of the many stand-alone solutions that have popped up in an early exit. We don’t invest in features because while the outcomes can be fast, they aren’t often large
Drivers of success include: distribution relationships; prolific integration; early relationships with potential acquirers (often from distribution and integration partners); build to sell/exit via capital efficiency
C) Wedge in stack is a more attractive entry. Here there is enough value that customers are willing to pay for it in their existing tech “stack”, but the product needs to integrate well with other products/platforms from the start. This strategy usually starts with medium sized business customers and moves upstream for the reasons described above. Of note, big companies can be built with this strategy but must ultimately choose to become a broader platform and bigger part of the stack (the bent arrow). ExactTarget, for example, was not a full marketing platform when it started; it was an email marketing product in the larger marketing stack servicing small and medium sized businesses. They moved upstream to enterprise and became a full stack provider, partially through organic development as well as acquisition… before a $2.6B exit. When wedge strategies remain just another product in the stack (the straight arrow), they tend to have moderate exits.
Drivers of success include: Early integration with top 5 tech stack participants/partners; scalable distribution channels, either through top 5 tech stack participants/partners or intermediaries in the value chain (integrators, VARs, etc); development customers large enough to have influence on integration partners when ecosystem is not open; rapid product expansion to reduce threat of stack participants fast following and to increase ability to displace other stack players more broadly over time; momentum and access to capital for tack-on acquisitions and mindshare expansion
B) Non-consumer entry is a platform play where a startup enters a market where products are too expensive or don’t meet the needs of a certain (and large) sub-segment. Here the platform is a simplified, cheaper and more accessible solution – the classic Disruptive Technology entry. Both Salesforce and Dropbox are perfect examples. Originally, Salesforce was an affordable and easy way for small businesses to adopt CRM… and of course Salesforce moved up market over time as most software successes do. Dropbox made a similar play in storage and sharing among prosumers and small businesses that couldn’t afford or deal with the hassle of on-premise shared drives, remote backup and expensive online data rooms. Needless to say, when successful, these are big outcomes.
Drivers of success include: Highly effective self-service or high velocity sales model (due to low dollar value sales); clear positioning to underserved or down-market segment; rapid sophistication of product to expand up market; network effects (a la Dropbox)
A) New market platform is the last entry strategy. Here a “platform” is launched from the beginning to solve a business problem for which a solution doesn’t already exist. Gainsight in customer success is the probably the most notable recent example of this. These are few and far between because most platforms and stacks are already defined. Incidentally, Gainsight is built on Salesforce, so a new stack wasn’t needed in this case to create a new market platform.
Drivers of success include: Unique market opening ⇒ think Gainsight’s perfect timing as SaaS becomes a big market ⇒ controlling churn is king to the model ⇒ rise of customer success as a business function ⇒ and so… customer success needs its own operating system. Superior thought leadership and branding to define and evangelize a new category. Early adoption by customers seen as industry innovators/leaders
My hope is these strategies crystallize common market entry modes, their tradeoffs and how investors might view them. Happy building!