Red vs. Blue in VC

Based on the title, you’re probably thinking this is a post about politics. It’s not.

This reference is to red oceans and blue oceans as discussed in the book, Blue Ocean Strategy, from authors Mauborgne and Kim. And I touched on this concept previously in a post called “Finding the Whitespace,” but I’d like to put a finer point on it here. And there is no topic that applies more directly than disruptive innovation.

In the interview, Mark mentioned that goal for disruptive technology is to compete against non-consumption. His position is that startups should focus on developing inferior products that can access a much larger number of customers across new applications. And this point was also discussed in detail in the book. A red ocean, is one where the market is set. There is a certain volume of customer that purchase a product at an average price. The market is well established and does not fundamentally change. Thus the strategies employed by large players in these marketplaces are one of share gain. Every player is trying to take market share from their competitors. It’s a competitive, bloody, fight for more market share… hence the ocean is red. Blue Oceans, on the other hand, are emerging markets. They’re not yet fully established. The number of customers and the price a product can command are both in flux… and there are no direct competitors. The fight is not one of competition but rather awareness. Companies fortunate enough to be playing in a blue ocean have the only product of their kind. By introducing non-consumers to their product, they grow the market itself.

This is why, at New Stack, we talk about companies that are creating new markets or fundamentally redefining the market they’re playing in. Every market is price * volume. If you’re familiar w/ Mekko Maps, imagine a Mekko. If not, think of a stacked bar on a chart. Each stack within the bar represents a competitor with market share. With a red ocean, the size of that bar is fixed. So, if you want more revenue, you’ve got to take it from others. With a blue ocean, the market is completely redefined along both price and volume. Price is significantly lowered, allowing access to a huge volume of customers that previously didn’t purchase a product for this problem. The original target customer is now only a small percentage in relation to total customers accessible. And, in addition to new types of customers, you get to add application adjacencies as well. So, you take a narrow customer that uses a product in a limited way. And you allow masses of customers to use a product far more than they had previously. Mark’s example was the Sony Walkman. A software example that just popped in my head is GPS. Remember the days of the Garmin? Placing that egg-shaped, plastic device on your dashboard for turn by turn directions? I thought it was great at the time. But, I only had one. And only used it in one of our vehicles. And I travel a lot. I never had it on me when I really needed help with directions. Then along comes Google Maps, for the whopping price of… FREE. I always have my smartphone on me and now can use turn-by-turn, GPS navigation in my car, in my wife’s car, when I’m with friends, when I’m out-of-state, when I’m walking around Chicago’s Loop, when I’m biking the trail systems in the area… the number of applications has exploded, making me a much more frequent user of GPS. And, the total market accessible has changed by an order-of-magnitude. Folks like my parents, who claimed they would never buy a Garmin are now everyday users of Google Maps. By lowering the price and easily accessing mass market consumers in a frictionless way, the market of GPS users has been completely re-invented.

Now, I wouldn’t suggest that every startup adopt a free pricing strategy for their products in order to create blue oceans… we all don’t have the same economic luxuries of Google. But, one can see why investors look for disruption in early stage startups. The Innovator’s Dilemma is real. Large corporations continue to shrink their R&D departments. Innovation, behind the moat, can destroy the margin profile for an existing P&L. While, incumbents may be forced to play in the red… where will you play?

 
   

   

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Pete Maglio

The takeaways to end this episode are fantastic! Thanks @TheFullRatchet & @BenEinstein! pca.st/Fey4 #smartHardware #startups