Never Too Late to be Too Early
I'm a bit late in writing about this, but my friend, Fred Wilson, wrote a post last week about investing in a company too early. Certainly being way too early is a 'cardinal sin of the venture capital business', as Fred calls it. But, early-stage VCs who are too worried about being too early will be overly cautious. You have to take some risks as an early-stage VC, and timing the market is one of the risks. If the market is obviously there today, then, by definition, your new startup company is too late.
How do VCs and entrepreneurs mitigate this? There are several ways:
1) Target an existing market with something that turns it on its ear. Maybe you can deliver a new product or service that radically changes the value proposition in a market. Or, combines a couple of adjacent markets together. Note that I am careful not to say 'is much cheaper than existing alternatives.' Although it can make a market entry strategy easy, a 10x savings on a $500M market turns it into a $50M market. The exception is if lower prices greatly expands the market. Don't automatically assume this to be the case.
2) Deliver something so great that users will happily forgive the shortcomings. I have an example of this from my background, our remote access products at Shiva in the early to mid-1990s. We were the best company at letting users dial-in to their corporate networks to get their email. There were plenty of issues with this (reliability and ease of use of phone connections, speed, PC client configuration issues, etc.) But, people were so hungry for access that they were willing to overlook all of these issues just to get that email while traveling. This seems pretty out-of-date in these times, but imagine how thrilled you'd be for any type of access when the alternative is none at all?
3) Plan on matching your service to the market's needs today while you evolve it as the leading-edge customers evolve. This is a pretty low-risk strategy, but also will likely lead to the lowest upside. All the other existing vendors can do this, too. The best way to really win here is to have some insight that others don't have. Find the leading edge customers who think the same way you do. Then, hope that you all are right that the rest of the world will follow you in the coming few years.
No matter what, don't get too far ahead of yourself on spending. And, set some milestones that you stick with. If you are building a new product, try to get some sort of prototype together that you can test out on customers. Make sure that you don't have trade-offs that are overly limiting. Be honest with yourself in case you really are hopelessly too early.
I think that the problem Fred brought up originally wasn't being too early, but sticking with a 'too early' idea for too long. Some companies are 'too early' but are able to hang in there with a low burn rate and some modest revenue until the market catches up with them. Those can turn out to be big wins as they'll see it coming before others can react.