Startup Strategy Guide: Answering Two Questions, Exploring Four Paths

Choice is the core of entrepreneurship.

The journey of entrepreneurship is never short of passion and creativity, but it is often plagued by confusion about the direction. The core issue has always been "how to find the product - market fit (PMF) and choose the right commercialization path."

Entrepreneurial Strategy Compass

Entrepreneurs may feel overwhelmed by too many choices - although some paths are obviously unrealistic and some cannot form a coherent logic. The four quadrants of the strategy compass can make this process controllable: helping startups quickly find a viable market - oriented strategy and clarify the core assumptions supporting each choice.

To sort out potential strategies, all new startups must consider two key competitive trade - offs:

One is the attitude towards existing mature enterprises in the industry: cooperation or competition?

Cooperating with existing enterprises, especially industry leaders, can enable startups to obtain resources and supply - chain support, thus entering larger and more mature markets more quickly. On the other hand, the numerous processes of large enterprises may cause serious delays in the cooperation process, and startups may even be at a disadvantage in profit distribution - after all, in the cooperation relationship, mature enterprises often have stronger bargaining power, especially when they can "borrow" the core ideas of startups.

The other option also has its pros and cons. Directly competing with mature enterprises means that startups can more freely build the value chain they envision, serve customers ignored by mature enterprises, and bring innovations that can enhance customer value and replace existing successful products to the market. But it also means facing off against well - funded and firmly established opponents.

The second is the focus of innovation and investment: protecting core technologies and building moats (control) or quickly opening up the market and directly targeting customers (execution)?

Some startups believe that maintaining strict control over products or technologies can bring more benefits. After all, when technological innovation is imitated, enterprises are likely to be in a passive position. Therefore, they will invest heavily in intellectual property protection. Although comprehensive intellectual property (IP) protection is costly, for technology - driven startups, it can not only prevent competitors from directly entering the market but also give them more say when negotiating with supply - chain partners. However, this approach will also increase the difficulty and cost of commercialization and raise the threshold for cooperation with customers and business partners.

In contrast, if the focus is on execution and the product is quickly pushed to the market first, it can accelerate the commercialization and product iteration process - which usually requires close collaboration with partners and customers. Startups choosing this path value more the ability to directly test and iterate ideas in the market. While the "control - oriented" strategy may delay the market entry time, "execution - oriented" startups will face competition head - on and deal with competitive threats with flexibility - that is, the so - called "move fast and break things."

Focusing on these two issues greatly simplifies the process of strategic reflection. A founding team doesn't have to find a customized combination of choices suitable for a specific idea. Instead, they can consider the potential of various possible options in terms of value creation and value capture within the framework of the four strategies.

Intellectual Property Strategy

In this quadrant, enterprises choose to cooperate with mature enterprises in the industry while retaining control over their own products or technologies. Startups focus on finding and developing ideas and avoid bearing the costs related to downstream customer service. Their core ideas must be able to create value for the customers of mature enterprises, which also determines which enterprises they can cooperate with.

In addition, since cooperation requires synergy with the businesses of mature enterprises, such startups usually choose general - purpose technologies compatible with the existing system. They are more like "idea factories", focusing on researching and developing a small number of modular technologies that can change the industry landscape, rather than testing all possible directions.

Dolby in the audio field is a typical example. In 1965, Ray Dolby invented Dolby Laboratories' patented noise - reduction technology, which later became the global standard and maintained its market leadership for 50 years. However, Dolby achieved a valuation of billions of dollars with almost no direct interaction with movie directors, music producers, and audio enthusiasts - it commercialized by licensing its proprietary technology to product developers and manufacturers such as Sony, Bose, Apple, and Yamaha.

Entrepreneurs adopting this kind of strategy attach great importance to the maintenance and protection of intellectual property. Well - designed patents and trademarks, combined with solid R & D work, can build a strong moat system, enabling startups to maintain bargaining power in long - term cooperation.

This strategy also determines the direction of the enterprise's culture and capability building: startups not only need to invest resources in cultivating relevant R & D skills but also need to hire shrewd and dedicated legal talents.

Architecture Strategy

Entrepreneurs who choose and successfully implement the architecture strategy often receive high public attention. They need to both compete and control, and usually need to redesign the entire value chain and control key nodes. However, for most entrepreneurial ideas, this path is neither realistic, and even if it is feasible, the risk is extremely high. Enterprises adopting the architecture strategy are not necessarily the earliest innovators.

Facebook and Google are typical representatives of this kind of strategy. There were search engines before Google and social networks before Facebook. But they brought innovation to the mass market through a delicate combination of customers, technology, and identity and firmly controlled the key links.

However, the risk for architecture - type entrepreneurs is that they may only have one chance of success. Therefore, it is not surprising that architecture - type entrepreneurs often end up trying to build platforms rather than single products. Although platforms can also be commercialized through other strategies, if the core of the platform is closed, entrepreneurs may be able to control a new value chain.

Value - Chain Strategy

Under the value - chain path, startups focus on investing in commercialization and competitiveness. They choose to integrate into the existing value chain rather than disrupt it - build and control a new value chain for new customers and achieve success by meeting the specific needs of each stakeholder in the value chain.

However, this relatively plain approach can create highly profitable enterprises. Such enterprises will position themselves in professional capabilities rather than radical competition. Although entrepreneurs using the value - chain strategy will conduct business around the customers and technologies of other enterprises, they will focus on cultivating scarce talents and unique capabilities and become the preferred partners of existing mature enterprises.

Most startups can adopt the value - chain strategy. Startups taking this path often focus on a horizontal link in the value chain and become the preferred partners with irreplaceable expertise. Compared with other entrepreneurial strategies, the role of the founding team may be the most crucial in the value - chain strategy. In addition to recruiting salespeople for end - customers and engineers to improve product technical performance, the team must also be able to integrate innovative talents, business development leaders, and supply - chain partners.

Startups adopting this strategy must be able to bring differentiated improvements or cost advantages to existing enterprises. Moreover, even if this innovation can indeed enhance the competitiveness of the entire value chain, startups must ensure that other participants in the value chain cannot replicate the value they create in order to gain a foothold.

"Disruptive" Strategy

The "disruptive" strategy is the opposite of the intellectual property strategy: startups choose to directly compete with mature enterprises in the industry, emphasizing rapid commercialization and market - share expansion rather than controlling the development process of ideas. Entrepreneurs adopting this strategy aim to restructure existing value chains and the enterprises that dominate these value chains. However, due to its nature, followers will constantly emerge. Therefore, the core of this kind of strategy is to take the initiative and stay ahead.

Generally, enterprises choosing this strategy usually choose to enter a niche market first. These customers are often underserved or even ignored by mature enterprises. This allows startups to test new technologies without being noticed: these technologies may have defects in the initial stage but have great potential for improvement. Moreover, by the time these technologies are truly mature, existing enterprises often find it difficult to follow up due to path dependence.

Therefore, such enterprises must remain lean and flexible, respond quickly to market changes, and be extremely focused on growth.

Netflix is the best example. Founders Marc Randolph and Reed Hastings were tired of late - fee charges for video tapes and decided to use the then - emerging DVD technology. At first, they tested this idea by mailing DVDs, and then established a service system in the late 1990s to specifically attract movie fans rather than ordinary consumers who only pursued the latest blockbusters. Netflix used "long - tail" content and recommendation engines to build customer relationships, gradually formed a new rental model, and finally disrupted Blockbuster's store business.

Making these choices is not easy because these four strategies often conflict with each other. Now let's see how entrepreneurs use the strategy compass to choose among these four basic methods.

Don't blindly trial - and - error, but conduct "precise experiments"

The first step is to fill in strategic options for all four quadrants of the compass as much as possible. This is not easy and requires collecting more information and conducting a certain degree of experimentation (but not investing too many resources before making a real choice).

This process can bring at least one benefit: allowing entrepreneurs to see the potential obstacles on each path. Some routes may be excluded due to lack of feasibility or mismatch with the team's capabilities. In other cases, the resources (funding, commitment, momentum) required for the strategy will become clear, enabling startups to focus on key elements and ensure the implementation of the selected strategy.

So how should entrepreneurs really make a choice?

For each quadrant of the compass, entrepreneurs need to clarify "which customers to target, which technologies to focus on, what kind of positioning to establish, who to compete with, and how to compete." If all four paths seem feasible, it just confirms the value of the founder's idea - if an idea can only correspond to one feasible future scenario, it is probably not a promising business opportunity.

When facing multiple choices, don't bet on one path at the beginning. First, consider multiple strategic alternatives, find at least two with commercial feasibility, and then select one based on the results.

After that, verify the feasibility of the idea before large - scale investment - many startups fail not because the idea is bad but because they have invested too many resources when problems are discovered. It can help entrepreneurs find in time that an idea may not work before investing too much.

When both paths pass the experimental verification, how to choose? The answer is "return to the original intention of entrepreneurship" - the strategy must not only be feasible but also fit the enterprise's mission and the team's passion, which is the key to attracting investors, employees, and partners.

However, each strategy will affect future turning opportunities. Some paths will be closed, and some will be opened. Startups must be aware of this to smoothly transition from startup to large - scale development.

This article is from the WeChat official account "Sequoia Capital Insights" (ID: Sequoiacap), author: Hong Shan, published by 36Kr with authorization.