It's tough(er) out there for "red ocean" startups

“Blue ocean” vs “red ocean” opportunity is a popular framing in VC land to describe whether a startup is going after a crowded existing market vs a “new” and “wide open” market with little to no competitors (at least initially).

A HBR article defines them as following:

• In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody.
• Blue oceans denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. There are two ways to create blue oceans. In a few cases, companies can give rise to completely new industries, as eBay did with the online auction industry. But in most cases, a blue ocean is created from within a red ocean when a company alters the boundaries of an existing industry.

Early on in a startup’s journey when there is little to show for yet, what has the biggest impact on where a startup is placed (blue vs red) in an investor’s or customer’s mind is storytelling / the ability to clearly articulate their unique insight and (customer) value proposition. This is also referred to as “category creation” (read the book Play Bigger on this topic if you haven’t done so already!).

Unfortunately, too many startups that come across ours and many other VCs’ desks aren’t able to clearly articulate why and how they’re going after a blue ocean opportunity. Thus, they get put into the red ocean bucket.

This has significant implications on how we assess them - amongst others, a key challenge of going after a crowded market full of incumbents (or larger, well funded startups) is that there is a much higher bar for the initial product - both from customers as well as investors. As Ed Sim from Boldstart put it well in his recent newsletter What's Hot in Enterprise IT/VC:

First, as a founder, you need to have a unique insight with a technical underpinning that is the reason for disrupting the existing solutions. But, in order to get any one to swap out an existing tried and true tool they use but don’t love, you still have to get at least 80% feature parity to existing solutions in order for customers to take the leap of faith to try your 10x product. That takes time, effort, and money [i.e. tend to be much more capital intense].

From a go-to-market perspective, you also have to hone your Ideal Customer Profile (ICP) and organization to determine your key entry or insertion point. Do you start with one specific feature to 10x a customer’s time or do you start with something bigger off the bat?

Getting to market, scaling revenue and many other things are much tougher in a red ocean market. Thus, it’s very rare that we dive deeper into opportunities we put in the red ocean bucket.

As said, the difference early on often comes down to storytelling. Thus, I encourage each and every one of you to put enough weight on this as you get started. Not only will this make a huge difference when it comes to your early funding rounds but also when it comes to selling to customers and recruiting talent.

This is much easier said than done yet the time invested pays off many times over.

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findfunding.vc ⭐ funder spotlight

findfunding.vc is our open sourced database of early stage VCs to help founders find the right investors. Check it out.

Looking for a pre-seed / seed investor with a dash of Marketing wizardry - here's your guy.

This week's findfunding.vc spotlight is on the one and only Wiz from Spacecadet.

Wiz is:

• 🌉 Soon to be SF-based
• 📢 Shares tangible marketing resources (https://visionquest.spacecadet.ventures/)
• 😱 Has three middle names

Wiz and the Spacecadet team are the Marketing VCs - they excel at supporting founders with all things marketing, particularly storytelling (stories to transform tomorrow).

✉️ To pitch him, send him an email wiz@spacecadet.ventures
🐦 Make sure to check out his prolific twitter profile

For more, check out our funder spotlight card below along with Spacecadet's profile on findfunding.vc

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Until next week,

Pascal