How to Decide Who to Target with a Horizontal Technology
You know it’s not everyone!
Creating a horizontally-based startup can feel like you've struck gold.
Your product can be applied to everything, and suddenly your total addressable market seems infinite.
But, hold the bus right there, dear founder. This perceived advantage is often a trap that ensnares many startups in their early stages.
Let's dive into how you can avoid this pitfall and strategically position your horizontal technology for success. We’ll talk about:
“Land and expand”
When to expand
A real-world example
What to do now/next
Let’s get on with it…
The Land and Expand Strategy
The key to success with a horizontal technology lies in delaying your gratification and using the land and expand approach. This means finding your ideal customer first – the I in ICP (Ideal Customer Profile) – which is likely nestled within a particular vertical.
Let's break down how to navigate this process.
Identify the Gap
Start by diving deep into your all your potential customers' journeys. One by one, look at:
What is their current state?
What is their desired state?
How difficult is the transition between the two?
Your product should help people with their difficult transition, and the bigger the gap, the more valuable your product is to that type of customer.
Keep an Eye Out for Strategic Partnerships
Once you've identified a promising gap, look for potential partners within your chosen vertical. Ideal partners will:
Have an established customer base
Offer complementary products or services
Benefit from integrating your technology
These partnerships can provide strategic funding, quick access to targeted customers, and/or valuable industry insights.
Hot tip: They also offer the best multiples when exiting.
Build Vertical-Specific Moats
While serving your initial customers, creating a deep, defendable position in your chosen vertical typically becomes easier. You can customize your product for your target vertical likely much faster and easier than anyone else entering the market from scratch. Consider:
Customizing features for the vertical
Developing industry-specific integrations
Creating specialized onboarding processes
Creating landing pages to test the different verticals their customized messaging, and their specific gap you’re filling
This approach embeds you deeply in the vertical while maintaining flexibility for future expansion. Of course, you don’t want to customize your primary product so much that it’s no longer relevant to any other industry in the future. Consider branching off for each vertical, but maintaining the horizontal technology as a platform for the vertical specific features to work with.
Watch for Exclusivity Requests
As you gain traction, keep an eye out for a particular signal of success: exclusivity requests. When customers start asking for exclusivity, you know you've hit the sweet spot.
This can lead to higher pricing power, stronger customer loyalty, and barriers to entry for competitors.
It's a position of strength from which you can negotiate favorable terms and continue to grow.
Before you sign that exclusivity deal, however, make sure you’re restricting it in some way - geographical, vertical, B2B company size, etc. Exclusivity is very valuable, so consider your pricing very carefully. Take your time while negotiating this.
Navigate White Label Opportunities
You may encounter opportunities for white labeling your product. While these can be lucrative, approach them with caution too.
Ensure you retain ownership of your core IP, negotiate terms allowing you to serve other verticals, and use the opportunity to gather data for future expansion.
Work the process
By following this land and expand strategy, you're not just throwing your product into the market and hoping it sticks. You're methodically identifying the most promising opportunities, deeply embedding yourself in a vertical, and creating a strong foundation for future growth.
This approach allows you to prove your value in a focused area before tackling the broader market.
But what happens when you've dominated your initial vertical?
That's when you face a crucial decision: do you stay and own the market, or do you expand to other verticals?
Let's explore this next fork in the road.
The Expansion Decision
Once you've established a strong presence in your initial vertical, you'll face a critical choice:
Stay in the Vertical and Own the Market
Pros: Deep expertise, strong brand recognition, potentially higher profit margins
Cons: Limited growth potential, vulnerability to industry-specific downturns
Expand to Other Verticals
Pros: Larger total addressable market, diversified revenue streams
Cons: Need to rebuild expertise and credibility in each new vertical
This decision isn't one to be made lightly. It requires careful consideration of several factors:
The size and growth potential of your current vertical
The transferability of your solution to other verticals
Your company's resources and capacity for expansion
The competitive landscape in potential new verticals
Of course, there's no one-size-fits-all answer. The right choice depends on your specific circumstances, goals, and market conditions.
But, having the leverage and ability to make these decisions is the luxury of being alive long enough to do so.
Building a horizontal technology startup does not lend itself to lasting very long unless you have an absolute massive amount of venture capital behind you.
It takes more money and more time than you probably think, which is exactly why it’s so difficult. And that’s why I recommend, bootstrappers especially, to find your ICP in a vertical and own that first.
Real-World Example: Shopify's Journey from Snowboards to Global E-Commerce
To illustrate this strategy in action, let's look at Shopify, a prime example of a company that started with a horizontal technology, focused on a specific vertical, and then expanded horizontally.
The Humble Beginnings: Snowboards and Frustration
In 2004, Tobias Lütke, Daniel Weinand, and Scott Lake wanted to open an online store for snowboarding equipment. Their company, called Snowdevil, faced a significant challenge: the e-commerce software available at the time was expensive, cumbersome, and didn't meet their needs [1].
Lütke, a programmer by trade, decided to build their own e-commerce solution. This decision would unknowingly lay the foundation for what would become Shopify.
Identifying the Gap: E-Commerce for Small Businesses
As they built their snowboard shop, Lütke and his team realized they had stumbled upon a broader problem. Many small businesses wanted to sell online but lacked the technical expertise or resources to build and manage complex e-commerce systems [2].
They had inadvertently developed a horizontal technology - a platform that could potentially serve any type of online store. However, rather than immediately trying to serve everyone, they made a crucial decision.
Choosing a Vertical: Focus on Small, Independent Retailers
Instead of marketing their platform to all businesses, Shopify initially focused on small, independent retailers - a vertical they understood intimately from their own experience [3].
This focus allowed them to:
Deeply understand their customers' needs
Tailor their product to solve specific pain points
Build a strong reputation within a defined market
By 2007, Shopify had launched as a dedicated e-commerce platform, still primarily serving small, independent online retailers [4].
Building Vertical-Specific Moats
As they grew within their chosen vertical, Shopify developed features specifically tailored to small retailers:
Easy-to-use store themes and customization options
Built-in blogging capabilities for content marketing
A simple inventory management system
These features made Shopify increasingly indispensable to their target market, creating strong barriers to entry for potential competitors.
The Expansion Decision
By 2010, Shopify had established a strong presence in the small retailer market. They faced a crucial decision: continue to focus on this vertical or expand horizontally.
Recognizing the potential of their platform and the growing e-commerce market, Shopify chose to expand. However, they did so strategically, leveraging the expertise and reputation they had built [5].
Horizontal Expansion: From Small Shops to Global Brands
Shopify's expansion strategy included:
Enhancing the core platform: They continued to improve their offering for small businesses while adding features for larger enterprises.
Shopify Plus: Launched in 2014, this enterprise-level solution allowed them to serve larger businesses without compromising their core small business offering [6].
Expanding services: They added services like Shopify Payments (2013) and Shopify Shipping (2015), creating a more comprehensive e-commerce ecosystem [7].
Strategic partnerships: They partnered with platforms like Facebook and Amazon, expanding their reach across various sales channels [8].
The Result: A Horizontal Success Story
Today, Shopify serves businesses of all sizes across multiple industries. From individual creators to global brands like Kylie Cosmetics and Allbirds, Shopify has successfully expanded horizontally while maintaining its appeal to its original target market [9].
As of 2021, Shopify powered over 1.7 million businesses in approximately 175 countries [10].
Lessons for Founders
Shopify's journey offers valuable lessons for founders with horizontal technologies:
Start focused: Even with a broadly applicable technology, choose a specific vertical to serve initially.
Deeply understand your initial market: Shopify's firsthand experience as online retailers gave them unique insights.
Build vertical-specific features: Create strong moats within your chosen vertical before expanding.
Expand strategically: Use the reputation and expertise gained in your initial vertical to fuel expansion.
Maintain your core while growing: As Shopify expanded to serve larger businesses, they never lost sight of their original small business customers.
Start focused and expand strategically.
Action Steps for Founders
Ready to put this strategy into action? Here are concrete steps you can take:
Conduct Deep Market Research: Identify 3-5 potential verticals where your technology could have the most impact.
Create Detailed ICPs: For each potential vertical, develop a comprehensive Ideal Customer Profile.
Gap Analysis: For each ICP, quantify the gap between their current and desired states, and how your product bridges this gap.
Partnership Mapping: Identify potential strategic partners in each vertical and outline possible collaboration models.
Prototype Vertical-Specific Features: Develop mock-ups or MVPs of vertical-specific customizations for your top 2-3 potential verticals.
Financial Projections: Create 3-year projections for both focused vertical and multi-vertical expansion scenarios.
Decision Matrix: Develop a weighted decision matrix incorporating factors like market size, ease of entry, competitive landscape, and alignment with your company's strengths.
By methodically working through these steps, you'll be well-equipped to make an informed decision on how to target your horizontal technology effectively.
Conclusion
Navigating the path from a horizontal technology to a successful, scalable business is no small feat.
It requires strategic thinking, careful planning, and the ability to adapt as you learn more about your market and customers.
Remember, the goal isn't to boil the ocean from day one.
Start by making a significant impact in a focused area, then leverage that success to expand your horizons.
This approach not only increases your chances of success but also provides a solid foundation for sustainable growth.
By following the land and expand strategy, you can avoid the common pitfalls of horizontal technologies and position your startup for long-term success.
Whether you ultimately decide to dominate a single vertical or expand across multiple industries, you'll be doing so from a position of strength and deep market understanding.
Now, armed with this knowledge, it's time to take action.
Your startup has the potential to revolutionize not just one industry, but many.
The key is to start small, prove your value, and grow strategically. Your journey to success starts with that first, carefully chosen vertical.
And hey, if you want to dive deeper into strategies like this for growing your agency with recurring revenue, or getting your SaaS business unstuck, grab some time and let’s chat.
Sources:
[1] Shopify. (2021). Our Story. https://www.shopify.com/about
[2] Kolodny, L. (2019). Shopify's CEO on the company's origins and its future. TechCrunch.
[3] McKenzie, F. (2015). How Shopify Grew From a Snowboard Shop to a $10B Commerce Ecosystem. Shopify Blog.
[4] Shopify. (2021). Shopify Announces Fourth-Quarter and Full-Year 2020 Financial Results.
[5] Silcoff, S. (2013). How Shopify went from snowboards to software. The Globe and Mail.
[6] Shopify. (2014). Introducing Shopify Plus. Shopify Blog.
[7] Shopify. (2021). Shopify Payments. https://www.shopify.com/payments
[8] Shopify. (2020). Shopify Annual Report 2020.
[9] Shopify. (2021). Customer Stories. https://www.shopify.com/customer-stories
[10] Shopify. (2021). Q4 2020 Earnings Call Transcript.
I'm glad you mentioned exclusivity requests and how to handle them - I've seen a lot of first time founders get burned on these, definitely important to put reasonable restrictions and limitations on them.