A VC friend of mine recently described his investment considerations. He mentioned one idea that many VCs think about, but rarely mention: new companies should typically try to leverage the existing value chain.

Disrupting a market segment is a huge undertaking; disrupting an entire industry vertical is much harder. While some exceptions exist (particularly when companies are really creating a new space and therefore not leveraging the existing value chain), many spaces rely on other sectors. For example, if you are starting a cell phone manufacturing company (e.g., Motorola), you will likely rely on the existing service providers (e.g., AT&T). If you made a cell phone that isn’t compatible with any of the service providers, you will either have to get them to adapt or try to create your own cell phone service company. Assuming that they will change is risky and trying to create two companies at once (a cell phone manufacturer and a cell phone service company) will be very hard to do well.

Ultimately, this idea is pretty simple, but worth thinking about. If your company relies on changes in other segments of the value chain, your odds of success go way down. As a result, you should generally focus on beating up the companies in your narrow segment, and working with everyone else in the value chain.

Comments

[James Gillmore]

However, sometimes every so often the right move is to disrupt the market. It will set you a part and be your unique value proposition. It will be risky because it depends on somethings outside of your control, generally having to do with the powers that be. However, if you think you can really pave the way because what you're offering is really just changing a backwards industry, it could just be perfect. At the end of the day some of these backward industries (real estate, lending, etc) need to be changed eventually. After all the increased efficiency that technology provides pretty much can't be stopped. So the typical VC question for such a contender is: ARE YOU THE RIGHT GUYS FOR THE JOB?

[bola ogah]

i found the article very useful, just came at the right time when i needed it, my suggestion for a topic would be on choosing the most stuitable structure for a business and do you mind talking about partnerships in business, the legal implications and all. that will be useful