Saturday, August 02, 2014

Beware the Monoculture: The risks of focusing on San Francisco and New York

I just finished reading a good analysis of the market opportunity for valet parking startups, written by Charles Hudson. He writes that the real competition for these startups may be public transit, Uber, Lyft and ridesharing services. In San Francisco, where he's based, he notes that these services have cut down on the use of cars, and therefore, the need for parking. However, it was while reading his post that I realized that San Francisco is primarily representative of San Francisco, and that extrapolating from the San Francisco market could get startup founders, as well as investors and analysts, in trouble.

San Francisco has been a parking nightmare for decades--at least from the time that I moved to the Bay Area in 1983. It's hard to find commercial parking, and it's expensive when you do find it. On-street residential parking is a nightmare. On the other hand, despite the many complaints about the Muni bus system, San Francisco has a very good public transit system, with busses, subways, streetcars, cable cars and trains. It was an early Zipcar market, and it's also the home of both Uber and Lyft. The availability of so many transit options grew out of the natural limitations imposed by San Francisco's geography and the concentration of startup talent.

You don't have to go very far to find a counterexample to San Francisco. Los Angeles is much bigger and more spread out than San Francisco, even though its downtown is smaller than San Francisco's. Los Angeles's public transit options range from poor to nonexistent. Cars are essential for getting around Los Angeles--its geography shapes the market for transit options just as surely as San Francisco's does, but in a different direction.

That illustrates a problem that many startups are faced with: There's demand for them in the area where they were founded, but demand tapers off dramatically when they move into different markets. For example, meal delivery services have flourished in both San Francisco and New York. Even though New York is much bigger than San Francisco, both cities have highly concentrated populations and multiple transit options. Both cities also have a proportionally large population of high-income earners, who can afford to pay for convenience. However, conditions are very different in, say, Omaha, Denver and Dallas. That limits the growth potential for those delivery services--they may do very well on the coasts, but find limited viable markets in the rest of the U.S.

There are many other services that you can think of that take advantage of the population concentration, transit options and high-income populations of San Francisco and New York, but that may not play as well in other places. There are also services that target other unique market characteristics--for example, a dating service that targets techies might be very successful in New York and San Francisco but less so in Pittsburgh or Cleveland, which have much smaller young techie populations.

You might say "We did lots of customer development and found that there's high demand for our service." That may well be true, but where did you talk to potential customers? If you only talked to them in your home city, you've probably got a biased sample. It's important to talk to people in multiple cities with different underlying conditions. Only then can you begin to understand where your service will and won't work. That, in turn, will help you to more accurately gauge your Total Available Market, and you'll be able to launch in the markets where your business is most likely to be successful. In short, successful customer development requires that you not only get out of your building to talk to customers, but that you get out of your home city as well.

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