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Starting any business is hard, but creating a new category of business with a completely new model is a high-wire act. Companies have to convince investors, customers, the media, analysts, and others that something the world has long managed without is now a necessity and legitimately constitutes a new business category. While educating and selling the market on this new category, there’s also a business to build and a whole new business model to formulate. Pulling this off is like delivering a nonstop TED Talk while inventing the light bulb and building General Electric all at the same time.
Many people feel it’s a challenge worth taking. Category creation is the holy grail in business. Companies that succeed at creating entirely new markets, industries, or product categories — like Airbnb, DocuSign, and Salesforce — generate wealth beyond their founders’ wildest dreams. The spoils are so great that the winners are often referred to as category kings. Over time, their brand name becomes virtually synonymous with their category, effectively barring new entrants.
Once a king emerges, would-be competitors become also-rans, or commoners. These businesses find it increasingly hard to maintain support: Media and analyst attention dries up, leading to less investment and fewer customers. Ultimately, they are sold for parts or shut down altogether, like Napster or AltaVista.
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Getting this high-wire act right is critical. Competition in new categories is more intense than ever. The cost of starting a digital company has shrunk by 90% in the two decades since the dot-com crash, thanks to the emergence of open-source software, cheap cloud computing, and social media platforms that offer low-cost advertising and free publicity.1 Low startup costs mean more startups, more categories, and more competitors vying for consumers’ limited attention.
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1. R. McDonald, A. Burke, E. Franking, et al., “Floodgate: On the Hunt for Thunder Lizards,” Harvard Business School case no. 617-044 (Boston: Harvard Business School Publishing, 2017).
2. R. McDonald, “Category Kings or Commoners? Market-Shaping and Its Consequences in Nascent Categories,” working paper 16-095, Harvard Business School, Boston, January 2020.
3. The Slack ad is reminiscent of Apple’s 1981 ad in The Wall Street Journal welcoming IBM to the personal computer market.
4. “Website to Rank Financial Advisers on Investment Results,” Bloomberg, Oct. 8, 2007, www.investmentnews.com.
5. Clayton Christensen first articulated this simple but game-changing insight in 2005, when he explained that although business leaders knew more about their customers than ever before — thanks to big data and sophisticated analysis tools — they were misunderstanding why people make purchases. They assumed that people buy things because they fit a particular demographic or psychographic profile when in reality people “hire” products to help them make progress in the circumstances in which they find themselves. See C.M. Christensen, T. Hall, K. Dillon, et al., “Know Your Customers’ ‘Jobs to Be Done,’” Harvard Business Review 94, no. 9 (September 2016): 54-62.
6. D. Sacks, “Bill Nguyen: The Boy in the Bubble,” Fast Company, Oct. 19, 2011, www.fastcompany.com.
7. E. Lee, “Why Did Color Labs Fail?” Collapsed, Aug. 15, 2017, https://collapsed.co.
8. D. Thier, “Digg Founder Kevin Rose Takes to Reddit, Talks Regrets,” Forbes, Aug. 2, 2012, www.forbes.com.
9. RaphaelM, “5 Things You Need to Know About the Rise and Fall of Digg.com,” Harvard Business School Digital Initiative, Nov. 18, 2016, https://digital.hbs.edu.
10. D. Rowan, “The Inside Story of Jan Koum and How Facebook Bought WhatsApp,” Wired, May 1, 2018, www.wired.co.uk.
11. C. Gallo, “Storytelling Tips from Salesforce’s Marc Benioff,” Bloomberg, Nov. 3, 2009, www.bloomberg.com.
12. A. Webb, “The ‘Uber for X’ Fad Will Pass Because Only Uber Is Uber,” Wired, Dec. 9, 2016, www.wired.com.
13. R. Mac, “The Inside Story of SoundCloud’s Collapse,” BuzzFeed News, July 28, 2017, www.buzzfeednews.com.
14. L. Sanchez, “Groupon’s Evolving Business Strategy,” The Motley Fool, March 19, 2019, www.fool.com.
15. L. Darmiento, “Ethan Brown Went Vegan but Missed Fast Food. So He Started a Revolution,” Los Angeles Times, Jan. 10, 2020, www.latimes.com; and S. Brownstone, “Can Silicon Valley Make Fake Meat and Eggs That Don’t Suck?” Mother Jones, Dec. 2, 2013, www.motherjones.com.