What does it mean to be a true category leader?
A few companies rise to the top of a category and dominate it in a way their name becomes synonymous with the category itself: think Google for search, Uber for rideshare, or Dockers for pants. But how do these companies take charge of their category and leave their lasting legacy?
Here’s what we’re unpacking today:
- How to create your own category
- Becoming a category leader/category king
- The “6-10 law” of IPOs
- What being a category leader truly means
Can you explain this concept of ‘category design’?
Dave Peterson: We feel a lot of companies, at least in the tech space, really didn’t pay attention or feel like they had any right to control or define their categories that they operated in. At a simple level, a category is ultimately the approximate real problem you solve. And the categories are the way that people navigate the world. One of the examples we give when we’re talking about this is a grocery store:
When you have a big list of groceries to buy, you walk into a grocery store, and the only way you can navigate a grocery store is with categories. You go through all the different items inside the grocery store based on the categories. That makes sense in the consumer world, but it never really made sense in the tech world.
Can you explain what you call the IPO ‘sweet spot’?
Dave Knox: One of the things you’ve mentioned in the “6-10 law,” related to the IPO sweet spot. Why is that concept one that investors and founders and everyone else needs to pay attention to?
Dave Peterson:The 6-10 law was something we discovered by accident. Our data science team came up with this interesting find: when we looked at funding, it really didn’t have any impact on the successful categories or the companies that became category kings.
But, the one thing that did stand out was: companies that went public in the 6-10 year timeframe yielded all the economics, and then, if you went public earlier than 6 years, even if you had a successful IPO in the long run, you’d be trading at a negative value.
If you went public after 10 years, you may have some positive results, but in the long run, you would see those results dwindle away.
That 6-10 year period is when a single leader for a category starts to emerge. That leader starts to take all the growth with them, and then that’s when the competition starts to fade, which helps boost margins. Growth and margins are 2 of the things that are highly rewarded for publicly traded companies.
We took 6-10 year window and slapped it right over the top of the category evolution model, which says categories take anywhere from 5-15 years to develop, and there was a direct correlation with those 2 things. That’s when we realized, “Wow! There is definitely a fuse that is lit when you’re developing a category, or when you’re building your company and building your products.”
How do you get an entire company to align around taking a stand?
Dave Knox: This point of view requires a company to draw a line in the sand, and take a stand. But getting your executive team, your investors, your board, your employees, etc., all aligned to this point of view is far from easy. So how do you help companies navigate this to come out with something that is not just a safe, watered-down point of view?
Dave Peterson: A strong category needs a thesis — a very strong definition of a problem — a category name that does its job. This is an intuitive place to answer “Where’s the solution to the problem?” Ride sharing is a very easy thing to understand. You don’t have to sit there and wonder what that means, right? You know exactly what that means — but that speaks to the head.
But the point of view speaks to the heart. It starts to help you help customers make almost an irrational decision to choose your company, and to ultimately become a fan of your company. The point of view is built around an almost “debate framework” of framing a problem up-front: clearly articulating the ramifications of that problem, painting a picture for the future, and then explaining very clearly what to do.
Now, this has been used in every debate since the beginning of time. It’s been used in every infomercial that you’ve ever seen.
When you bring a point of view into the mix, it can speak to the heart and move people’s behavior. It can make it clear that the old way the world worked is silly or stupid or dangerous, and the new way is something you should embark on.
The example of Elon Musk’s point of view:
I think one of the greatest category designers out there right now is Elon Musk — you can pick on his personality all you want, but he’s definitely bringing us to his world with his point of view on many things.
There’s a fine line between a mad scientist and somebody who’s going to get us to Mars and die. But every time they launch something into space, we’re sort of rooting for him, because we know through that point of view he has a vision that we can get to Mars and back someday.
Does everyone think you’re crazy when you first start building a category?
Dave Peterson: I would argue one of the most important rules of thumb is this: today’s solution creates tomorrow’s problems. Every time you find yourself in a particular category, you gotta understand that that category has a natural curve to it. It starts off with everyone thinking you’re crazy. All of a sudden there’s this massive surge of adoption and a bunch of VC money comes rolling in. A bunch of companies emerge. Eventually, 1 company starts to rise and become the category leader.