In 1996, Marshall Mather’s debut commercial album was a flop. Mather’s sold the record from the trunk of his car in Detroit car parks. It is rumoured to have sold just 70 copies. When it was reviewed some years later, it received 5.5/10 stars by Rap Reviews.
In 1999, Eminem aka Marshall Mather’s released, ‘The Slim Shady LP’. It sold 283,000 copies in its first week and propelled Eminem into international stardom. The album became certified double platinum. Rolling Stone would later rate it the 352nd greatest album of all time.
So what happened?
How did Marshall become Eminem and go from broke to platinum with the same voice?
The rap industry and the tech industry are similar. There are thousands of talented artists and entrepreneurs with the same problem, distribution.
In a world, where consumers have limitless choice, and limited attention, there seems to be zero bandwidth for new apps & underground artists. How does anyone break through the noise of thousands of SaaS products and mumble rappers doing the same thing. And even if you are different, how do you convince anyone to care?
People’s care factor is usually zero.
It really is the defining problem of the generation.
In the words of Naval, ‘it has never been easier to start a business, but it has never been harder to build one’.
Music and tech have become hyper-competitive as the tools to build have become democratised making production available to all, yet building a sizeable audience is reserved for a select few.
When Dr Dre signed Eminem, he realised he had a distribution advantage. The rapper’s lyrics and looks were provocative — it sparked a publicity engine that spiralled the rapper to number one (he was also genuinely amazing at rapping but so are lots of people who aren’t famous).
AirBnB was the same. Journalists loved writing about the startup where strangers slept on your bed in your living room.
Venture capitalists are also trying to look for talent that has some distribution advantage, a way of reaching people that the many other talented competitors simply can’t. These answers are a tell-tale sign there is no distribution advantage at the early stages:
- ‘We are going to use channel partners’
- ‘We are going to use Google advertising’
- ‘We are going to use product led growth’ (product is an MVP…)
- ‘We are going to list on X marketplace’
All of these are great channels for established businesses, Atlassian sells predominately from channel partners. But that’s the problem. How can an early stage tech company compete and stand out, when that is what everyone else already does.
Here are distribution advantages which we look for when evaluating companies. Others have different lists to us.
Fundamentally, a market is a community of people who have a particular need. It helps that some startups have already ‘cornered’ this community where they either have created the community or have an exclusive way of reaching an existing one.
Let’s look at the two examples:
Selling to an existing community is perhaps the greatest distribution advantage of all. Fractal, is an NFT marketplace startup founded by Justin Khan in 2021. Before they even launched a product, they had 100,000 people in their company discord. It’s a common advantage for celebrities but can be done by anyone. Some companies with non-famous founders (yet) are even creating the community before they launch the product (cough cough Earlywork ;).
Some startups may have exclusive access to a pre-existing community by virtue of the founding team. It’s common for Y Combinator companies to sell their products to the thousands of companies in the alumni community. Alumni networks, special relationships, past achievements are all reasons the founders may have access to a particular community of target buyers.
Mission based does not extend to aspirational company values like ‘do good’. I am referring to companies that are actually in frontier technology that could change the world. From creating electric planes to cultured meat, these mission based companies have a huge distribution advantage that has an effect on all others — publicity engine, partnerships & access to existing communities.
‘When you want something, all the universe conspires in helping you achieve it.’ — Paul Coelho
Zoox is a great example of this — the Aussie company was one of the first self-driving car companies in the world. Their mission attracted press, talent and led to a partnership with Amazon through a $1.2 billion acquisition.
A normal SaaS company won’t have these type of distribution advantages, not even a climate tech SaaS.
Early Strategic Partnerships
There are many flavours of early strategic partnerships, to list a few:
- Strategic Investor
- Strategic B2B Partnership
- Strategic Influencer Partnership
An early stage company can leverage the extensive distribution networks of others to promote the product. An example of B2B partnership could be a company like Harrison.ai (radiology AI) partnering with a large health care provider to roll out their technology to all their clinics.
We always look for hints that this is a possibility.
Take for example our portfolio company, Lygon. Their strategic partnership with the banks is so important because they manage 73% of all their target market. They only need three companies to be on board before they can reach most of their target customer.
Viral effects, not to be confused with network effects, are when each user of a product tells more users about the product. Word of mouth leads to exponential growth.
So how do you know if there will be viral effects at the beginning?
Many entrepreneurs have well-thought-out product strategies to obtain viral effects. Examples include:
- Superhuman: When you receive an email from someone with the email software, it says, this email was ‘powered by superhuman’. Every email sent by it’s users is a force multiplier of viral effects.
- Linktree: Each new user of Linktree, becomes free publicity for Linktree, as their followers interact and discover the value proposition of the business.
These are the types of mechanisms at play we look for.
Access to Underpriced CPA
Cost per acquisition (CPA) is the lifeblood of paid distribution. It refers to how much it costs on social media advertising to get a customer to purchase the product.
If you recall, a red flag that there is no distribution advantage when someone says ‘we will spend money on Google search ads’. This is because these are auctions where the highest bidder wins, a race to the bottom, where early stage companies are the first to lose. This same holds true for a lot of media buying online — CPA's are expensive.
But if, an entrepreneur can show they have access to mispriced CPAs, then this is a huge advantage. It may come from being first on an emerging platform e.g. selling on Tik Tok in 2019 or developing a new mode of buying ads e.g. Eucalyptus.
Word of mouth and publicity sell.
Not many people at barbeques talk about amazing B2B SaaS tools they have used nor does SMH do front page articles on the joys of invoicing software. Companies with remarkable founding stories, wild products and wild missions are publicity engines. It’s free distribution.
We are looking for the tell-tale signs that a company is a content engine.
Is there a way of making users generate content the platform can use? Is there a body of content they can leverage? Is there a way they can produce content better, cheaper & faster than everyone else?
A copywriter, SEO specialist or growth marketer can be accessed by anyone willing to pay market rate but some businesses have access to a free content engine. Yelp’s entire business model is built around user generated reviews.
In a world with a million rappers and startups, only the ones with distribution advantages will win.