What is category creation?

Category creation is the art of positioning your startup—its service or product, brand and messaging, and voice—in a space where there is no competition. Whether you’re launching your startup, getting VC investment, or launching new products or services, it’s all about positioning. For example, when Xerox created the first xerographic image in 1938, it created a unique category and dominated the photocopy market for decades.

Some startups are able to create successful, entirely new categories, while others need to position themselves in existing markets and carve out successful niches. Many startups believe that investors only want to invest in category leaders—but this is only partially true. Investors want a stake in companies that can grab market share, whether they are category creators or late movers. As there is a case for pitching your startup as a category leader or a late mover finding the perfect niche, let’s start by looking at the pros and cons of each approach.

What are the advantages of being a late mover?

Bushnell’s Law states: All the best games are easy to learn and difficult to master. They should reward the first quarter and the hundredth.

This aphorism from Nolan Bushnell helped him create the video arcade sensation Pong. Following the success of the home version of Pong, Bushnell got the idea of making a video game console with removable cartridges. By 1979, Bushnell’s Atari was the fastest-growing company in U.S. history, controlled 75% of the video game market, and was in complete control—and was even seen in movies and TV.

By 1984, however, the company was in trouble and top programmers such as Steve Jobs and Steve Wozniak were leaving the company. Despite introducing at-home video games to millions of consumers, other competitors—such as Mattel and Coleco, and later Nintendo, Sony, Sega, and Microsoft—quickly grabbed Atari’s market share.

Startups would be wise to remember a few points from Atari’s meteoric rise and fall:

  • Atari did leverage its first-mover advantage to dominate the video game console for a few years, and the Atari 2600 is still the 18th best console seller of all-time—having moved 30 million units.
  • Atari tried to create many different game cartridges and make a small profit on each sale rather than simply trying to improve the quality of their big-name hits—Pitfall!, Donkey Kong, Pac-Man and Ms Pac-Man, and Space Invaders.
  • Atari’s rivals were wise and focused on fewer games—but with higher quality.
  • Recall that former Atari programmer Steve Jobs “saved Apple” by slashing the number of Apple products by 70 percent.
  • Atari’s two other businesses, arcade games and home computers, however, were not profitable—while their home video console product was overtaken by ColecoVision and Intellivision.
  • This last point demonstrates the so-called pioneer syndrome among startups—they often create the market, build marketing and growth strategies, and build product awareness, only to be surpassed by a stronger competitor who has copied or improved upon their ideas and research.
  • As Atari was getting ready to launch its next update, the video game landscape had already changed—the great pioneer was quickly dying from bug bites and dysentery while the next settlers were taking advantage of the roads and infrastructure that Atari built.

How can creating a category elevate your brand?

While the popularity of video games was never higher than during the worst days of the COVID pandemic, the availability of coffee peaked during the start of the US baby boom (1946)—at 46.4 gallons per person. As many US baby boomers were getting ready to retire in 2014, the per capita availability of coffee was down to about 19.6 gallons; yet, by 2015, the coffee industry was taking in more money than ever:

  • $225.2 billion was the total economic impact of the coffee industry in the United States in 2015.
  • 1.6% of the total US gross domestic product was coffee-related economic activity.
  • $74.2 billion was spent by consumers on coffee in 2015.

The natural question then arises: if overall coffee consumption dropped by over 50%, how did coffee revenue explode? Starbucks did its part by taking a standard cup of coffee and creating a status symbol—an accessible luxury for people. But what about Keurig and their coffee capsules?

Keurig made its mark in the robust coffee industry by fulfilling the two main components of category creation:

1. Creating or borrowing a great product design

Keurig provides a convenient, clean, one-cup-at-a-time pod-style brewing system using premeasured, sealed coffee capsules with over 200 varieties.

Apple, meanwhile, didn’t create the MP3 player, they found the right product and came to dominate the market with the iPod.

2. Implementing an innovative business model

By first distributing their coffee pods to offices, they built brand awareness before selling to individual consumers and homes.

In the same vein, Apple’s iPod took over the MP3 market with a sleek, intuitive design, but—more importantly—seamlessly integrated it with their iTunes music management software.

Even though one K-Cup of coffee is about 10 times the cost per cup of more traditional pots of drip coffee, consumers love the speed, convenience, and lack of cleanup. K-Cups didn’t just make a better cup of coffee, they offered an entirely new experience in a very old market and delivered the convenience coffee drinkers didn’t know they needed.

You’ve read the numbers on LinkedIn posts: “13 companies that were instrumental in creating their categories accounted for 53% of the incremental revenue growth and 74% of incremental capitalization growth over three years.” Now, it’s time to explore the meaning of those figures with a deep dive into the nuts and bolts of category creation.

When to be a category creator?

If you want to be a category creator, you have to ask yourself a few questions:

  • Are you sure your product solves a problem?
  • Are you ready to put customers first and let them champion your category?
  • Are you willing to market the new category over your brand?
  • Are you backed by deep VC pockets?

Does your product or technology find a new way to solve a problem? Remember, Uber didn’t create a better taxi, it created “on-demand rides.” It’s important to win the battle for popular opinion—marketing’s “air wars”—to push the market to embrace change.

If your sales team has to explain how the product works, then you will have some unhappy salespeople and your customers will never be able to champion your solution.

Not allowing your customers to champion your product is also a mistake. Think of people who are willing to camp out on the street for an iPhone—these are the famed early adopters. Early adopters are willing to pay more to get products earlier than the rest of the market, and they go out of their way to tell their friends and colleagues about the new product, even through posts on social media.

Also, pay attention to how customers describe your product. If you get too attached to a word or phrase that describes your solution, your ego may cause you to miss out on free golden ticket suggestions from already loyal customers.

How can your startup stand out in a crowded market?

Finally, creating a category takes a long time and resources, so you’ll need a lot of patience, effective marketing, and some deep pockets to fund your efforts, which isn’t always easy for a new business.

For example, Waveup worked with a startup that introduced an entirely new modular housing system that allows people to change the wall design and setup within their house. The company gathered initial investor interest and raised funds successfully, but we saw the common difficulties they afterward:

  • Marketing and branding are extremely expensive
  • Other companies with more funds started copying their playbook

In such cases, retaining the initial advantage comes down to the team’s ability to secure go-to-market partnerships with bigger players. This allows them to get to market faster than competitors emerging along with the ability to secure patents.

Waveup has also had many cases wherein startups have:

  • Successfully taken on an existing category
  • Identified a clear, unmet need
  • Addressed the need
  • Won praise from consumers and raised large rounds of funding

One Waveup client raised $20M Series A for a solution in a very crowded market with loads of legacy competitors and new startups.

What was their advantage?

Their UX was simply more intuitive and focused on the end user—in addition to a strategy that really focused on the community. This vital detail empowered them to capture consumer love and loyalty and catch up on growth with other competitors—and become a unicorn in less than 2 years.

How can a late mover create a category?

Genetic testing has been around since the 1950s. It’s not new. Yet, Concert Genetics somehow found a way to create a voice that communicates their ability “to provide tools that connect, unify, and simplify the world of genetic testing.” Genetics—with tens of thousands of different tests on the market—is a very complex industry.

Clinics need to find the best tests available, which often involves having to worry about complicated tracking systems across test selection, billing and ordering systems, and protecting customer data.

Hence, Concert is bringing everyone on the same page—in concert—with its comprehensive genetic test identification system which empowers a level of automation in genetic test ordering, coverage, payment and clinical decision support.

By creating the category of precision medicine, Concert removed a great deal of the mystery and disagreements between healthcare stakeholders—such as health care plans, insurance providers, labs, and medical professionals—and created a winning category.

Another company that became a category creator without inventing its product is Tesla. Electric cars have been around for 190 years, but the innovation that made Tesla a true winner was its flywheel system, in which wins for your business build on one another over time, gaining momentum so that growth almost seems to happen magically. Tesla’s flywheel includes:

  • Hardware
  • Software
  • Retail and Services

Tesla now charges $7,000 for its full self-driving software—totalling $500 million in deferred revenue. This software has made its way into retail and services, giving Tesla direct access to consumers and successfully leveraging its proprietary data to sell insurance in California.

Tesla’s flywheel of cars, software, and retail and services have elevated it from a mere car company to a category creator and true global icon.

Keep category creation simple

If you’ve ever met a taxonomist or scrolled through social media, you know that people like to put things and people into categories. It’s human nature. Keep your category creation simple. If people can’t understand the category—even with an explanation—then it’s too complex.

Make it clear and relatable. New categories like e-commerce, used in relation to the iPhone, took existing words and made simple, understandable compounds that communicate what they are. If you try to outsmart the market, don’t expect to own a category.

Finally, remember that Elon Musk didn’t invent the electric car and Steve Jobs didn’t invent the mobile phone—but both were able to create categories. In fact, it doesn’t really matter if you are a first or late mover. Investors are looking for startups that have:

  • Developed a clear niche
  • Built a competitive moat (powerful brand and unique tech, economies of scale, community and networking effects, and special government status)
  • Monopolized the market and have shown they can keep generating cash flows

Show that your execution strategy is focused and different from competitors. It’s not about getting to the Moon first—it’s about owning it.

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Igor Shaversky

PARTNER AT WAVEUP

In the last 10 years Igor helped over 500 startups and venture funds around the globe to raise over $3B+ in funding | Big fan of everything lithium-powered - helped on several battery and bike-sharing investments; and now driving & exploring the world of EVs on his own | Huge believer in the enormous potential of VR, AR and Metaverse | Travel addict - visited over 100 countries & completed 2 round-the-world journeys | Spent his first money on a snowboard and has been snowboarding ever since - 16 years and counting