When a startup succeeds in creating a new market or industry, there’s often a “gold rush” phenomenon of others trying to grab a piece. But not all of these spin-offs are copycats.
Once the space is saturated, hustling entrepreneurs identify the need to offer support services, and that’s how derivative startups are born. Typically, startups have one or more needs that are unmet internally. For example, most startups can’t afford a full-time attorney to perform legal and compliance work. This creates an opportunity for another startup to serve as outsourced compliance and due-diligence professionals. Other new companies might spring up to help with logistics, infrastructure, payment mechanisms, data aggregation or customer service.
When I started my real estate crowdfunding company, we were addressing a gap in the market, but we couldn’t solve all of our own pain points. We needed derivative startups to help us thrive. By partnering with them, we’ve been able to address some of our biggest challenges.
Just as fungi help plants thrive (and vice versa), derivative businesses form a symbiotic relationship with disruptors. As the second wave of innovation, they allow emerging sectors to flourish.
Why disruptors need derivatives.
Disruptors arise to meet an unmet need, but they often generate their own gap in the market. Derivative startups can provide the missing puzzle piece. For example, when Airbnb disrupted the hotel industry, its business created an unmet need for property management services. After their experience as hosts for Airbnb, Guesty’s founders developed a system to fill this need and take the pain out of the sharing economy for hundreds of thousands of hosts.
Secondary startups like this address bottlenecks in new processes and allow innovators to scale. Consider ride-sharing services such as Lyft and Uber. They revolutionized the transportation services industry, but the limited number of car owners hampered their potential to scale up. Derivative startups Breeze and HyreCar arose and began leasing vehicles to Uber and Lyft drivers throughout the U.S., thereby solving the new industry’s bottleneck.
Disruptive startup leaders should encourage this growth rather than look at disruptors as challengers. By nurturing support services companies, a disruptor can foster his own company’s growth and allow his industry to mature and evolve. Here are three ways to facilitate derivative startup success.
1. Communicate your needs.
Seek out enthusiastic business leaders who want to provide services to growing companies like yours, and speak candidly about the challenges you’re facing. Whether you’re attending a conference, conducting interviews or working with an incubator, be vocal about the verticals of your business that need support.
For example, my team participates in speaking opportunities at large conferences on real estate crowdfunding. Each time, dozens of people meet with us to uncover our industry’s pain points. Then, they go to work on creating a startup to address those issues.
2. Invest in derivatives.
Directly funding a derivative of your company might seem strange, but it’s good business for both sides. When disruptor employees quit to form a new startup, they solve challenges they identified while working for their old company. Former employers invest in the fledging startup because they recognize that it can help solve their pain points.
For instance, Marc Benioff left Oracle because he saw a need for a customer relationship management tool. Former Oracle CEO Larry Ellison invested in Benioff’s successful Salesforce platform, and years later, Benioff invested in DocuSign, another derivative business that supports CRM platforms.
3. Be the beta tester.
Signing on as a startup’s first customer is frightening, but that calculated risk can pay off if the company succeeds. By testing its services and engaging in an honest, open dialogue about ways the company is or isn’t meeting your needs, you’ll help the startup help you. Be willing to act as a guinea pig, but don’t be shy about providing constructive feedback.
More opportunities for derivative startups emerge daily. Every new industry spawns a need for new players to address pain points for disruptors, and would-be entrepreneurs are racing to fill these needs. Embrace these derivative startups, and you’ll allow your business and your industry to flourish.