Ideation on a Category

How does an entrepreneur think through a market hypothesis for their start-up?

I know many people start with a "scratch their own itch" or a "this is cool technology" approach.

If you're interested in how I tried to synthesize (not saying it's right) different approaches and theories on startups and disruptions, read on.

My approach is to take my understanding of key start-up ideas, with the primary goal of creating a category-defining start-up.

The initial idea

This describes my thoughts on how to develop a hypothesis for a potential start up after starting with the technology first.

After working in a company which deployed serverless on the edge and diving into the blockchain, I thought there should be a decentralized compute. Some of this came from falling into the "memesis" trap. In this case, I studied Helium for a long time and their outcomes seemed amazing. I wanted to apply their decentralized approach to new market categories.

I'll describe Why Helium is a great project to learn the power of blockchain but for now, let's just start with the starting point.

The technology was a WASM-based, serverless compute that used ZK proofs and blockchain-type consensus to trust minimize each node.

The adoption problem

As I entered the market, I realized I hit some headwinds that I originally thought were tailwinds.

While WASM is probably the next version of cloud after Kubernetes (not an immediate rip-and-replace, but likely to eat away at use cases), it seems to still take a while for adoption. Serverless makes so much sense, but that adoption is not here yet. So combine makes it hard to find a path for growth.

On top of this, these trends are first-order, meaning, most people already recognize that they will come. This means the large giants will adopt it, increasing the competition (which isn't bad if it means it is meeting existing demand). But it's difficult to own the category.

So the question became whether a decentralized compute would open demand.

Now we look at Helium.

Helium's proposition was it rapidly created supply by front-loading the capital expense on consumers and, through the token design, let them get positive ROI's, as early as within six weeks for the early adopters.

However, it didn't seem to do much for the demand supply -- the user of their IoT network. This paid per request usage is what should drive the token-based flywheel: as the usage goes up, the price goes up, which attracts more miners. But as is often the case, creating supply does not typically create demand.

This is why finding demand is usually better to then fulfill with supply. Or have demand drive supply.

Given there was little existing demand for WASM serverless that could be owned as a category, adding on "decentralized" because of my love of Helium, didn't really make for a combination that would yield rapid growth.

Starting with Markets

I know I read this somewhere and don't remember. But the concept of Product Market Fit needs Markets. Growing. Not necessarily starting big, but a potential to be very big. If the market as defined is already big, then there will already be or soon will be lots of well-funded players. That's rough.

It's better to find the smaller market that you have insight will grow fast and then become a very big market.

Classical disruption theory by Clayton Christensen tended to follow this by targeting non-consumers with "barely good enough" technology. As the technology went up market, the TAM would grow. This is a nice opportunity if you can find it because it is almost like a law of physics.

However, finding an existing large market where the UX is badly broken is also good. Stripe and Airbnb fit that category. Credit card process was always large and fragmented. They did the schlep work to make it better. Hotels and vacation homes already existed. Arguably their "couchsurfing" model from the beginning is like Christensen, but they rapidly entered a space where VRBO had already been inhabiting; but they grew into an existing market by making the User Experience better than both VRBO and traditional hotels.

Existing demand feels like the surest way to grow quickly. Yes, there are companies that stumble onto an opportunity that hijacks existing demand and then makes it into so much more. Slack stumbled onto messaging and there were a ton of messaging companies already. They made the UX way better.

So how else can a start up enter large existing markets?

I read somewhere (find reference) that business model innovation is a meaningful component of a successful, disruptive startup.

The simplest version is as described by Christensen. His version of business model innovation is to provide, because of technical innovation, disruptive price. For example, Haier worked on solving the need for smaller refridgerators to serve the Chinese middle class; so they were able to offer their fridges at dramatically lower prices.

Innovations can change the economics and the market behavior. Google made advertising at scale cheaper and self-serve, which rewired the typical advertising process and relationship between the buyers of ads. They then captured the value by changing the value chain between advertisers, advertising agencies, and consumers.

Dell's innovation allowed them to have the cash first from the customer so they never carried inventory cost through JIT while providing personalized computers.

Picking a market where compute may matter

Given this background, I started to look at a different set of possible market categories where compute mattered and had growth characteristics.

The gaming industry is growing, has a huge TAM, and has different segments, stakeholders, and personas that create a rich environment to find a specific niche that can be targeted with unique technology.

This is a bit of a weird state of mind: to hold in one hand the existing technology while trying to be open to a large market and find problems.

The typical challenge is that holding onto existing technology may bias the search space. The typical start-up approach is to hold a pure problem seeking mentality and then build the technology.

In my case, I thought the existing technology could give me a specific Point of View to solve problems. Not saying it's right, but I do think having a strong, believable, and executable Point of View is more likely to find a meaningful category. But it can also lead to problem blindness. Like I already wrote that The Future is Decentralized Verifiable Compute...so I'm definitely biased, and needed to hold more lightly while searching for problems to solve.

I had other categories in the list, but gaming kept coming back. I felt intrigued, even as a non-gamer, and its size and dynamism suggested optionality. So I decided to work backwards from the gaming industry.

Thinking about personas and GTM at the same time

Product market matters, but product-channel-market fit determines viability and growth. If the channel is too obscure or takes a long time to reach the market (the users or buyers) it's tough to grow fast. At minimum it's tough to validate.

What may be a tough persona for some may be easier for others. This depends on the product and entrepreneurs.

Businesses are easier to target directly, but if you have to reach 2 million restaurants to have a viable market, that becomes tough (or you have a clear conviction on how to do so, as did Door Dash)^[1].

Consumers may give you more rapid feedback (they buy or bounce), but reaching them at a meaningful scale can also be difficult.

On the other hand, large enterprises are easier to identify by name; but finding the right buyer in the compliance department, for example, can be challenging.

I also heard a tip for another entrepreneur: pick the persona and the industry you love, because you'll become them. So if you think you would not get a kick out of talking to, say, insurance adjusters all day long, don't pick that market.

So within the gaming industry, I needed to think through the possible personas of gamers.^[2]

For me, I felt I connected with:

• Bargain Buyers
• Community Gamers
• Popcorn Gamers

This wasn't just due to personal connection. I think these are more likely to be larger markets overlooked by the "Ultimate Gamer" which, to be sure, is an important segment. But I felt these could be good influential segments of the market that might not be targeted as much as the hardcore gamers.

How to reach them?

It was hard to think through how to actually talk to them other than by putting up the landing page and trying to create offers to reach them to test the market. But validation is different from an actual GTM. Relying on AdWords as the GTM is pretty much a dead in the water approach for most start-ups.

So I thought about who is the other persona, is there a different customers to consider?

I felt it was the small and mid-sized developers

They already have a userbase of players. Whether they communicate with them is another matter (I suspect most don't).

They can be contacted more directly and a business proposition might be possible for them.

IF pains on both sides could be met in a unique way, this felt like a worthwhile market to target.

It met a few criteria at this phase:

• A willingness to spend
• Targetable and approachable
• Growing in numbers

Testing a Point of View

At this point, the best approach of course is to have lots of conversations and uncover a pain point. This is classic customer discovery.

Increasingly I feel that, because it's such a well-worn path, it's likely a first-order approach that yields first-order problems. That means the market wil have lots of similar solutions.

However, knowing what customers think are their real pains should never be ignored. I think, however, with Google and some assumption, many problems can be hypothesized and then the test should be with a new POV.

This approach of the POV is where the innovation will come and the grit and insight of the entrepreneur comes in.

The purpose of the POV is to force customers to make a choice.^[3]

Where does this POV come from? It comes from living in the future.^[4]

Honestly, I didn't think I was somebody who lived that much in the future. I had lots of ideas of things that I felt could solve problem or be interesting, but I didn't have often a strong point of view of the future.

However, this changed with web3.

While lots and lots of web3 seems like lots and lots of nonsense^[5], I do believe there's a technology-enabled principle at the center: ownership.

Tokenization can create ownership in things that couldn't be owned before. That potentially unleases new business models in existing but potentially growing markets.

So I then thought through, with the personas and markets, where can I zero in on ownership as a unique POV?

The Gaming Cloud Market for Multi Player Games

Jumping into a flood of existing demand that appears to be growing is a better bet than wading into still waters.

Cloud gaming is growing. I have not been a gamer, but from a quick study, much of the gaming industry centered around beefy PCs or dedicated gaming consoles.

However, Covid was a catalyst (also a good sign for opportunity) that accelerated cloud gaming.

However, big players have entered^[6] (and exited^[7]). This is usually a very bad sign when Amazon, Google, Microsoft and Nvidia enter a market based on compute.

It still is a huge concern, but I wanted to continue to test the waters.

What if we could work a special niche that is too small for the big players to want to enter but that could position us in a new and different market?

With the "ownership" POV I asked if "player owned servers" could be a potential "future"?

Why would player owned server be a wedge in the market?

The concept of a player owning the server could potentially play into the concept of decentralized servers. This would go after a horizontal cut of the gamer personas we looked at, meaning that "ownership" could be a value of any of those personas.

In general, ownership creates incentivized behaviors of "super sellers" which tends to throw fuel on businesses, especially those with marketplace dynamics.

But it's a weird and wacky idea that piggybacks on existing customer behavior.

Why does existing customer behavior matter?

The best way to begin iterating is to satisfy existing demand. Is there a risk we solve for a local maximum and never get big? Yes, and that risk is big.

But it's important to show some traction and a strong conviction that the behavior, if enabled by the startup's secret sauce, can make something much, much bigger. I'll tackle that bit of art and guesswork later.

But getting some kind of traction and interaction with the desired market matters for many markets.

So what is the existing behavior?

Gamers hosting private servers for MMOPG's

This is super niche, but there are a few reasons. One which seems to be an opportunity, one which seems like it's perhaps not as big right now but could be.

Why would gamer host a private server?

One is more transactional: they want to play a game that normally runs on a PC but either don't have a PC or don't have a PC that is powerful enough.

These are more short-term transactional needs.

If cloud gaming grows, as I suspect it will, this need will eventualy dry up. In the same way no body plays a local DVD and it is all streamed, game of the future will be in the cloud.

But here's the second reason: some want to create a private server to mod that server. These servers can continue to operate long after the game itself has be sunset.^[8]

This seems super niche and weird. Till I started to grok it's analog.

Modded online games are like fan fiction

The games currently modded were designed to have private servers with the capability to be modded.

These games continue after being sunset and continue to be played with new capabilities.

What was so interesting is the level of community that developed, illustrated by an in-game funeral for a real player.^[9]

What are the economics to help support and grows these such that there is a positive relationship with the original developers?

I don't know yet, but it feels like a thread to pull on from "living in the future."

Is it possible that enabling any online game to have basic community-driven mods could creator a new creator class?

Roblox is the quintessential platform for creators in the gaming economy (and I believe the winner of the Metaverse). Within the platform, developers can build new games using their tools and hopefully attract players. They also have the concept of private servers. These appear to be "forks" of existing games which allow the host to determine who can join that server either for free or for a fee.

What if that creator capability can be extended to any video game through player-owned servers?

This certainly is possible with existing MMO games that support mods, which means, without the developer making code changes, we can begin to test existing demand with customers and charge for spinning a private server.

But...can the UX (Airbnb and Stripe) be better to tap into the growing game market with an existing trend of the Creator Economy?

For example, can we provide a WASM environment so that any cloud hosting company can offer this ability for their customers to have a private server of a supported game?

Doing so benefits cloud hosting companies with another service that could be in demand.

Could we provide to those Mod-able games additional tools, based on the WASM container, to make modding easier? These can even include authentication, pay-ins, pay-outs, and custom web pages.

I'm not sure how open these mod-able games are, but if we could make it easier for the admins of these mods to add assets, rules, in-game stores, we could augment their creative process.

Why would this be appealing?

Right now, although Roblox has dramatically lowered the barriers to entry, it's still not that easy. I've tried to build a game in Roblox and while the tools for individual primitives are straightforward, it's still pretty hard to build from a blank canvas.

However, with existing games published by studios, the huge lift of lore, characters, and significant graphics investments are already done. Those sunk costs could be "forked" by creators the same way open source code is forked. That base can then be modified by the admins.

If we are able to simplify that administration for existing mod-able games, that could potentially increase the number of private servers.

If we are then able to support verifiable ways to pay out royalties back to the developer for these private servers, while also enabling the admins to get payouts in a DAO-like manner (contributors all get something something for their work), these could potentially be viable communities. All the DAO infrastructure and rhetoric makes sense what there is a community of people able to contribute and build with simple tools and a clear creative north star, and governance is just ensuring things like direction of the game, rules, and payouts.

But, the key issue is the core base will have been built by a professional development firm. These communities will not be starting from zero. Instead, as in the case of fan fiction, they will be modifying based on something they love rather than starting from scratch.

To me, this simplifies coordination and collaboration. The existing lore and game play by the professional game studios provides Schelling points for the developers: they can already guess what the right things and wrong things are in the modifications based on the strong base.

Where could this go?

To me, what's appealing is that much of the user behavior already exists.

If we can streamline the UX and broader the audience, that's a good starting point.

But where could this go if our thesis is right?

A very very small segment of games are built to be mod-able.

But why not provide an SDK or even a porting service so that all games can become MMOPGs?

All is a stretch, obviously there are large segments of games that would never be worth modding: strategy games, card games.

But....watching my kids play Roblox, I wouldn't put too tight a constraint. For example, these characterless car racing games probably would not make sense to mod.

But maybe the mod is creative and creates an small modification that allows teams to act as the pitcrew and make simple cosmetic changes to the cars. And characters have their avatars.

Or maybe a Donkey Kong game (which my kid ask about) becomes a hang-out game instead of a single-player Obby? The game gets ported with capabilities which allow multiple Mario avatars to hang out together and dodge the Monkey.

I don't know if these are good ideas.

But I'm still surprised that a game where kids pretend to be going to "school" could be so popular.

Who could be good scaling customers?

The rise of influencers who stream games still seems surprising to me.

But they are the ones who could most benefit creating private servers of games with small, incremental mods from their community.

Influencers can earn recurring revenue from players who continue to play. And the developers continue to earn money from these forked versions of the games, even when they sunset ongoing development. That's good for the studios to benefit from these forks in the form of incremental royalties. These also become great places for marketing additional games.

Influencers can became good outlets because of the alignment of interests.

But the ideal state is that the developers themselves become the means to scale.

If we can work closely with developers, either with their library or while developing their games, to give them tools to launch and promote the mods, this taps into the new Gaming persona of the "Private Host" and the "Game Mod."

Games can invite different skills, such as graphic designers, writers, voice-actors, and developers.

What is the technical enabler and moat?

I think encapsulating the games into WASM, along with a set of WASM-based functions, would be the best form factor for widespread adoption by hosting companies. In the same way hosting companies adopted "click to install" software for open source programs like Wordpress and Joomla, so could this startup by providing a single WASM library that the hosting company could provide to all of their customers who want to run a private server.

The monitoring of these servers from bad actors can be done through a decentralized consensus or could be done through a regular hash of its environment back to a public ledger.

The payouts could be streamlined using a smart contract via tokens: players pay in fiat and tokens are issued as payouts that can then be exchanged for fiat. But tokens become a way to monitor and tweak the payout economy across the stakeholders: developers, players, mod community, admins, and of course the start-up itself.

But the key capabilities will need to be new creator tools and ways for developers to be able to quickly and easily enable this player-owned private "creator servers".

Defining a Category

Category creation is the holy grail and super hard. It involves living in the future with enough credibility that it comes into being. There needs to be just enough difference to own the category.

One of those elements is languaging, and I think between "player-owned servers" or "player/creator owned servers" there's an opportunity.

The category takes existing trends, such as the Creator Economy, but also existing behavior, such as MUDs (in the text world) and mod-able MMOPG's, and asks, "What if these trends entered a new market?" or "What if this existing behavior were on steroids?"

Ownership has been a POV of Web3 that has seemingly obvious concepts, like fans owning pieces of a song, or collective ownership of the Constitution. I don't know how this will really play out in games.

But letting a new persona of players to feel actual creative control and ownership of produced games seems exciting for both the developers and the players. The fan fiction comparison feels richer and ripe of opportunity than the "Youtube creator" economy, which we can see is already big, or the Roblox-creator economy which is big, but not clear on the sustainability for the individual developers (meaning casual developers, not the professional development firms.)

Here I do believe that the blockchain and verification of computations can reduce the IP theft and fraud that probably plagued the fan fiction world. Fan fiction seemed like there was an opportunity for incremental royalties to the author and beer money for the fiction writer, with the off-chance something good could come out and be a hit.

Within online games, the community building and recurring income of extending existing worlds seems like the right, new foundation.