Distribution vs Product: What should an early-stage tech founder focus on?

December 6, 2020

Taylor Neiman, the founder of Toucan, asked an important question that struck a chord. I had a few thoughts to share, so here goes.

If you’re the founder of an early-stage tech company, what do you focus on?

On the one hand, there’s no great success to be had from a sub-par product.

On the other, if you build a great product and nobody knows about it, you lose then as well. Build it and they won’t necessarily come.

Microsoft Teams vs Slack

The most recent case to dissect is the meteoric rise of Microsoft Teams, which came into existence in 2017 and had 115 million users as of October, 2020.

Teams competes with Slack, which came into existence in 2014, got to a million users in 18 months, was at 4 million users when Teams launched, and 12 million users when Teams hit 75 million.

Source

If anecdotal evidence from HackerNews comments are to be believed, Teams has a worse product and UX than Slack. Teams is also bundled into Office 365 and Microsoft currently does not charge separately for the product.

Yet, Slack had to orchestrate an acquisition with Salesforce vs continuing to grow independently into a company as large as Salesforce.

Distribution wins

Despite having a lead of several years and a superior product, Teams is currently leading the market due to a significantly superior distribution.

Microsoft bundling Teams into Office 365 means the product was in front of every enterprise customer Microsoft had already made inroads with. Not charging separately for Teams made it a no-brainer for large companies to try it out.

It’s important to note that if Teams was a horrible product that made life worse for its users, adoption would be strong but retention would be dead and Teams users would leave quickly for Slack or other alternatives.

However, Microsoft’s product is just bad enough to tolerate and just good enough to not switch to Slack and start paying for the tool.

Slack explained this phenomena best when they took out an ad on the New York Times front page titled "Dear Microsoft".

We realized a few years ago that the value of switching to Slack was so obvious and the advantages so overwhelming that every business would be using Slack, or “something just like it,” within the decade.

What about product?

Between two competitors in a market, if all other things are equal (like product quality), then the company with superior distribution wins.

But what if one company has superior distribution and slightly worse product (Company A, or Teams) vs superior product but worse distribution (Company B, or Slack)?

There’s a minimum bar for your product. If it’s world-class, then distribution will only do good for you. But even if your product is above average and gets the job done, superior distribution can help you win a market.

Simply because Company A will reach 100 customers and solve their customer’s problems well enough for them to continue using their solution, while the Company B only reaches 2 customers during the same time period.

How does this play out in the long run?

If Company A’s product remains above average while Company B makes huge breakthroughs in their product that improves the lives of their users in non-trivial ways, in the long run as Company B catches up in building distribution, they have every chance of winning the market.

But this scenario assumes that Company A is complacent and doesn’t improve their product at all. That’s a risky assumption to make, one that you don’t want to bet on for the survival of your company.

By joining hands with Salesforce, Slack has clawed back their chances of winning the market.

Salesforce already has inroads to large enterprises and a huge sales team to sell to them. Slack has brought firepower to the distribution battle with Microsoft.

What should an early-stage tech founder focus on?

The short answer - I don’t know.

But here’s me laying out two potential paths that I would consider if I were building a company from scratch, as well as the path I’m taking today building DelightChat.

Path 1

Obsessively focus on building the right product, but spend at least 20% of your bandwidth in figuring out the distribution channels that can give your product its initial traction.

As your product matures and retention curves start flatlining at higher values, increase your bandwidth on cracking distribution.

Distribution doesn’t just mean hire a huge marketing or sales team. If your product has the inherent characteristics of growing through word of mouth, then focus on nailing product-led growth.

Path 2

Obsessively focus on building distribution and inroads to your would-be customers. Become an entity that’s trustworthy and valuable in their eyes, understand them better, and then build product(s) to solve your customers’ most pressing problems.

The path we are taking at DelightChat

From Day 0, we have been obsessed about building the best product & distribution.

Mine and the team’s bandwidth is split 50-50% on building the best product in the market for our target audience, as well as creating resources, tools, and content that build inroads to our ideal customer base.

By following this strategy, I believe DelightChat as a company will be stronger in distribution during the early months or first year of operations, but product will catch up and become world-class towards the end of first year.

This will set us up for strong growth, distribution + retention driven, in year 2 of our business. That’s our bet.

What’s your bet?

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