No objective is more important for SaaS founders than early category leadership. Over 75% of the market cap in a software category typically goes to the category leader.
VCs know this, so funding disproportionately flows to startups that can lay claim to early category leadership. Perception often becomes reality, as the startup with the most resources to spend on sales and marketing builds the largest subscriber base, which gives it more resources. This virtuous cycle causes most SaaS categories to accrete to a big winner over time.
It’s not just VCs who want to back the category leader — it’s customers too. The reason is a variation on the old saying that “nobody ever got fired for buying IBM.” Nobody ever gets fired for buying the category leader. The category leader wins the easy sales — the order taking — while also-rans must sell hard to win every deal.
- Define your category.
It makes intuitive sense that the startup that defines a new SaaS category will be perceived as the early category leader. It will thus be the beneficiary of investors, talent and customers all seeking to coalesce around an early leader. Conversely, a startup that allows itself to be placed in a category defined by others will be viewed as a late entrant facing tough headwinds.
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