Establish a New Category

Go to the iTunes store and you’ll find 23 diff erent categories of music: Alternative. Classical. Hip Hop/Rap. Rock. Most bands and their music fi t into one of these categories: Led Zeppelin is “Rock” while Taylor Swift is “Pop.” The Grateful Dead, on the other hand, defi ed existing category boundaries by combining various genres of music and melding it all with extreme improvisation to create their own unique sound—and in the process, their own musical category.

Early in the band’s history, the Grateful Dead teamed up with Ken Kesey and provided music for his Acid Tests, elaborate parties where the participants dropped acid. The Acid Tests weren’t concerts where people came and watched the band perform; rather, the audience members were expected to be part of the performance and provide entertainment to the other attendees. This tradition of the crowd being part of the performance continued long after The Grateful Dead grew beyond being Kesey’s house band. A big part of the Grateful Dead’s value proposition was not just what was happening on stage, but the collective experience you had being entertained by the audience, with whom you were having a unique, collective experience.

From those early days, the Grateful Dead became known for their extended riff s and improvisational jams, which often melded jazz, country, bluegrass, psychedelic, and rock. Because the resulting fusion of genres defi ed set categories, the band’s followers came up with a new category, “Jam Band,” a term now used to classify bands, such as Phish, that followed in the Grateful Dead’s footsteps.

The Grateful Dead crossed musical boundaries and created their own sound—setting themselves apart from other bands.

By innovating across musical boundaries, the Grateful Dead stood out from other bands of their time—the Rolling Stones, the Beatles, and so on—a uniqueness they carried with them throughout their career.

The Grateful Dead attracted fans who took to the road, following the band across the United States and creating an entire subculture that included its own language (i.e. “space,” “drums,” “tapers”), traditions, fashions, and “alternative” lifestyle. Beyond the music, this subculture and the fans themselves became part of the product that attracted new fans.

Marketing Lessons from the Grateful Dead

In every industry, there is a barely distinguishable herd of competitors that move in unison. Don’t fall into the trap of moving in lockstep with that herd. Rather than try to outperform your competition in your existing industry, follow the Grateful Dead’s recipe and create a new industry by reconstructing your market’s boundaries.

The problem with innovating within industry boundaries is that you end up spending huge sums of money trying to move the needle a few percentage points in terms of market share. When a boundary-changing newcomer comes along, companies and their mildly diff erentiated products lose tremendous market share and sometimes die—as seen when Blockbuster reacted too late to competition from the Internet, broadband, and the “content-on-demand” services provided by cable companies and Netflix.

The Grateful Dead teaches us that ignoring conventional wisdom is the key to creating uncontested market spaces.

Y Combinator Creates a New Investor Category

The most anxiety-inducing part of any start-up is raising money from angel investors and venture capitalists (VCs). This process creates problems for founders, for four reasons.

One, founders spend a great deal of time wooing angel investors and VCs—time that could be spent building a product or selling to customers. Two, investors and VCs often give founders more money than is needed in the early stages of the business, which means more dilution for the founders. Three, investors insist on getting “preferred” stock, which has stronger rights than the founders’ stock. And four, in order to “watch” their investment, outside investors want seats on the board and will make business decisions for the founders. Often these problems are so great that the start-up ends up not getting funding or falling apart after it gets funding.

Serial entrepreneur Paul Graham saw these problems and decided to change the experience by providing seed funding for start-ups by using a novel approach through his new company Y Combinator. First, instead of going through the dog-and-pony show that’s typical of the investor wooing process, start-ups looking for seed money simply click a link to a short online application from Y Combinator and fi ll it out. Y Combinator then invites the most promising founders in for a meeting and makes its funding decisions immediately after, dramatically reducing the time a founder needs to spend on raising money and dramatically increasing the time the founder can spend on building a great product or signing up early customers.

Instead of investing in companies one at a time, Y Combinator invests in two “batches” per year with many companies per batch. Because this batch size is large, Y Combinator invests a smaller amount of money than a typical angel or VC. In many industries, the costs associated with starting a business have dropped, so the smaller amount of money is just enough to “prove the concept” and, after that, the company will either keep going or shut down. The typical Y Combinator investment dilutes the founder 2 percent to 10 percent—as opposed to the typical 20 percent to 50 percent associated with angels or VCs. Y Combinator also buys the same type of stock as the entrepreneurs (common as opposed to preferred) with far fewer strings attached.

And finally, rather than take a board seat from which to “watch” the investment, Y Combinator requires all of the recipients to come to San Francisco where the founders are groomed through a series of one-to-many seminars and bootcamps over two months, a process likened to a start-up business degree. This bootcamp format is great for the young entrepreneurs they fund and is just the right level of involvement.

Like the Grateful Dead and its music, slapping the “VC” or “angel investor” label on Y Combinator is diffi cult because

what it off ers is so diff erent from what the typical VC or angel investor off ers entrepreneurs wanting to start a company. Y Combinator has ignored traditional market boundaries and has created its own category!

Summary

Redefine your industry boundaries

Every industry has opportunities for creating new ways of doing business that can separate your company from your competition and place you in your own unique category. Just as Y Combinator put some real thought into how VC and angel funding wasn’t helping start-ups, and thus created a completely new category that is being followed by new groups like Techstars, you, too, must develop a similar approach to your industry.

ACTION: Redefining your industry boundaries is not an easy task. Rather than try to tell you how to do it, we will pose some questions for you to ask yourself to get your ideas flowing.

In addition to thinking about your industry competitors, what are the “alternatives” to your product? Can you fi nd ways to erase the traditional “boundaries” of your industry by incorporating or subsuming or competing with some of the alternatives?