Why Is the Local Market So Elusive for Tech Companies?

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We create technology to increase efficiency and to help businesses generate more money per dollar spent. This is especially true in the local SMB market where even a slight change in profit margin — up or down — will greatly affect the health of a business.

Yet why does it seem like most of those small businesses never even get a chance to take advantage of new and innovative technology?

The breakout success of Uber and the promise of other new hyperlocal concepts have recently sparked my own introspection on the difference between success and failure in the local market. That led to addressing a few lessons learned while building a hyperlocal startup highlighted here a few months ago. In the piece I touched on our team’s experience walking into thousands of local businesses — like discovering why local merchants are difficult to get a hold of, why they hold frustrations about being constantly sold by strange new companies, and how they are out of touch with newer technology mostly due to the busyness of their own business.

So why is it that so many seemingly promising ideas (and companies) have failed to catch on within the local market?

I’ll be leading a discussion around this very topic at Street Fight Summit West 2015 next month in San Francisco, but figured it would be a good idea to get the ball rolling here first.  By no means do I know the answer, nor do I believe there is just one answer to the question.  Using boots-on-the-ground perspectives as well as keen observations of current market shifts, a few ideas have percolated my awareness and build off each other to create a perfect storm waiting to rage against any unprepared or underfunded hyperlocal startup.

First and foremost, although the cost of starting a tech company has dropped dramatically, it is still extremely expensive to enter multiple local markets. The economics of software deployed and used in the physical world is a lot different than the economics of operating a website or mobile app with no relevance or requirement to a specific location.

I find too many young companies are getting too far out over their skis in regards to the local market. The scenario goes like this: [Insert any new startup here] has a great idea for a [insert shiny new concept here], builds a team, writes some code, hosts it on AWS, gets a working version out and deploys it to their first test market. Once they see initial uptick in usage, they quickly raise a small round of financing and set out to take over the entire United States by next summer — a task that proves more difficult than imagined.

The local market is a different beast with a totally unique playbook.  The general definition of local means a physical geography somewhere in the world, and doing anything at a physical location almost always requires people to be present — to sell a customer or to carry out operations. So, the more locations and people you have, the more money is required for your operations.

Therefore, successful expansion throughout the local market requires very large capital infusions. Although other costs of starting a company have dropped, humans will always remain the highest cost of operating a business, and it’s rising!  Human costs are the main reason Uber has raised almost $6 billion in venture financing over the course of the last 5 years. People on the ground (or in cars) cost A LOT of money, a reality many defunct companies either underestimated, took for granted, or did not even consider.

Critical Mass
Second, a certain critical mass is required to reach breakaway velocity — both in a specific city and globally.

Taking the first point into consideration, once a company has enough capital to get started they must then reach a certain level of adoption to become a dependable option. Uber had to have enough available cars in a given market so that as a new user I enjoyed a quality-first experience — otherwise I never would have come back to use it again. Instacart and Postmates need to employ enough couriers so when I want it now, I get it now. Apple Pay — or whatever the default mobile payment system will be in the future — needs to be available and work at least half of all the merchants I frequent in my city for me to depend on it as a viable payment option.

Reaching critical mass in any area involves a long checklist of requirements including adequate capital, great marketing, proper app and product distribution channels, service dependability, identifiable branding and local champions to help spread the word. All these things (requiring humans!) are quite difficult to achieve for a young startup overreaching in their expansion playbook.

But if achieved, critical mass creates viral and word of mouth growth that helps to take weight off the (sales and marketing) shoulders of a company, earning them additional users at no cost.  For instance, a friend tells another friend about the product and enjoys a better user experience because that friend is on the app too.  A local coffee shop observers a competitor using a new mobile payment system and determines it has to have it too so they don’t look antiquated.

As a critical mass of people is reached in a certain region, more usage of that technology drives evermore usage of that technology — creating a virtuous cycle of growth. My intuition tells me that unsuccessful companies in the local market lack the financial or human capital needed to reach the required level of critical mass to shift usage momentum in their favor.

A third hindrance in the hyperlocal space involves the very resource we have the least of — time. Simply put, it usually takes so much capital and so much time for a company to successfully deploy a new customer in the local market that the world has already moved onto the next big thing before a critical mass of customers is ever achieved. And given how fast new ideas hit the market these days it’s only getting more difficult for startups to overcome the time issue.

The dance goes something like this: Local merchants struggle to even find the time to meet with your company pitching a new idea. Once time is found and the meeting does happen, they view it as a hassle to learn your product and don’t make it top priority to implement your new concept into their daily operations. Once they do start using your product it takes time for it become a mainstay and thus so much time has passed between the first meeting and product implementation that this new innovative concept is not so new or innovative anymore.

Consider what technology most SMBs use today to enhance their marketing or sales? Email newsletters? Facebook posts? Twitter or SMS messaging? These have all been around for years! Or what about CRM tools, payroll, payment and POS. systems? The problem is that our industry is moving so fast that many local merchants are only now rolling out technologies consumers have already moved away from!

The constraints of cost, critical mass and time spawn a vicious cycle that hinders innovative new technology adoption in the local market. The promise of hyperlocal technology is alive and well, and indeed its future looks very bright. Any new startup aiming to crack the hyperlocal code today will need to craft a whole new playbook with these three things in mind.

Nick HughesNick Hughes is director of business development for Knotis. He previously founded the mobile payment startup Seconds as well as Coinme, a new company built around expanding bitcoin and digital transactions into the physical realm via Bitcoin ATM’s. In addition to those projects, Nick is co-founder and the host of Founders RAW, a multi-media platform focused on highlighting stories of startup founders and their companies.

Nick Hughes will lead a panel on the challenges of hyperlocal business models at Street Fight Summit West in San Francisco on June 2nd. More info, agenda, and tickets here.