Some industries have much higher barriers to entry than others. In many cases, there are obvious, rational reasons for this. Disrupting drug companies (Genzyme/Pillpack) takes vast amounts of capital to ensure safety and efficacy. Disrupting taxi companies (Uber/Lyft) requires enough scale to overcome onerous bureaucracies and disparate geographies. Many of these battles are simply the cost of doing business and easy to foresee. However, most entrepreneurs learn their chosen industry is far more difficult to disrupt than they originally thought. Usually they learn this years after starting the company.

Rational Barriers To Entry

As an early stage investor, we’re looking for markets that seem ripe for disruption but with low enough barriers to entry that a small, underfinanced startup can make an impact. With hardware products, we’re looking for:

A diverse consumer base. This allows entrants to hone in on a small, high-need market segment and gradually expand to build a venture-scale business. This is necessary for nearly all consumer startups.

This allows entrants to hone in on a small, high-need market segment and gradually expand to build a venture-scale business. This is necessary for nearly all consumer startups. Minimal innovation. Some industries haven’t brought much innovation to market due to market dynamics (ie regulations, geography, or financing). Other verticals are already highly competitive and commoditized.

Some industries haven’t brought much innovation to market due to market dynamics (ie regulations, geography, or financing). Other verticals are already highly competitive and commoditized. Disconnected brands and consumers. Product categories where brands don’t have a close connection with their target consumers. Some of the most interesting hardware businesses reshape this relationship and shorten the supply chain to the consumer (ie Warby Parker and Casper).

Product categories where brands don’t have a close connection with their target consumers. Some of the most interesting hardware businesses reshape this relationship and shorten the supply chain to the consumer (ie Warby Parker and Casper). Confused and frustrated consumers. Too much choice often leads to confused customers. For example, traditional mattress companies have complex product lines, varied prices without obvious differentiation, an arcane buying process with slimy salespeople, and frustrating 6 hour delivery windows.

I can’t stand this feeling. Image Wineopolis (http://www.wineopolis.com/are-you-a-typical-american-wine-drinker/)

One of my favorite examples of a product category that appears to be ripe for disruption is the wine industry:

Diverse consumer base. $40B of wine is consumed in the US every year. It ranges from two-buck-Chuck and Franzia to $500 bottles of Dom Pérignon and everything in-between. Few product categories are as diverse as wine.

$40B of wine is consumed in the US every year. It ranges from two-buck-Chuck and Franzia to $500 bottles of Dom Pérignon and everything in-between. Few product categories are as diverse as wine. Minimal innovation. Vineyards focus on one thing: making wine. Wine brands tend to be terrible when it comes to experimenting with new technologies to improve the wine buying and drinking experience.

Vineyards focus on one thing: making wine. Wine brands tend to be terrible when it comes to experimenting with new technologies to improve the wine buying and drinking experience. Disconnected brands and consumers. Vineyards make wine. Bottling companies put juice into glass and slap on a label. Distributors pick it up. Wholesalers ship it to retailers. Consumers wander around aimlessly trying to figure out what to buy. This results in embarrassingly small margins for vineyards. It’s a system with a huge amount of entropy.

Vineyards make wine. Bottling companies put juice into glass and slap on a label. Distributors pick it up. Wholesalers ship it to retailers. Consumers wander around aimlessly trying to figure out what to buy. This results in embarrassingly small margins for vineyards. It’s a system with a huge amount of entropy. Confused and frustrated consumers. The average consumer doesn’t know the first thing about what kind of wine they like or how to drink it (myself included). Consumers rate the design of the label and the suggestion of the store clerk as #1 and #2 reasons for picking a bottle to buy.

If wine is so ripe for disruption then building a company to disrupt the wine market should be easy, right?

Emotional Barriers to Entry

Hardware markets have non-obvious hurdles startups must overcome: the emotional aspects of the product experience. Every product category has its own types of emotional barriers to entry, but some are more challenging than others:

Ritual. As products evolve throughout history, they merge with culture to become deep-seated in the psyche of consumers. Humans have been drinking wine for many thousands of years and the experience hasn’t changed much. There is a long history (about 300 years) of wine in glass bottles and cork stoppers. This is sewn into the fabric of wine culture and anything that tries to disrupt glass and cork tends to be very hard for consumers to endorse. Think wine-in-a-box and synthetic corks: the industry has an allergic reaction to anything even slightly innovative.

As products evolve throughout history, they merge with culture to become deep-seated in the psyche of consumers. Humans have been drinking wine for many thousands of years and the experience hasn’t changed much. There is a long history (about 300 years) of wine in glass bottles and cork stoppers. This is sewn into the fabric of wine culture and anything that tries to disrupt glass and cork tends to be very hard for consumers to endorse. Think wine-in-a-box and synthetic corks: the industry has an allergic reaction to anything even slightly innovative. Gatekeepers. Consumers are often made to feel inferior to a class of elite “experts” in certain industries. Mattresses, eyeglasses, cars (and of course wine) are all good examples of industries with experts that “know more than you” and will help “guide you to make the right purchase decision.” Some, like in the wine world, go so far as to serve as gatekeepers for the entire industry: anointing certain wines, creating objective ratings for extremely subjective experiences, and even creating a caste system of sommeliers to “educate” wine drinkers at fancy restaurants.

Consumers are often made to feel inferior to a class of elite “experts” in certain industries. Mattresses, eyeglasses, cars (and of course wine) are all good examples of industries with experts that “know more than you” and will help “guide you to make the right purchase decision.” Some, like in the wine world, go so far as to serve as gatekeepers for the entire industry: anointing certain wines, creating objective ratings for extremely subjective experiences, and even creating a caste system of sommeliers to “educate” wine drinkers at fancy restaurants. Disempowerment. Complex distribution systems create information asymmetry between producers and consumers. This is bad for both ends of the supply chain: producers often feel like they don’t fully understand their customer base and consumers have trouble connecting with the brands they love. But cutting distributors out of the supply chain turns out to be extremely challenging. Over time, wine consumers and vineyards have built up a dependency to these middlemen (consumers in most states don’t know they can have wine shipped to them, and producers rarely understand who drinks their wine or even where it goes after the unmarked box truck picks it up from their bottling line.)

These three hurdles collude to create a series of complex barriers to entry that make it challenging to build a product that consumers will happily buy to displace their existing product.

Overcoming Emotional Barriers

Two years ago, we made a big bet on Kuvée with the opinion that wine is a in desperate need of change. Kuvée’s system hinges on an intelligent wine sleeve that keeps wine fresh for 30 days after opening and wine in proprietary bottles that are optimized for cost-effective shipping. We worked with the Kuvée team to rethink the wine experience: from discovering wines you’ll love and moving bottles around the world to drinking/preserving wine and finally re-ordering wines you love.