Verticality

Many startups begin with a technological innovation that can make existing processes significantly shorter, simpler, or cheaper. Because all possible applications of such a technology are not known at the time of its development, it is up to the companies that choose to work with it to determine how to market it. The big question is: Should you go vertically or horizontally?

Vertical markets are deeply customized to the needs of an industry, trade, or profession. Real estate is a great example of a vertical market. To provide value to customers in real estate, you must understand finance, housing, brokerage, and so on. You must dive deep, or the service you build might be too naive for your potential customers.

Horizontal markets, on the other hand, don’t focus on a specific group of customers and are based on products built for diverse groups of people. The most familiar example of a horizontal product and market is Facebook and its advertising business. Facebook’s advertising products must be appealing to everyone. They can’t go too deep into any particular industry, because they serve too many groups to fully satisfy them all. But they make up for it with large volumes.

Making the choice between a vertical and horizontal market can be difficult, as the same technology can usually be applied to both types of markets. Let’s take virtual reality, or VR, as an example. As a young VR startup, you might focus on a particular market like real estate and build a product that enables people to view homes without leaving their seats. Or, with the same technology, you may choose to build a platform that helps other startups to develop their own VR products more easily.

There are multiple factors an entrepreneur faced with such a choice must consider. The first, of course, is market size. Vertical markets sometimes seem too small for venture capitals to invest in, especially if they’re mature markets. It’s up to you to sell it as a huge opportunity. Maybe you can do it, but sometimes it’s simply impossible.

The second factor is the difficulty of entry compared to a market’s attractiveness. In case of lucrative markets that are growing fast and have low barriers of entry, other players may want to follow in your footsteps and steal part of the pie for themselves. In a horizontal market, you will have to face multiple strong competitors, which usually means thin margins—while a well-chosen vertical market may be easier to monopolize. The tradeoff is the limited growth potential of a vertical market. Since they require specialized products, it’s significantly more difficult to outgrow vertical markets. Doing so may require an extremely painful strategic shift.

As you can see, there are many variables to take into account. As one final consideration, be aware that successful companies in horizontal markets are simply bigger than successful companies in vertical markets. Building a company like that can be a high-risk, high-reward play. I understand that it can be a source of great motivation. Whatever you choose, good luck!