Cosmetic Verticals vs. Structural Verticals

In a recent meeting with the founder of a portfolio company, the conversation landed — as it often does with early stage companies — on how to navigate the ongoing challenge of go to market focus.

Go to market into a niche vertical and risk capping the size of the opportunity you are chasing. Go horizontal and risk creating something a lot of people like but no one loves.

The reality is that debating between vertical and horizontal actually creates a false choice and can lead companies to not be ambitious enough in the early days about the size of the opportunity they have the ability to attack (in the name of staying "focused").

This happens most often when companies incorrectly align their go to market plans around a “cosmetic vertical” (customers that look alike) instead of a “structural vertical” (customers with the same job to be done).

Cosmetic verticals tend to be subsets of more important structural verticals and when a company's message resonates with a core cosmetic vertical they tend to stop there — out of comfort, ease of messaging, or commitment bias rooted in wanting to serve a certain “type” of customer — often missing major market opportunities in the process.

There are two different types of mistakes founders and investors make at the intersection of cosmetic and structural verticals, which I explore below through the examples of Shopify and OpenDoor.

Shopify — Broad from day one

Shopify started out of a personal need to sell snowboarding gear online and a frustration with the options available to do so at the time — of which there were already many.

In the early days as the company moved from building software solely for themselves to building it for others, it may have been easier to convince investors that the reason these already on the market options sucked was because they were too broad and not “focused” on serving a specific type of customer. Thus the path to Shopify building a big company would be to pick off adjacent verticals of online sellers one by one over time.

You can envision the pitch:

They instead chose a very different — and likely harder at the outset — path, going broad from the beginning based on the realization that the job to be done in their snowboarding business was one that could accomplished across a much wider set of customers with essentially the same product.

The path to achieve the fictitious goal highlighted above would have likely taken just as long and been just as hard while resulting in a company orders of magnitude smaller. It surely wouldn't be hailed as the company responsible for reviving the global merchant class.

The decisions made early in a company's trajectory echo throughout its entire lifetime and the effectiveness of the founding team in identifying the right structural vertical to play in is crucial.

Opendoor — Structural opportunity hiding in plain sight

The conflation of cosmetic and structural verticals can also be a reason that people avoid massive opportunities hiding in plain sight altogether. Instead of evaluating structural underlying similarities of a customer, an asset, or a use case, we get caught up on cosmetic differences and get tricked into thinking that the opportunity doesn't exist at all.

Opendoor is a perfect example of what can happen when an entire market conflates cosmetic verticals and structural verticals.

As Keith Rabois explained in conversation with Patrick O'Shaughnessy, the concept behind Opendoor, which raised capital at a valuation of almost $4 billion earlier this year, was that the market over-indexed on the cosmetic differences between individuals houses and missed the underlying structural reality that homes — regardless of how they look — are much more of a commodity (unlike, say, fine art) than we previously realized.

This realization formed the secret upon which OpenDoor built up its early traction, a unique dataset, and perhaps most importantly, a trusted brand recognized and highly referred by homeowners across all its major markets.

Simply being able to make the distinction between what is cosmetic and what is structural became an advantage in itself for OpenDoor and unlocked billions in available market size for Shopify. In both cases, of course, the early insight was met with brilliant execution).

While the getting this right is totally idiosyncratic for each company and is quite unknowable a priori, the impact of the decision has a compounding impact (positively or negatively) over time and should be something companies invest ample time in from the outset.

I am a Paris-based early stage venture investor at TechNexus where we invest globally in companies transforming the way we work and live.

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