Category: Entrepreneurship

During the last month I have spent more time looking at Angel investments as I believe it is a great time to start a business.  However, one key question I keep asking myself after meeting with entrepreneur after entrepreneur is whether or not what they have is just a feature of a larger product offering, a standalone product in and of itself, or a business for the long term with multiple products.  Each path provides a unique risk reward perspective for both investors and entrepreneurs.

To be honest with you, many of the companies I have met with seem like features of a broader product offering.  That is not bad in and of itself as focus is key when starting a company and going to market. As a start-up, you always want to be the innovative player with the new easy to use technology.  However, just being the mobile version of what is already existing in the market is a cause for concern as it doesn't take much for a larger competitor to replicate that effort and use its marketing muscle and existing customer base to freeze a start-up out.  Sure, you may get some customers early on as you are the only one, but in the long run you need to think about what broader feature set you will offer to be a true standalone product. 

A product is typically a couple key features tied together to solve a problem for a customer.  This means that you can provide more value to your customer and consequently extract more dollars from your end-user.  The opportunity for many companies that are just features is a quick flip, but the risk is if that doesn't happen the large player may just develop the feature in-house leaving no exit for you.  The more seasoned entrepreneurs know that starting out with a killer feature is just a launching pad to bigger and greater things.  They know it is just a go-to-market strategy that is part of a larger vision and a step towards a broader offering down the line.  These entrepreneurs know that they may never get there, but also understand that without this they have a limited market and return opportunity.  yes, I know start-ups are inherently uncertain and many times it is difficult to even calibrate how big the market is, but don't forget to lay out the broader vision beyond the initial killer feature when building your company.

On the flip side, what I don't advocate is coming out of the gate as a complete and whole product solution.  This brings you right into the crosshairs of large, incumbent players and makes your life much more difficult as you have to sell against a much larger salesforce with significant marketing muscle.  While your goal may be to grow to that kind of solution, start highly focused, features are ok, but have a broader vision to show a path towards building a great company.

I was on a call yesterday with an inspired and talented management team.  As we walked through the deck, one point particularly struck me as I listened to their well-honed pitch.  The company was trying to boil the ocean and do everything for its customers.  While it was great that the team seemed to understand the market and the problem that their customers had, I must say that I started to lose interest by the fifth differentiating feature of the product/service.  One slide really highlighted the problem for me – it showed a feature list of 10 features and then showed 3 different competitors who were either already well established public companies or well funded startups that only offered 30% of what this angel-funded startup would offer.  In my mind I was wondering how an angel funded company could go-to-market against companies with billion dollar market caps or with $30mm of venture funding which were highly successful because they were incredibly focused on a subset of problems that this start-up was trying to solve. I know, I know, I always like entrepreneurs to think big but that must be balanced with how a startup goes to market.

You see, it is always hard for a startup to enter a market with an end-to-end product positioning as most customers expect large companies to cover this territory.  What most customers expect from startups is innovation and breakthrough offerings, not end-to-end solutions.  Going back to the call, my humble suggestion was for the management team to complete their beta test with their handful of customers and figure out which 2 or 3 features were the most compelling and differentiated offerings with respect to their competition and market.  They should then plan their go-to-market strategy with a more focused approach that emphasized a new and innovative offering instead of a "we do it all for you" approach.  In the long run, if successful, the startup could always add another feature or two as they grew their customer base but keeping the message simple early on is imperative to drive a successful product launch.

While 2009 was a tough year, I must say that it was nice to see a number of our portfolio companies have blow out 4th quarters for bookings and growth.  Despite that, I am still taking a cautiously optimistic approach to 2010.  There are still conflicting reports on the growth of the economy and it is unclear whether Q4 was the release of some pent-up demand of if it will be more indicative of sustainable new spending on technology.

Either way, I would like to caution those start-ups out there who are looking to aggressively ramp up their sales based on a great quarter (more on this from a post in 2006 on when to hire a vp of sales).  Yes, it is imperative to keep the momentum building but before you get too aggressive with your growth plans make sure you can answer all of these questions about your go-to-market strategy:

1. Do we have a clear value proposition and know which market we are selling into and who we are selling to in the organization?

2. Do we have the right product and are our customers satisfied? – selling is one thing but if the product has serious issues in production then ramping up sales could put a severe strain on the business moving forward

3. Are our sales repeatable or one-offs which means lots of customization of our product on every deal?

4. Is our quarter based on one or two lucky huge deals or based on a broader swath of customers?  Do we have a continually growing sales pipeline or did we run it dry for a big Q4?

5. Do we have a solid understanding of the full sales cycle from lead generation from marketing to the closing of the sale – it is important to get good metrics here to make sure that marketing is spending wisely and targeting the right areas of the market to build the pipeline.  You need to feel confident that if you spend more on marketing, you will get more leads which will lead to more sales.

6. How can we build a more leveraged sales model through resellers, partners, or OEM relationships – you can't do this without answering #1 above.  If you are solely reliant on direct sales then think long and hard about how to add more leverage to the model

In short, if you can answer these questions and the data and anecdotal evidence from the field points you in the right direction, then by all means ramp up your growth.  If you can't answer all of these questions in a highly positive light, then cautiously ramp your sales.  Too many times I have seen portfolio companies get overexcited about their growth prospects and then realize the product is not ready for primetime or that the pipeline has run dry and subsequently the startup overspends and needs to go through a layoff.  Overhiring and then cutting back can be quite negative for morale and can also be a huge cash drain and distraction for management.  Just remember to take a step back and do some analysis before you bet the company's future based on a good quarter or two.

Our washer and dryer was on the fritz today, and as I started to do some research on large capacity stackable units I started to get overwhelmed with all of the new terminology and features.  After all, isn’t a washer a washer and a dryer a dryer.  How many different combinations and features could there be?  As I dug deeper I found myself thinking about these appliances less from a consumer’s viewpoint and more from a marketing one and appreciating how these various companies could make a commodity product sound so exciting and differentiated.  Sure, all of the competing products had to check off performance, speed, and low energy but what really struck me was the marketing terminology they used to differentiate themselves.  Rather than just sell a steam washer or dryer LG had TrueSteam technology while Electrolux offered PerfectSteam on their site.  These appliances didn’t just balance well but LG used TrueBalance AntiVibration System versus the Perfect Balance System from Electrolux.  Other features included the Direct Drive motor from LG for better performance while the Electrolux offered WaveTouch Controls.  What this really helped me think about was how these various companies prioritized the features for their given market and how they differentiated themselves through their proprietary technology or secret sauce.  And yes, I immediately began to think about how looking at marketing in the washer and dryer world would apply to startups.

Researching washers and dryers reminded me of several meetings I had years ago with a marketing expert named Richard Currier.  His big thing was to take a basic technology, break it out into a few parts, and to give them sexy names.  For example when Sybase the database company was on the market it was fighting with Oracle and others and ended up capturing a big chunk of the financial services market because it leveraged an innovation it called Two-Phase commit.  Every sales person would lead in with the benefits of Two-phase commit and while other competitors may have had something like it, if it wasn't Two-Phase commit it wasn't good enough.  What Sybase did was take one of its secret sauce technologies (innovative at the time, standard now), named it, and leveraged the crap out of it with its sales force.  While the technology performed as advertised, naming it definitely gave it some cache.  

Coming back full circle, I had a conversation this morning with an entrepreneur who was going after an interesting segment in the online video and marketing world.  The company had some nice revenue for a bootstrapped operation.  However I mentioned to the CEO that it seemed more like a one-off consulting or agency shop versus a scalable VC-backable market opportunity.  As we dug into his technology deeper and as I started to understand some of the magic behind his platform, I recommended to him that he think long and hard about figuring out what the secret sauce in the backend was and how to name it so he could better market his services and compete against others.  While naming it won't in and of itself help him land more customers, I can guarantee that it will help his company sound more exciting and innovative versus companies that do not.  And in the end whether the deal is closed the sales prospect will certainly remember and question how important TrueBalance Antivibration and WaveTouch controls are to his purchasing decision.

I am not going to rehash Om Malik's excellent summary of "What went wrong with Joost" but I did want to dive deeper into a few points.  As I have always said, raising too much money can be a curse and not a blessing.  Here is an excerpt from my post in 2006

This to me can kill a company before it even gets off of the ground.  Expectations are too high too early, companies will ramp up too quickly, and any misstep is seen as a failure.  Secondly, companies that have too much capital usually try to do too many things and lack focus.  It sounds like Joost was building a client, negotiating with media partners, and building out its own ad serving technology and had its own ad sales staff.  It sure sounds like a big operation. 

Another point to add is that companies founded and led by rockstar entrepreneurs are not enough to drive success.  Rock star founders and CEOs will definitely open a ton of doors and drive lots of media attention, but the company still has to execute.  In addition you want your rock star driving much of the execution rather than hiring a huge staff with layers of bureaucracy.  Many of these famous entrepreneurs will typically have their hands in a number of different projects at once.  Finally, having been successful before, you really need to assess how hungry these rock stars are for success.  Hunger and passion do play a huge role in driving company DNA and creating a winner.  I have had just as much success funding entrepreneurs who have had modest wins but were still seeking the big exit.  Bottom line is that Joost had a ton of promise but may have been better served by raising much less money at the start and staying highly focused on the task at hand with a much leaner operation.

Jonathan Kay from Grasshopper sent me a great video on entrepreneurship.  First I love the inspirational message.  Secondly, I like the use of a viral video to cleverly promote his virtual PBX numbers for entrepreneurs.  Take a look and hopefully it will brighten up your day.

What I love about the message is that entrepreneurship is not about making money but about pursuing a passion and doing your part to make great products to make the world a better place.  OK-it may sound a little hokey but I remember during the bubble how entrepreneurs would come in talking about how much money they would make for everyone but have no passion for their product.  And guess what, many of these monetary focused entrepreneurs were the first ones to quit when the world got tough.  Without a bigger sense of purpose, it is hard to be an entrepreneur and stick through the inevitable tough times that will come your way.