Business-to-business (B2B) high technology markets are all about the market and only less so about the technology. This is primarily driven by corporate buyer conservatism — corporate buyers hate to make mistakes in purchasing technology and, if you’re going to make one, it’s far better to be in the herd with everyone else, collectively fooled, than to be out on your own having picked a runner-up or obscure vendor because you thought they were “better.” Hence, high-technology markets have strong increasing returns on market leadership. I learned this live, in the trenches, way back in the day at Ingres.
Uh, Dave, please stop for a second. Thank you. Thanks so much for coming out to visit us here at BigCo today. Before you begin your presentation, we wanted you to know that if you simply convince us that Ingres is as good as Oracle that we’re going to chose Oracle. In fact, I think you’re going to need to convince us that Ingres is 30% to 40% better than Oracle before we’d realistically consider buying from your company. You may now go ahead with your presentation.
Much as I hated it on that day, what a great position for Oracle to be in! Somehow, before the product evaluation cage-fight had even begun, Oracle walked into the cage with a 40% advantage — brought to them by their corporate marketing department, and which was all about market leadership.
Why do corporate buyers care so much about buying from market leaders?
- Less project risk. If everyone else is buying X, it must be good enough, certainly, to get the job done.
- Less embarrassment risk. If the project does fail and you’re using the leading vendor, it’s much less embarrassing than if you’re on an obscure runner-up. (“Well, I guess they fooled us all.”) [1]
- Bigger technology ecosystem. In theory, market leaders have the most connectors to other systems and the most pre-integrated complementary technologies.
- Bigger skillset ecosystem. Trying to find someone with 2+ years of experience with, e.g., Host Analytics or Adaptive Insights is way easier than trying to find someone with 2+ years of experience with Budgeta or Jedox. More market share means more users means you can find more skilled employees and more skilled partners.
- Potential to go faster. Particularly for systems with low purchase and low switching costs, there’s a temptation to bypass an evaluation altogether and just get going. Think: “it’s the leader, it’s $35K/year, and it’s not that hard to change — heck, let’s just try it.”
Thus, relatively small differences in perceived or actual market leadership early on can generate a series of increasing returns through which the leading vendor wins more deals because it’s the leader, becomes relatively larger and thus an even more clear leader, then wins yet a higher percentage of deals, and so on. Life for the leader is good, as the rich get richer. For the others, life is a series of deals fighting from behind and, as they said in Glenngarry Glenn Ross, second prize really is a set of steak knives.
This is why smart vendors in greenfield markets fight for the market leadership position as if their corporate lives depended on it. Sometimes, in this game of high-stakes, winner-takes-all poker companies cross boundaries to create a perception of success and leadership that isn’t there. [2]
When run correctly — and legally — the goal of the market leader play (MLP) is to create a halo effect around the company. So how do you run the market leader play? It comes down to four areas:
- Fundraising. Get the biggest name investors [3], raise the most capital, make the most noise about the capital you’ve raised, and use the money to make a few big-name hires, all in an effort to make it clear that Sand Hill Road has thoroughly evaluated the company and its technology and chosen you to be the leader.
- Public relations and corporate awareness. Spend a nice chunk of that capital on public relations [4]. Have the CEO speak at the conferences and be quoted or by-line articles in the right tech blogs. Better yet, hire a ghost-writer to author a book for the CEO as part of positioning him/her as a thought leader in the space. If applicable, market your company’s culture (which is hopefully already documented in a one-hundred slide deck). Spend big bucks to hold the biggest user conference in the space (which of course cannot be labeled as a user conferenced but instead an industry event with its own branding). Use billboards to make sure the Digerati and other, lesser denizens of Silicon Valley know your company’s name. Think: shock and awe for any lesser competitor.
- Growth. Spend a ton of that capital to hire the biggest sales force, wisely first building out a world-class onboarding and enablement program, and then scaling as aggressively as you can. In enterprise software new sales = number of reps * some-constant, so let’s make sure the number of reps is growing as fast, and perhaps a little faster, than it wisely should be. Build out channels to increase the reach of your fast-growing sales force and don’t be cheap, during a market-share grab, about how you pay them. In the end, Rule of 40 aside, hotness in Silicon Valley is really about one thing: growth. So get hot by buying the most customers most quickly. [5]
- Strategic relationships. Develop strategic relationships with other leading and/or cool companies on the theory that leaders work with leaders. These relationships can vary from a simple co-marketing arrangement (e.g., Host Analytics and Floqast) to strategic investments (e.g., Salesforce Ventures invests in Alation) to white label re-sale deals (e.g., NetSuite’s resales of Adaptive Insights as NetSuite Planning), and many others. But the key is to have the most and best strategic relationships in the category.
- Denial of differentiation. While you should always look forward [6] when it comes to external communications, when it comes to competitive analysis keep a keen eye looking backward at your smaller competitors. When they see you running the market leader play, they will try various moves to differentiate themselves and you must immediately deny all such attempts at differentiation by immediately blocking them. Back in the day, Oracle did this spectacularly well — Ingres would exhaust itself pumping out new/differentiated product (e.g., Ingres/Star) only to have Oracle immediately announce a blocking product either as a pure futures announcement (e.g., Oracle 8 object handling) or a current product launch with only the thinnest technical support (e.g., Oracle/Star). Either way, the goal is for the mind of the buyer to think “well the leading vendor now does that (or shortly will), too.” Denying differentiation gives the customer no compelling reason to buy from a non-leader and exhausts the runners-up in increasingly futile and esoteric attempts at differentiation.
So that, in a nutshell, is how creating a leader is done. But what if, in a five-vendor race, you’re not teed up to be the leader. You haven’t raised the most capital. You’re not the biggest or growing the fastest. Then what are you supposed to do to combat this seemingly air-tight play?
Responding to the Market Leadership Play
I think there are three primary strategic responses to the market leadership play.
- Out-do. If you are in the position to simply out-do the flashy competitor, then do it. Enter the VC arms raise — but like any arms race you must play to win. [7] Raise more capital than they do, build your sales force faster, get even better strategic relationships and simply out-do them. Think: “yes, they were on a roll for a while but we are clearly the leader now.” Cloudera did this to Hortonworks.
- Two-horse race. If you can’t win via out-do, but have a strong ability to keep up [8], then reframe the situation into a two-horse race. Think: “no, vendor X is not the leader, this market is clearly a two-horse race.” While most B2B technology markets converge to one leader, sometimes they converge to two (e.g., Business Objects and Cognos). Much as in a two-rider breakaway from the peloton, number 1 and 2 can actually work together to distance themselves from the rest. It requires a certain cooperation (or acceptance) from both vendors to do this strategy, but if you’re chasing someone playing the leadership play you can exhaust their attempts to exhaust you by keeping up at every breakaway attempt.
- Segment leadership. If you can’t out-do and you can’t keep up (making the market a two-horse race) then have two options: be a runner-up in the mainstream market or a be a leader in a segment of it. If you stay a runner-up in the mainstream market you have the chance of being acquired if the leader rebuffs acquisition attempts. However, more often than not, when it comes to strategic M&A leaders like to acquire leaders — so a runner-up-but-get-acquired strategy is likely to backfire as you watch the leader, after rebuffing a few takeover attempts, get acquired at a 10x+ multiple. You might argue that the acquisition of the leader creates a hole in the market which you can then fill (as acquired companies certainly do often disappear within larger acquirers), but (unless you get lucky) that process is likely to take years to unfold. The other choice is to do an audit of your customers, your product usage, and your skills and focus back on a product or vertical segment to build sustainable leadership there. While this doesn’t preserve horizontal M&A optionality as well as being a runner-up, it does allow you to build sustained differentiation against the leader in your wheelhouse.
# # #
Notes
[1] Or, more tritely, “no one ever got fired for buying IBM” back in the day (communicated indirectly via ads like this), which might easily translate to “no one ever got fired for buying Oracle” today.
[2] Personally, I feel that companies that I’ve competed against such as MicroStrategy, FAST Search & Transfer, and Autonomy at various points in their history all pushed too hard in order to create an aura of success and leadership. In all three cases, litigation followed and, in a few cases, C-level executives even went to jail.
[3] Who sometimes have in-house marketing departments to help you run the play.
[4] In accordance with my rule that behind every “marketing genius” is a big marketing budget. You might argue, in fact, that allocating such a budget the first step of the genius.
[5] And build a strong customer success and professional services team to get those customers happy so they renew. Ending ARR growth is not just about adding new sales to the bucket, it’s about keeping what’s in the bucket renewing.
[6] That is, never “look back” by mentioning the name of a smaller competitor — as with Lot’s Wife, you might well end up a pillar of salt.
[7] If you’re not committed to raising a $100M round after they raise a $75M round in response to your $50M round, then you shouldn’t be in an arms race. Quoting The Verdict, “we’re not paid to do our best, we’re paid to win.” So don’t a pick fight where you can’t.
[8] This could be signalled by responding to the archrival’s $50M round with a $50M round, as opposed to a $75M.