The Importance of Nurture in Nascent Markets

Posted on April 6, 2013 | 9 comments

I just finished reading Phil Fernandez’s recent book, Revenue Disruption, and I have to say that I recommend it highly.  Fundamentally, Fernandez argues that the old Chinese Wall between sales and marketing needs to be torn down.  Instead, companies need to think of a continuous process, executed collaboratively between sales and marketing, that helps develop people into leads into opportunities into customers.

It’s a simple re-framing, but a powerful one.  Instead of sales and marketing handing contacts over the wall — often with strict wave-off rules where one side can’t touch the contact if he is on the other — that they need to work together, see things from the customer’s viewpoint, and understand that turning prospects into customers is a long process of intermixed touches by both sales and marketing.

While Fernandez would say this is important for all companies, I believe it’s critical for start-ups in nascent markets.  Why?  Because when a market is only 3% penetrated it means that 97 people out of 100 that you meet will definitionally not be ready to buy.  Ergo, start-ups must develop awesome nurture programs that both help accelerate the buying timeframe (e.g., through education) and ensure top-of-mind awareness when the customer eventually does decide to enter the market.

9 Comments

Posted in Marketing

The Simple, Definitive One-Step Hot Market Test

Posted on March 22, 2012 | 3 comments

Founders, entrepreneurs, venture capitalists and startup employees often spend a lot of time wondering, worrying, and pondering if a company is in a hot market.  Will the company shoot the moon?  What is the market potential?  Are you in Geoffrey Moore’s tornado?

After 25 years or so doing high tech companies, I have a simple test:

If you have to wonder whether you are in a hot market, you’re not.

It’s really that simple.

That’s not to say that re-positioning / pivoting into a hot market is impossible.  But I have always believed the biggest strategy problem most companies face is not “step 2” — i.e., determining strategy given a situation assessment.  That’s actually not that hard.  Step 1, however — figuring out your market situation — is the killer.

Companies get it wrong because people are optimistic.  No one wants to call the baby ugly.  People confuse the potential to be in a hot market in the future with being in one in the present.  (If we just sit here, maybe Prince Charming will come along.)  And people want to believe that changing markets is as easy as putting { mobile | big data | social | analytics } lipstick on the proverbial pig.

Because the prospect of not being in a hot or soon-to-be-hot market is too grim to ponder (and/or too politically incorrect an assertion to state), companies tend to always assume that they are in a hot market.

I remember visiting an empty building with 2 guys sitting  atop a $30M venture capital sinkhole.  “We’re in big data.  That’s a hot market.”  That was funny I thought.  I didn’t think of them big data.  And I was on the board of Aster Data, one of the original “big data” companies.  And if you’re in a hot market, why is the building empty?

It’s also not to say that you can’t build a nice company or get a good return for your investors if you are not in a hot market.   Many strategies — mostly focused on developing series of market niches — can be successfully applied in these situations.

But if you get the situation assessment wrong, you’ll never correctly arrive at the right strategy for it.  (And hoping for offsetting errors isn’t a good approach, either.)

I’ve spent about 18 years of my career working in hot markets and about 8 in cold ones.  I’ve also advised a handful of companies over the past 4 years, some in hot markets and some in cold ones.  I can tell you there is a difference.  A difference so obvious that I am positive that the only people who wonder if they are in hot markets are the ones who aren’t.

If you’re in one, you know.

3 Comments

Posted in Strategy

The Future of the Company

Posted on March 8, 2012 | 10 comments

It’s fairly common to hear the CEO of a company that makes most of its money doing thing-X announce that the future of this company is thing-Y.

Why might they do this? I think it’s often just to sound visionary and bold. In rare cases it might be a clever plan to distract thing-X challengers by redefining the competitive agenda to include both things X and Y (Oracle excelled at this with many failed initiatives such as the NC).  There are certainly also cases where markets go bad and must be exited, such as when Intel needed to flee the commoditizing DRAM market.

But in the embrace-change-or-die culture of Silicon Valley, there’s also something fashionable about saying, “I know we are the leaders in thing-X. But thing-X is not strategic enough. So the future of this company is thing-Y.”

It takes guts to say it. TechCrunch and the VCs will get goosebumps.  There’s a certain burn-the-ships attitude that one can’t help but admire.

But is a good idea? I think, for the most part, no.

While it is sometimes absolutely necessary to lead companies through major transitions, I think the “future is Y” tactic is overused and often misapplied.
Sometimes burning the ships drives a high level of commitment to developing a fertile new world. Sometimes, however, it leaves a bunch of starving sailors on a barren rock.

My two favorite examples of this principle are Ingres and MarkLogic.

Let’s do Ingres first. Ingres was founded in 1980 about 2 years after Oracle and was one of the original 4 players in the relational database market. For a bevy of reasons more related to marketing and strategy than technology, Ingres lost the early relational database wars to Oracle. For example, by 1992, Ingres was struggling $240M division of the $400M struggling applications vendor ASK, while Oracle dominated the market and was about $1.2B. Somewhere around 1989 or so, it became clear to Ingres that they couldn’t win the core RDBMS market. In an epic display of bad decision-making, the company declared that the RDBMS market was commoditizing and decided to strategically focus on application development tools. I remember hearing top management say “the future of this company is application development tools.”

This was a terrible decision for several reasons:

  • The RDBMS market was still in its infancy. Today, it’s a $15B (per year) market. Literally, hundreds of billions of RDBMSs were sold subsequent to Ingres’s decision that it was a poor market. It was in the top-two market opportunities for IT in the last century. (The other being PC operating systems.)
  • The RDBMS market was not commoditizing. Ingres confused the growing dominance of a standard query language (SQL) with product commoditization. The products were all quite different. SQL would be extended and, in effect, re-made proprietary. The market wasn’t trending to pure competition and commoditization; it was headed towards oligopoly. Oracle drives 50%+ margins in RDBMS.
  • The notion of carving a segment off the market was never considered. When someone loses the battle for dominance in market A, you don’t need to move to market B; you can segment the market instead. For example, Ingres was always very strong in query optimization. As Ingres was bailing out of RDBMS, a new multi-billion dollar segment was opening in databases specific to data warehousing, where that optimization technology would have been critical. Open source was another option was hiding in plain sight (the original University Ingres was always open-source; even before the term or concept was widely in use).
  • Application development tools were a non-attractive market maybe 1/5th the then-current size with low barriers to entry, boatloads of competitors, strong downward pricing pressure (e.g., free runtimes), a powerful entry Visual Basic / Visual Studio and a bevy of other PC-based tools.
  • The statement, and accompanying reallocation of resources, alienated all the database people who thought “why do I want to work at a database company not committed to databases?” The answer was you didn’t. Many of them ended up at Oracle and Sybase.

Tools were indeed the future of Ingres and that future ended up pretty bleak. In 1994, the whole struggling ASK/Ingres mess was sold to CA for $311M, a fraction of annual revenues.

Now, let’s look at MarkLogic. MarkLogic was founded in 2000, to create a hybrid DBMS / search engine based on the XML data model and the XQuery language. In 2003, Gartner wrote a note called XML DBMS: The Market That Never Was. Despite that, I joined the company as CEO in 2004 because, while I was aware that there was no horizontal momentum for the XML DBMS category, the company did have outstanding technology, strong investors, a great team, and a handful of good early customers.  I strongly believed it was a classic case of where a “bowling alley” strategy could be applied successfully.

(A bowling alley strategy is a systematic vertical market development strategy described in Inside the Tornado by Geoffrey Moore. The idea is simple: in the absence of strong category momentum, a vendor can be successful nevertheless by focusing on specific needs in specific industries and then bridge across markets by solving similar problems in new industries or new problems in the same industries.)

To me, it was clear cut and, God bless Geoffrey Moore, it worked. Of the dozen or so XML DBMS vendors in existence in 2004, the only one who succeeded in building a real business was MarkLogic. Some went out of business. Some repositioned into XML publishing applications. Some were sold for a pittance.  Do you remember any of these names:  Tamino, Ipedo, x-Hive, TigerLogic, Ixiasoft, Xyleme, eXist? It wasn’t exactly a hot category.

Despite the fact that 90%+ of the revenue was coming from the media and government verticals, several “important people” persisted in believing that the future of the company was enterprise. (Meaning, selling horizontally to F1000 IT.)  I never liked that because a horizontal enterprise assault had played no role in the company’s success to that point, and the data I saw suggested that wasn’t going to change in the future. To me, anyone paying close attention to the present might well conclude that if enterprise were the future, then that future might be pretty bleak.

Several things happen when leaders of thing-X companies declare the future of the company is thing-Y.

  • You make counter-intuitive investment decisions. For example, if I told you that thing-X salespeople sold $2M/year and thing-Y salespeople sold $1M/year, you might expect that a company would consist of 100% thing-X salespeople. (For a given number of salespeople that maximizes revenue.) But once thing-Y is declared strategic, the company will seek to hire more of the lower productivity salespeople to support the strategy.
  • Thing-X employees feel disenfranchised. I’d always felt that Oracle never forgot it was a database company. No matter the timeframe,  a top database engineer was a prestigious job. At Ingres, after about 1989, it wasn’t prestigious to be in the database group. Oracle never said tools or apps were the future of the company. Oracle, in effect, said: we are the leader in database and will leverage that to expand into tools and apps.
  • Thing-X customers can potentially get rattled. I’m told that at the first MarkLogic User Conference after I left, that new management explained to an audience almost composed of media and government customers that the future of the company was enterprise.  It’s risky to treat your customers like your high school sweetheart on the day you went off to college.  (Hasta la vista.)
  • Your best employees will want to move to thing-Y. By saying the future is thing-Y, you are announcing to your team that the past is thing-X. Your best and brightest will quickly get the message that to maximize their career opportunity, they should be working on thing-Y.

I firmly believe that there are situations where companies must leave an old market and enter a new one. Cognos’s exit from mid-range application development tools into BI is a great example. In 1996, you could safely say that the future of Cognos was BI. I’m sure that created many transition issues internally for them and, for the record, I believe that Cognos managed those issues extremely well. But given what was happening to VAX/VMS and MPE/XL Cognos had no choice. They needed to burn the ships and move to a new world.

But for, the most part, I believe that VCs, board members, and executives make one of two mistakes when they say the future of a thing-X company is thing-Y.

  • They are hoping the future is thing-Y because for some reason they find that market more attractive than the market for thing-X. Often this may be a case of boredom with your own market (i.e., grass-is-greener syndrome) or a lack of creativity in developing it. Recall that Google was in part born by Yahoo declaring search non-strategic, and instead choosing to focus on portals and content.
  • They are creating an artificial rhetorical “or” for dramatic purposes when the real message should be “and.” Follow the Oracle model instead:  we are going to lead in databases and, by hook or by crook, we are going to build an applications business because we believe that both are strategic to our future.

So the next time you hear anyone say the future of your company is Y, challenge them. Ask about X. Ask about Z. Ask about X and Y as opposed to X or Y. Then consider the real consequences of having your entire organization — and customer base — truly believe that the future is Y.

If you like that picture, stick with it. If you don’t, think a bit harder and change the plan.

10 Comments

Posted in Strategy

The Right Time To Raise Money At A Startup

Posted on March 2, 2012 | 3 comments

I’m often asked by entrepreneurs:  when is the right time to raise money at a startup?  I invariably say two things in response:

  • Whenever you can
  • Right now

Whenever You Can
Most startups typically go through ups and downs. Say you’ve just completed 4 consecutive quarters above plan. You growth is high and your burn rate is reasonable. You have enough cash to go three more quarters before you need money. What should you do? Unless you are virtually certain that your quarterly streak will continue, I’d say raise money.

Why? Because the increase in valuation / decrease in dilution from adding 1-2 more quarters to the streak is nothing compared to the decrease in valuation / increase in dilution from tanking a quarter along the way. Whether you’re a subscription or perpetual company, investors will always want to see new sales / new bookings as your primary growth metric. While the SaaS model does damp revenue volatility, that’s precisely why a VC will want to see bookings. And, in my experience, bookings are volatile. During my 24 quarters at MarkLogic, we hit our bookings targets about 90% of the time. But I can say, sometimes when we missed, we missed. I remember one quarter coming in around 50% of target. Right after that quarter is exactly when you do not want to be raising money. And, by the way, it’s usually precisely when you need it.

The fastest way to end up bridge loans – where you lose almost all control of your company and are fed milestone to milestone – is to not raise money when skies are blue and instead try to raise money in a storm. Much as I love them, VCs are not in the business to be nice people:  if you’re coming to them, hat in hand, with 30 days of cash in the bank, I can assure you that you will not raise money on favorable terms. You could have done that 90 days ago. But, if you’ve tanked the quarter, now it’s too late.

To show this in reverse, one trick VCs love is to sneak a peek at an extra quarter. I remember one time when I was raising money, we’d agreed on terms, and the lawyers said it should take 2-3 weeks to close the round. It was June 12th, so if everybody pushed hard we should have been able to close the round before the quarter ended on June 30th. But suddenly everyone disappeared. Hello? Hello? Why aren’t the VCs calling back? How come their lawyers have gone silent and are taking forever to turn paper? Hello? Hello?

We made the quarter and the round closed July 5th. Arguably, I could have gone back and asked for a higher valuation based on having made the quarter – i.e., knowing that 2Q would be successful wasn’t priced into the round. But the VCs are good, they knew I wouldn’t do that – and they wouldn’t have let me if I tried.  So they got a “free peek” at the 2Q results. I’ll bet you $1000 that if we’d tanked that quarter, they’d have come back to me seeking to lower the valuation. The game is neither fair nor symmetric. (So time your round to close before the first day of the last month of the quarter.)

Right Now
Particularly for new companies, I believe the right time to raise VC money is right now. Too many would-be entrepreneurs treat fund-raising like going to the Senior Prom. I need to find a date. I need to book a limo. I need to do my hair. I need to get a dress.

Translation: I couldn’t possibly go talk to VCs about raising money until I have a great slide deck, an advisory board, a CEO, a Beta product, or some customers.

To me, it’s all avoidance. Traditional A-round VCs want to catch you in your dorm room. They are used to talking PhD students (or drop-outs) about their visionary ideas. They are not worried about whether you have a CXO. (In fact, they would be more than happy to help you find a CXO which, by the way, I wouldn’t recommend.)  They are worried primarily about the market opportunity, your idea, and your technology. As Don Valentine always said: great markets make great companies.

What’s more, they want to invest in people they know. One way to get known is to build a relationship over time as you think about raising money for your company. The best way to do this is to find someone in your network who can connect you to a top VC partner and who’s spent time getting to know you and your company (e.g., someone who’s perhaps done some advisory work or an angel investment). Then you want that person to send a top VC an email that looks like:

Dear Joe,

I have been working a bit with Mark Smith who just (ideally, either left great company or completed or ideally dropped out of a great PhD program) and who has a very interesting idea for a company. They are thinking about raising money and thus weighing the pros and cons of bootstrapping, an angel round, or a VC round.

I’d suggest meeting with him.

This way you remove the “prom factor” from your VC meetings because are not going on the big one-shot date. You’re not raising money. You are thinking of raising money. So it’s not awkward for them to not invest – in fact, they never even need to say no. But if they like your idea and your company they’ll be shoving money in your pockets whether you ask for it or not.

Better yet, you can invoke their competitive instincts by noting that you’re chatting with several VCs about whether you should raise money. Best of all, this approach lets you benefit from their wise (and free) feedback as you develop a relationship over time. If they are even moderately interested, they are going to want to track you (i.e., “hey, come back in a month and let’s have a coffee”).  If you continue to make good progress during that time (i.e., accomplish what you say you will in a given timeframe), you not only build credibility but also slowly transform yourself from stranger to interesting person who I’ve been tracking for the past 6 months. That becomes even more helpful when the VC needs to convince his partners to invest in you, as he invariably will.

So, now you know the secret. When’s the right time to raise money in a startup? Either right now or whenever you can depending on your situation. No business ever died from a little extra dilution. But, as the ever-quotable Don Valentine also pointed out: “all companies that go out of business do so for the same reason; they run out of money.”

3 Comments

Posted in VC

The Independently Wealthy Salesperson

Posted on February 26, 2012 | 1 comment

Technical founders and entrepreneurs can easily overlook the coin-operated nature of salespeople. Why? Because they aren’t salespeople, they’re product people and they’re just not wired the same way.

Founders might be motivated by changing the market, popularizing a product, or just proving they are right. Salespeople, almost all the time, are motivated by their compensation plans, so the compensation plan should be the de facto expression of what you want them to do and how they should spend their time.  Ergo, as mentioned in this post, you should get them done before kickoff. And put a lot of thought into them.

Why? Because a typical salesperson will spend the whole weekend after you give them their comp plan in Excel modeling how much money they will make under various scenarios. I’d also say to make them as simple as possible both to make it clear what you want salespeople to do and to avoid the inevitable unintended consequences that often accompany complexity.

One huge question is whether comp plans should be capped. Almost all salespeople would say no. Part of the reason they’re playing the game – particularly at a startup – is for the lottery ticket.  Think: while I know my on-target earnings are $250K, I want to have a shot at earning $1 or $2M – that’s what drives me to work those killer hours.  So while I recommend leaving comp plans uncapped, I also recommend that management model the full range of scenarios and, for example, accelerate rates in the 100-250% of plan range but to greatly decelerate them after that.

You can always hedge your bets in the compensation plan terms and conditions (e.g., plan can be changed at any time to correct for errors or unforeseen circumstances), but if you actually use that language the whole salesforce will know and you will quickly lose the lottery-ticket value in your comp plan. It is far better to put some more thought into the plan on the front-end. I know one guy at a startup who did a $10M deal off a $1M quota and received only a fraction of his stated comp. Because he didn’t want to burn bridges, he just quit. But in this scenario, everybody loses.

Outliers, however, can take several forms. I know one sales manager who groups salespeople into three buckets:

  • Those who clearly understand their comp plans. They sell what’s incented, when it’s incented, and make the most money per sales dollar.
  • Those who mostly understand their comp plans. Those who do a good job following the plan incentives, but not a perfect one.
  • The “independently wealthy” who seem to pay no regard to the incentives in the comp plan

I love bucketing reps in this way both because it’s funny and it immediately prompts an important question. Why are these reps not following the plan? Perhaps it’s just sloppiness or stupidity. Or perhaps there is more going on. My advice is to analyze reps in this way, show them that if they had sold different products at different times how their pay would have varied and then ask them why they didn’t. While some people invariably just miss the point, you might also discover “good reasons” why your people aren’t following your plan: maybe it’s too complicated and they don’t understand it, maybe they don’t think the higher incentive offsets the additional risk of selling a new, strategic product.

Or maybe they truly are independently wealthy and just doing sales for fun. But I doubt it.

1 Comment

Posted in Uncategorized