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Why building a great product isn’t sufficient for success

spotify

Two articles in today’s Wall Street Journal triggered my realization of the how new ventures of today must provide services, not just products, to their customers..

First comes Spotify.  While most people think of Spotify as a music on demand service, the company was also a pioneer in curating and recommending playlists:

Since launching a decade ago, Spotify has sought to distinguish itself from competitors by its playlists, which it says help users discover and listen to more music. Some of its most popular playlists attract upward of 10 million followers.

By focusing on playlists instead of on either individual artists, specific songs or even record companies, Spotify has created the LP of the digital age. LP initially stood for “long player” – a vinyl record that spun at 33 and 1/3 revolutions per minute, providing up to about 20 minutes listening time on each side of the record. This slower speed was in contrast to the 45, which only held up to about 4 to 5 minutes of music per side. Thus the 45 was ideally suited for individual songs, known as singles. LPs would usually consist of one or two hit 45s and the rest was filler. The LP was one of the first and most powerful examples of bundling – forcing customers to buy something they didn’t want in order to get something they did value. LPs were also called albums, as the very first vinyl records were recorded at 78 rpm. So little music was on a 78 that multiple 78s were sold as a collection known as albums, after the physical holders of the multiple 78s, similar to the way families once stored their photographs in an album – yet another antediluvian product .

Steve Jobs and Apple’s iTunes broke the LP/album model. No longer did music lovers have to spend $12 to $16 on a CD to get the one or two songs they really wanted – they could simply download those songs for 99 cents each – a price Jobs forced down the throats of the record companies. Of course, you could still download the an entire album – 12 songs – but you would just pay 12 times 99 cents for it. Digital downloads superseded the CD due to this unbundling. Unbundling provides consumers with both choice – any song you wanted for 99 cents – and convenience, you could download a song on any device from any location, so long as you had an Internet connection.

Spotify was, if not the first, the most prominent seller of streaming music, which has now surpassed the digital download as the most popular way to access music. Spotify’s
all-you-can eat, on-demand subscription model provides incredible convenience to music customers. But Spotify shrewdly recognized the megatrend of the new, consumer-driven bundle of songs known as playlists. Playlists were available on iTunes and other digital download services but they didn’t take off until Spotify added the social dimension: you can create and share your downloads with your friends, and of course, vice versa. Thus powerful social sharing, combined with great ease of use, and a vast storehouse of music, has made Spotify’s service very attractive to tens of millions of music lovers.

The playlist actually provides another value to users of Spotify’s and other streaming services: recommendations. For example today Spotify announced it is adding playlists of music soundtracks to its offerings.

Many fans already compile their own playlists based on the music they hear on TV shows and in movies. Messrs. Jernigan and Bush said they hope fans listening to the “Mid90s” playlist will discover other music from the era and start creating their own playlists.

So we see the winning business model that has elevated Amazon to the second highest valued company, after Apple, in the world: providing users with low price, convenience, ease of use, an almost infinite selection of products, and recommendations as to what else to buy (customers who bought X product also bought products W and Z.)

The other article in today’s Journal that embodies the new business model of value-added services is Tiny Rooms, Shared Kitchens: Co-Living on the Rise in Big Cities, subtitled Developers are now preparing to build some of the largest new co-living properties in North America. The new model of co-working spaces – large open plans has now superseded both the private office and the hated cubicles for businesses.

Real estate developers facing a market of rising rents, but limited supply of rental properties in the residential market, have shrewdly extended the co-working space model to the residential real estate market.

Co-living, a budding real-estate trend often derided as an extension of college dorm life, may be growing up.

At co-living buildings, tenants lease tiny rooms in larger apartments shared with strangers. Renters have access to living rooms, kitchens and other common spaces, while amenities like cleaning services, dog walking and cooking classes are part of the deal.

Co-working space providers like WeLive have now extended the office model of bundling services with rental space to the residential market, thus WeWork spawned WeLive. Note that both the open office plan and the co-living space both drive down cost by putting substantially more people per square foot than the old models.

From mailrooms and laundry rooms that double as bars and event spaces to communal kitchens, roof decks, and hot tubs, WeLive challenges traditional apartment living through physical spaces that foster meaningful relationships.

Co-working adds the social element and access to shared facilities to the staid old model of apartment living. As the authors of the article write, there is evidence that skyrocketing rents over the last six years have forced more apartment-dwellers to live with roommates.

The first lesson from these two Journal articles is that startup founders need to surf a business and/or technical wave, in Spotify’s case the digitization of music and the subscription business model and in residential real estate developers, the rapid and accelerating increase in demand for rental housing. But how does a founder discover these technical and business waves of change? The answer is simple: immerse yourself in your target market, be it lovers of music or renters of apartments. That means getting out of the office and talking to dozens of customers, reading what your customers read, attending the trade shows and conferences your customers go to, following the influencers your customers follow, using the products your customer currently use. Walk in your customer’s shoes!

And there’s one other trick that successful companies like Spotify employ: borrow a business model from another market, in Spotify’s case the subscription model used by magazines, and employ it in your target market.

The second lesson for founders is that building an app or even a software platform is necessary but far from sufficient. Founders must strategize before they start designing their product how will they add social sharing to the product? How will they provide access to ancillary products? How will they curate products and create bundles that encourage customers to buy more? How do they crowdsource recommendations to help their users make purchasing decisions?

A final lesson for founders, especially those who may not even have an idea yet, get out of your comfort zone. If your main thing is athletics, try attending a symphony. If you are really into Twitter, spend time reading the long articles on Medium. If you are into classical music start exploring hip-hop. What drives the success of many companies, especially those in which technology plays a strong part is cross pollination.  The pioneers of co-living space for millennials copied the dormitory housing model of colleges and universities: tiny bedrooms adjacent to large common areas providing things large large screen TVs, living room furniture, coffee bars, and other amenities that the residents all can share.

The mega-lesson: a great product won’t succeed unless it is tightly integrated with services that help your customers make the buying decision, help them share, help them connect with other customers, help them access useful and exciting ancillary products or services. Yep the key word is help. Your goal as a business is to help your customer get what they want, when, where, and how they want it. Help! Help! Help!

 

 

 

 

Don’t be a tweener!

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Where was Steve Jobs during the eleven year span between being ousted from Apple and his return to brilliantly turn around the company? He was founder and CEO of NeXT computer. I have more than a passing familiarity with NeXT, as the computer store I built at MIT stocked the NexT Cube for purchase by students and faculty. The IT systems group, of which I was one of a handful of directors, had a meeting with Jobs before he went off to his Boston launch. That gave me the opportunity to meet Jobs and see (and hear) his amazing charisma up close. It made me a true believer in his vaunted ‘reality distortion” field.

But despite Jobs’ world leading charisma and marketing savvy and the highly advanced software and hardware developed by NeXT, the machine was a flop. NeXT had everything a startup needed to succeed: a product visionary, a world class team, a mission (create the  best computer in the world for education), investment of millions of dollars from Canon ($300 million as I recall), and virtually cost-free marketing due to Jobs’ renown. (For a deep dive into the history of NeXT I recommend you read Steve Jobs & The NeXT Big Thing by Randall Stross.) So why did NeXT fail? I believe it was because its leading edge product was a tweener. What the heck is a tweener you may well ask? As usual, Google has the answer:  

a person or thing considered to be between two  other recognized categories or types. “Price considered him tweener, too small for a lineman and too big for a linebacker.

This definition is quite fitting as I first came across the term as a football fan. But what brought tweener to mind today was not football but an article in The New York Times:
In Battle With Amazon, Walmart Pushes Deeper Into Entertainment by  
Michael Corkery and Brooks Barnes. Here’s the gist of the article in a nutshell: 

The investment with Eko totals $250 million, according to two people briefed on the matter, who spoke on the condition of anonymity to discuss details of the deal. It is thought to be the largest bet on the interactive entertainment niche, which has long tantalized producers as a potential gold mine but has never gained widespread adoption.

Again, I have far more than a passing experience with interactive products. I produced one of the first interactive business case studies in conjunction with the Harvard Business School’s publishing arm and Professor Christopher Bartlett. Despite the gold plated imprimatur of Harvard this product didn’t sell either. It was a tweener: it was in between the established market of print business cases and the tiny, but established niche of software simulations.

Walmart is chasing the mirage of interactivity in both entertainment and advertising. Talk about being a tweener! No doubt what they produce will be too passive for a videogame audience and too complicated for video advertising.

The authors also point out another problem with interactive content:

Interactive content has also been hindered by a generational divide. Older consumers — and media executives — are accustomed to a passive viewing experience and have a hard time grasping this way of participating in storytelling. Younger viewers are the opposite.

Another way to look at the interactive content as being a tweener is that it sits between the passive Hollywood TV and movies model and the interactivity model of the videogame market.

Untold hundreds of millions of dollars has been lost by established print media publishers, Hollywood studios, and venture capitalists over the past three decades by falling into the great divide between the lean back model of traditional entertainment and the lean forward model of games.

I believe that positioning is 90% of marketing; how you position your product against established products and where your product falls in relation to the products your customer currently is using. Steve Jobs’ positioned NeXT as the computer for higher education. How much he really believed that and how much that was it was just an attempt to avoid a lawsuit from Apple by not directly competing with them I don’t know. But while Jobs built a stellar academic advisory council, upon which MIT had a seat, the NeXT machine was priced like a computer workstation from Sun Microsystems but it had the processing power and other specs of a consumer PC.  One thing the advisors had told Jobs was that his price was far too high for students to afford, even with an academic discount- it was priced like a workstation, which had a faster CPU, more memory, and hard disk space, etc. But as Jobs did with most outside criticism, he ignored our advice.

Jobs made a number of other mistakes. He insisted on using a new type of removable storage that was very expensive and hard to get. While the software development tools were outstanding, NeXT couldn’t attract developers as it was caught in the age old chicken and egg problem. Developers won’t create products for machines that don’t have an established customer base and consumers won’t buy machines that lack a wide choice of software applications. He also violated one of the principles I preach to founders: don’t try to innovate across multiple fronts! If you have an amazing authoring system for virtual reality don’t also try to create an accounting system that is so simple anyone in any company could use it. What Jobs learned from NeXT was one thing: focus! He ruthlessly slashed Apple’s product line, including the Newton which had a cult-like following. He brought laser-like focus to everything he did at Apple. He was as product of the many ideas he said no to as the ones he  put the company behind.

So whatever product or service you plan to create take a look at the existing markets that serve your target customer and don’t be a tweener, unless you can flip the NeXT model around: the power of a workstation at the cost of a PC!

 

 

Realizing the real world value of social connections

 

waze

The Waze crowdsourced navigation service also has a service for carpooling. However, Waze has had a problem figuring out how to make the service work. Originally Waze, tried to promote the service based on its economic benefits of having someone help cover gas costs for a trip that they were going to make anyway.

According to Waze founder and CEO, Noam Bardin, Waze earlier this year realized they needed a better formula for connecting strangers willing to ride together in a car.

Some people enjoy commuting with others who work for the same employer or live in the same neighborhood.

Many women, for instance, only want to ride with other women, Bardin said, while other people enjoy commuting with others who work for the same employer or live in the same neighborhood.

‘‘Carpooling is a more social experience,’’ Bardin said. ‘‘A lot of time those of us working in the digital world forget that social connections are often the most important thing in the real world.’’

The lesson for founders from the Waze carpooling service is that customers are not always motivated by economic benefit. If you are developing a service you really need to understand what non-monetary factors may influence customers to try out your service. Clearly social connections will play an important role in any real world service. That’s very easy to forget if you spend all your time in front of a screen instead of in front of real live customers.

Adding a social connection feature to your service doesn’t mean you are competing with Facebook or Instagram. Social has become a vital ingredient to all products, just as AI is in the process of now becoming a necessary ingredient.

But whether you include social or AI in your product or service it needs to be baked-in, not pasted on top of your product as an afterthought.

A good exercise for founders developing a new product is to understand what besides financial gain motivates your customers and how can you harness that motivation to connect with customers.

Hierarchical vs. networked management models

eileenfisher.jpgReading two very different articles about business in two different publications the other day got me thinking about models of management. Management Today by Chander Chawla on Forbes.com is an overview of what he sees as the models of management.

The military was problem the first attempt to gather a diverse group of people organized to work together towards a common goal. hat structure gave us a few principles:

  1. Hierarchy

  2. Command and control

  3. Incentives for achieving the goals

  4. Division of responsibility based on function

  5. Centralized decision making

My experience working for a very large company, then called Thomson, now Thomson Reuters, with about a $7 billion dollars in yearly revenue down to a two-person startup jibes with the traditional model. And every startup I mentor at MIT has a CEO, CTO, and often a COO. Startups all have boards of directors, CEOs and a hierarchical management structure. Nothing has changed in my five decades of working life.

But Eileen Fisher, founder of her namesake clothing company, managed to build a company that for three decades has gone without a CEO.

The unconventional leadership structure reflects Ms. Fisher’s belief that consensus is more important than urgency and that collaboration is more effective than hierarchy.

She’s driven her company to annual sales of $500 million and it’s still growing. The interview with her in The New York Times Corner Office column by  David Gelles provides fascinating insight into a company with decentralized decision making and no boss.

I’ve written previously about how companies need to be built on a foundation of values and Eileen Fisher clothing is built upon the values of timeless designs, sustainability, and simplicity.

Her employees now own much of the company and she believes that really works:

It engages people and their sense of ownership, and they’ll tell you things. They’ll say in a meeting, “Don’t spend my money on that.” People aren’t happy when they see people wasting money here or there or being extravagant on something.

Nothing could be more counter business cultural than Eileen Fisher’s “leadership through listening.”

At that point you had a real business going. What was it like to become a boss?

I still struggle with that. I don’t think being a boss is my strength. I think of myself as leading through the idea, trying to help people understand what I’m trying to do, or what the project is about, and engaging them. I always think about leading through listening. I was a designer, so I didn’t have preconceived ideas of how this business works. And I was kind of lucky to not know.

I encourage you to read the rest of the article for more details on this founder who has refused to  become a boss and has succeeded not despite that,  but because of it. Those of you with the time and patience can also read the full Management Today article where the author posits four types of management:

management

Frankly I can buy into both domain management and organizational management. You will have to decide for yourself about Perception management and Feelings management – neither resonated with me. While perception is important in any business and of course we all have feelings, that doesn’t mean they are domains of management. Mr. Chandra himself admits that However, the four management categories do not carry equal weight. A lot depends on your level in the hierarchy, the maturity of the organization, and your function. 

Before you just follow your friends and classmates by building your startup on the military command and control model at least take the time to understand where that model came from and that there are alternatives. And whatever you build, build it on a strong foundation of values.

Being a rather anti-authoritarian myself, the choice of models is easy, the one built upon the values of the networked model where colleagues collaborate, create, communicate and arrive at consensus.

 

 

 

Looking for the exit sign?

exit

I’ve had firsthand experience with both buying and selling companies. Buying two companies and selling three were great learning opportunities. I know enough to be dangerous. If you are ready to start looking for the exit sign, I highly recommend the article on TechCrunch What every startup founder should know about exits by Benjamin Joffe and Cyril Ebersweller.

But the first question in this process is how do you know you are ready to sell the company? Surprisingly the article skips over this important step. There are several signals to listen to about selling your company.  Selling the company is a CEO job, aided by your CFO, if you even have one! In my day every VC-backed company had to have a CFO – if only to watch over the millions of dollars in the startup’s checking account. But today?! Uber just hired their first CFO recently! One reason is that there are many CFO’s for hire, either through an agency or directly. So it shouldn’t be a problem for you to find one.

  • Venture is out of cash, can’t raise any more and will have to shut the company down if you can’t sell it. This is the worst case, but not uncommon case.
  • Need more capital to grow. Perhaps you are in a capital intensive business but one that investors are leery of. So if you don’t grow eventually you will have to sell or go under.
  • You and your co-founders have been at it a very long time. You’re tired and worn out. Perhaps infighting and/or staff attrition are creating havoc. People want out.
  • Venture is doing fine but you just were given an offer you can’t refuse. CEOs have a fiduciary responsibility to do what is best for the shareholders. So it’s your duty to bring this opportunity to your Board.
  • You lack the capital to be an acquirer. By building strategic alliances in your market over several years you have seen that growth of companies in your market is largely through acquisitions. Since you lack the capital to be a buyer you will need to be a seller. Look for being acquired by a company that does acquisitions exceptionally well, like Cisco or Thomson Reuters, that you would enjoy working for after the sale is over.

There may well be other reasons, but as you can see from this list three out of five come from negative scenarios, only two from positive.

Ever heard of the Boy Scout’s motto? It’s Be Prepared! In the case of mergers and acquisitions that means from the day you incorporate your venture you should be prepared to be acquired.  That does not mean your goal or purpose is to sell your company! However, it is a highly likely option. In 2016 97 percent of exits were M&As. And most happened before Series B.

As George Patterson, managing director at HSBC in New York said, “Good tech companies are bought, not sold. The question is thus: how to get bought?”

Patterson says it’s important to understand how mergers and acquisitions actually work; how to prepare a startup for an exit; and how to develop a “feel” for the market you’re exiting through and into.

There are five types of acquisitions according to Mark Suster, managing partner at Upfront Ventures:

  1. Talent hire ($1 million/dev as a rule of thumb —  location matters)
  2. Product gap
  3. Revenue driver
  4. Strategic threat (avoid or delay disruption)
  5. Defensive move (can’t afford a competitor to own it)

As you can see, three out of five are driven by negative scenarios for the buyer! This is no coincidence. Evidence shows that most acquisitions fail. That’s a deep subject I won’t get into here. But if you are selling you are best off being a talent hire or revenue driver.

  • Do everything by the book. Your CFO or freelance CFO must have experience in  acquisitions! Your lawyer and CFO will make sure you do things that will make it easy to sell the company, like a clean capitalization table and incorporation as a Delaware C-Corp. Use of an accounting system that is set up correctly and maintained assiduously. NDAs with all employees and significant others.
  • Make sure your IP is as clean as your cap table. That means that someone in the company on the operations side should be in charge of tracking all IP activity on your behalf (trademarks, copyright, patents) and that you are conforming to all Ts and Cs of any business arrangements your venture is part of, from your office lease to a distribution agreement.  Buyers performing their due diligence will want easy access to a complete, well-organized set of all documents pertinent to your IP and that of others, such as software licenses.
  • Manage expectations. Everyone in the company should know that the sale of the company is one of several possible scenarios. Keep in mind, “No surprises!” But you don’t want your staff looking over their shoulders constantly trying to spot the buyer, just as you don’t want them trying to figure out how much they will be worth in the event of an IPO.
  • Know your market. You and your management team should get familiar with possible buyers through your business development or strategic alliance initiatives. In fact this is one of the best way to be bought, as you can date before you marry.

As I wrote about previously, in the post Why I don’t like hearing about exit strategies, …Your job is to build a great company. If you do that, the exit strategy will take care of itself. And if you don’t … the exit strategy will also take care of itself.” So don’t let the idea of an exit be a distraction to you or your team.

Missionary marketing – what is it and why you might consider it

sales

I can’t recall exactly when I first heard the term “missionary marketing” but it was years ago when I was an active entrepreneur trying to raise capital from VCs.  Most likely it was from a VC explaining to me why he didn’t want to invest in one of my startups. But the term is just as relevant to startups today as it was decades ago. Translating from
VC-ese, “missionary marketing” means that you – the founder – will have to spend considerable time and money educating customers. Tying up capital and founder’s time explaining to customers why they should buy their product and how to use it for business advantage seems like a poor case of resource allocation.

Certainly the best way to educate customers is “peer education” rather than “venture education.” I don’t have data to support this supposition, but I wager that many users of apps that have grown virally have benefited from friends showing friends how to use newly discovered apps like SnapChat – notorious for its opaque and confusing interface. One of the best quotes from Antonio Garcia Martinez’s book Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley is “… marketing is like sex, only losers have to pay for it.”

The disclaimer I’d attach to this quote is that while it certainly applies to consumer markets where if you haven’t built virality into your product you will go broke paying customer acquisition costs, it doesn’t apply in the hyper-competitive enterprise software market. I assure you no corporate IT staffer would be caught dead teaching a fellow IT person at a direct competitor how to use an enterprise program like Salesforce  – that would be a sure way to get fired. What some founders don’t seem to understand about the consumer market is it is a non-competitive market – consumers don’t try to keep their discovery of great apps secret, on the contrary, they can win social points for alerting friends to the latest hot app as Instagram was only a few short years ago. That’s the secret to what is now called viral marketing but used to be called simply “word of mouth.”

But on the contrary,  what if you are in a B2B market where customers will rarely talk with each other for fear of giving up competitive advantage? That’s where of necessity you will have to do missionary marketing. While cloud computing is the IT trend du jour today, just a few years ago the pundits all thought it would never fly. What company would entrust its IT functions to some startup’s servers? Salesforce was probably not the first SaaS application, but it’s certainly one of the oldest and most successful. If we used the Internet Wayback Machine we might be able to find examples of Salesforce’s marketing of it’s cloud based application. Check out the Salesforce website from March 7, 2000. Great list of benefits!

What lead me to think about missionary marketing was noticing this graphic from the article Rethinking Guided Reading to Advantage ALL Our Learners, which I noticed when browsing Flipboard.

OLM-progression-full

A friend of mine has been marketing math education software to schools for years and we have often talked about the learning model in primary education. But what caught my attention was the middle column of this graphic. It looks a lot like how you would educate a corporate software buyer: first demonstrate your product; then provide customer testimonials and references to enable your prospect to share the experiences of satisfied customers; the provide hands-on system setup and training before finally letting the now-educated customer to use your product on their own successfully.

So while corporate business and IT executives are unlikely to warm to the idea that they are the students and you are the teacher that is the reality if you are launching a new and truly different product. And if you aren’t doing that then you are going to have to compete on price – good luck with that!

 

 

Values => Intentions => Goals

values

Sometimes I come across an article that has a kernel of real value to founders even though the article itself may be lightweight. Such is the case with the Forbes article The Most Successful People Don’t Set Goals — They Do This Instead by Jennifer Cohen. The article follows a disturbing trend these days: making assertions without any evidence or data to back them up. I read this article twice and it totally lacks anything that supports the assertion in its title.

However, the key point of the article is of value to founders:  “setting objectives without intentions is a waste of time.” While you may or may not agree with the statement that follows, “Setting a goal is black and white—you either achieve it, or you don’t.” –  after all with a sales objective of $XXX,XXX/yr. you could exceed the objective by 10% or even fall short by 5%, either way it’s not black or white. Other goals, like selling your company before the end of the fiscal year, are black or white, binary goals. You either meet the goal or you don’t.

But behind every goal there should be an intention. Intention implies forethought, premeditation, planning, design, and deliberateness. These are all processes. If you are the one setting a goal you need to make clear to those who have to carry it out what is the intention. If you are asked to meet a goal you should ask what the intention of the goal is. Understanding how the goal fits into the larger plan for your venture will help you to meet that goal.

Equally important is that corporate goals should be rooted in your venture’s values. I’ve written about values in the blog post  Values: the bedrock of startups.

As a founder, one of your first orders of business should be defining, documenting, and communicating not just the vision of your venture but the values the company stands for. Alignment between intentions and values is critical to the success of your venture.

Another worthwhile concept in the article is the idea of responding rather than reacting.  The author quotes business writer Steven R. Covey, “Between stimulus and response there is space. In that space is our power to choose our response. In our response lies our growth and our freedom.” Far too often in startups I’ve seen people react rather than respond. This can lead to either conflict from an emotional reaction or the mishandling of an important issue. Being aware of your intentions can help you respond thoughtfully, rather than simply reacting, thoughtlessly.

Set your goals on a layer of intentions built on the foundation of your venture’s values. Like the author, I don’t have data to support this advice; but it’s advice from decades of experience as well as from my mentors.