Lies, damn lies, and statistics

TAM-SAM-MarketThe saying “Lies, damn lies, and statistics was popularized by Mark Twain, who attributed it to the British prime minister, Benjamin Disraeli. The actual origin of the phrase isn’t clear and doesn’t really matter – it’s as true today as it was in Twain’s day and far more relevant in a world flooded with statistical analyses derived from reams upon reams of data.

But what does this evergreen phrase have to do with founders and mentoring? Increasingly in our data-driven world investors and business partners are insisting on quantitative evidence of both a new venture’s market opportunity and the size of the problem it is trying to solve. Thus many founders need to rely on third party research to buttress their arguments, as they don’t have the resources to do in-depth primary research themselves. Typically the sources of the data they rely upon – government and market research analysts – have far more credibility than the founders do.

I came across a perfect example of the perils of “data risk” for founders in The New York Times article Digital Divide Is Wider Than We Think, Study Says by Steve Lohr. It describes how Microsoft researchers did a study on the actual use of high-speed internet in the U.S. They concluded that 162.8 million people do not use the internet at broadband speeds. However, the Federal Communications Commission (FCC) claims that only 27.7 Americans lack broadband access!

If you are a company like Microsoft that is interested in profiting by solving the so-called digital divide – the large gap between the many millions of U.S. residents who have broadband access and those who don’t – you have to have the correct data to act as foundation for your business. Microsoft, of course, has far more resources than ever available to a startup, but the discrepancies found by their researchers between FCC findings and their’s are dramatic. This gap is most striking in rural areas of the U.S. For example in Ferry County in northwestern Washington, the area highlighted in the  Times article, Microsoft estimates that only 2 percent of people use broadband service, versus the 100 percent the federal government says have access to the service.

It turns out that the FCC relies on simplistic surveys of internet service providers that inherently overstate coverage. For example, if one business in an area has broadband service, then the entire area is typically considered to have broadband service available. You can get the full details of how Microsoft generated their data in the article, which I highly recommend, but suffice to say that they did not rely solely on ISPs for their data – they performed primary research.

There are several lessons for founders who are relying on government or other sources for data that may be the foundation of their business case.

  • Consider the source of the data. In this case one would expect the FCC to have accurate data. But anyone who has been following the politicization of the FCC would realize that they are very biased: it’s in the FCC’s interest to show that they are doing a great job by making broadband universally available through their policies that favor ISPs.
  • Try to learn the source behind the source. The FCC did not do any primary research into broadband access, they totally relied on third parties – ISPs – who like themselves, were biased towards showing universal data access.
  • Find out the foundational definitions.  Nowhere in The Times article is broadband defined! Access speed can vary exponentially from 100 mbps to 1 gigabit service.
  • Learn how the data was gathered. The FCC relied on simplistic surveys of ISPs rather than performing rigorous surveys of consumers’ access to broadband. The best data is gathered from primary – firsthand – research.
  • Find multiple sources for the data. One way to factor out bias or poor data collection techniques is to find more than one source for the data. Just as it’s a risk for manufacturing companies like Apple to rely on a single vendor, if your venture is relying on just a single source for foundational data you are exposing yourself to the risk that your data may be in the “damned lies” category.
  • Verify data sources with your own research. Let’s assume you were looking to start a business to serve a rural area, for  example, an internet-connected animal tracking service for cattle ranchers. Rather than just basing your total addressable market on a single, potentially biased source like the FCC, do your own primary research.  By interviewing just a few ranchers you would probably find that most lacked internet service or relied on very slow satellite systems for their internet connectivity. Others might even have to drive to their local library to access the internet. Hard to get real time location tracking by relying on your local library for broadband access!
  • Understand that there is no such thing as “objective data.” No matter how rigorous the statistical methods used, biases of the researchers will seep into the data. Microsoft has its own bias, as it is trying to convince the FCC to allow them to use the “white space” between TV channels to deliver internet access to rural areas. So it’s in their interest to show very low levels of internet access – just the opposite bias of the FCC (and big ISPs and broadcasters, both of which are dead set against Microsoft’s initiative).

The bottom line is that secondary market research that has value in determining your total addressable market may be necessary, but not sufficient. Supplement that research with your own primary research, as cash-constrained as that research may be. A good question to ask during your customer discovery process is to ask your potential customers how big they would estimate your market to be and what, if any data, they rely on themselves. While not all data is lies or even damned lies, it may well be tainted by bias – it’s up to you understand and account for the biases and assumptions of your market research sources.

Lessons to be learned from a web publisher

buzzfeed
Saeed Jones and Isaac Fitzgerald, replying to tweets during a commercial break on “AM to DM,” a weekday morning show produced by BuzzFeed News. The show is paid for by Twitter.CreditDavid Dee Delgado for The New York Times.

Today’s New York Times article Founder’s Big Idea to Revive BuzzFeed’s Fortunes? A Merger With Rivals contains a number of great lessons for virtually any startup, not just web content publishers like Buzzfeed. Here they are:

You can start you venture as a “side hustle”

Side hustles, or starting a new venture without giving up your day job, have become a startup meme for good reason. While the general population thinks being an entrepreneur is all about taking risks, the truth is just the opposite. Venture capitalists and other investors want to see the four types of risk be mitigated as the company grows. And so should the entrepreneur who started the venture. Joshua Peretti started Buzzfeed while he was employed at another web publisher, The Huntington Post.  While this strategy obviously worked for him, I’d be careful about starting up a venture that could be perceived as a competitor by the company which currently employs you. From my experience publishers tend to be more open about this than most, perhaps because most of them lack trade secrets that high tech companies guard so jealously.

Run experiments

Buzzfeed was an experimental project by Joshua Peretti. Startups are successions of small experiments, it’s how founders learn and find the elusive product/market fit.

“BuzzFeed has always been very experimental,” he said. The ethos that led to its viral content and mining of memes to explain the day’s news is now being applied on the business side, he said, “to consider commerce and advertising and even donations.”

Choose your company name with care

Buzzfeed is a great example of compounding two evocative short words into one for your company name. Microsoft may have been the first tech company to do this. It still works and is far better than creating monstrosities like iFoobarystas.ai.

Start small

Starting small doesn’t mean starting with a minimal viable product, or one that can barely has a pulse. It means two things: one, creating a minimal remarkable product and two, launching a product you can learn from.

Have multiple revenue streams

As a colleague pointed out to me, monocultures are highly risky in the world of tech, where the environment can change overnight. Just one change to Facebook’s newsfeed can and will cut revenues of publishers drastically.  Buzzfeed has very diverse revenue streams.

BuzzFeed now sells cookware at Walmart and accepts banner ads on its web pages. It runs a morning show on Twitter, a weekly one on Facebook and another on Netflix, all of which are paid for by the platforms. Its newsroom and its entertainment studio churn out thousands of videos and articles each week, to an audience of 690 million people every month. The company also gets a commission when a reader buys a product on Amazon or other commerce sites after clicking through from one of BuzzFeed’s recommended product links, known as affiliate marketing. And on Monday, BuzzFeed News announced a membership model that provides exclusive access to newsletters and behind-the-scenes content for $5 a month.

Virality is essential in B2C startups

The cost of customer acquisition tends to be greater than customer lifetime value in a consumer facing company, so you need to build virality into your product.  Virality literally jumpstarted Buzzfeed, as by accident as an email spat between Mr. Peretti and Nike went viral via email. It eventually reached millions of people. Mr. Peretti ended up appearing on the “Today” show debating labor issues with a Nike executive.

Diversify as you grow, not as you start

As the saying goes, more companies die from indigestion than starvation. Focus is the name of the game in startups. But growth is also the demanding taskmaster. The trick is to grow and diversify without losing your core values and the focus on your mission.

As BuzzFeed’s audience has grown, so has the diversity of its content. Hard-hitting investigative journalism lives alongside listicles, quizzes and cooking videos

Money is a means to an end

Whah? You ask. The great entrepreneurs, from Steve Jobs on down, realize that they need capital to realize their vision. Money is a way to fund progress towards that mission. If you are only in it for the money find an easier way than founding a company. Startups are just too hard. Go to Wall Street instead. Profit is a byproduct of creating a great product and serving customers well, not the sole purpose. This ethos has survived at Apple beyond the death of Steve Jobs.

Be willing to hide your ego

These lessons on how to start and grow a company are incidental to the Time’s article throughline, which is that web publishers may need to merge in order to obtain greater economies of scale and negotiating power. Mr. Peretti and his colleagues at web publishers like Vox Media, Refinery29, and Group Nine see a merger as an opportunity, not as the loss of their personal autonomy.

Philippe von Borries, a co-chief executive of Refinery29, said that in the next year or so there might be “an opportunity for the leading media and entertainment companies that emerged over the past decade to come together,” provided all parties could settle on a shared culture and vision.

While these lessons are all extracted from an article about web publishing, they are applicable to virtually any startup. But one last lesson: lessons are contextual, they are not commandments. In the language of programmers they are local, not global. It’s up to you as a founder if and how you apply these lessons to your own venture.

 

 

 

Don’t be a tweener!

Next

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!

 

 

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.

Musicians are entrepreneurs too!

 

jones

“Country is the genre that still prizes lyrical and musical excellence above all else, above image, above fame, above production value.” PHOTO: DAVID MCCLISTER FOR THE WALL STREET JOURNAL

I loved music, or to be more specific, rock and roll, as a kid. I’d lie awake at night listening to the radio. Soon I was tape recording songs off the radio that I liked, which eventually lead to a short but eventful career doing sound reinforcement for musicians at concerts and clubs.

I wasn’t really thinking about the business aspects of music then, even though I had tried to start my own sound reinforcement company until I realized I’d never have enough money to afford more than an entry level PA system, as sound reinforcement systems were called in those days. PA = Public Address!

But one thing I did learn was that it was far easier to work with the opening acts who were just grateful to one) get a soundcheck, which often they didn’t have the opportunity for, two) get to play through a great sound system, which 3) also had a high end monitoring system so they could hear themselves on stage.

After leaving sound engineering I became more interested in business and in the business of music. I developed great respect for the bands that actually got to tour and make records, the select few out of thousands of scuffling local bands.

So while The Wall Street Journal article Caroline Jones’s Unusual Journey to Country Music Stardom caught my eye, it was the article’s sub-title that captured my interest: The singer rejected management as a teenager, made her own bookings at schools instead of bars, and ended up singing with Nashville greats.

Though she already had a manager, she decided, at 18, to part ways with him and become her own agent, producer and publicist. Instead of following the standard club circuit, she cold-called boarding schools and colleges to book gigs there, eventually turning her set into a music-teaching curriculum. “I didn’t want to just play bars for five years. I wrote sensitive, poetic songs. At a bar they want to hear ‘Free Bird,’” she says, mimicking the sounds of its famous electric-guitar solo.

So there are two lessons for you founders out there: cold-calling can work! And creating a complementary service, as Ms. Jones with with her music education curriculum, and help pay the bills.  And all because she wanted to play her own music, not ape the hits, as most bar bands are forced to do. She held true to her vision, even if it entailed a lot more work:

Of her independent path, she says, “Complete creative control … has always been essential to me.” What’s wrong with a more traditional path? “It’s not so much that they tell you what to sing, but you’re informed by people who know what sells,” she says

Like a true entrepreneur she re-invested her earnings from playing well known New York venues into producing her own songs and paying a website $40 to release each of her four albums on line.

She fell in love with country music as a young child and stayed true to her path:

“Country is the genre that still prizes lyrical and musical excellence above all else, above image, above fame, above production value,” she says. “I’m trying to steer clear of the basic pitfalls that a lot of artists fall into because they’re so sensitive and emotional. I want…to put happy music into the world, not sad depressed music.”

Indie musicians have learned a lot from web entrepreneurs about how to promote themselves through website song releases and social media, but tech entrepreneurs can also learn a lot from indie musicians about sticking to their vision no matter what and doing things for themselves, including cold calling customers.

Ironically Ms. Jones is the daughter of Paul Tudor Jones, a billionaire hedge fund manager. But aside from giving her a strong work ethic and encouraging her to be independent, she earned her success through hard work and a little bit of luck in getting the right producer and being willing to move to Florida, where he’s based, to work on her album. That album became a hit. Fortune favors the prepared mind. Louis Pasteur.

 

Does networking for actual humans work?

 

networkingFor as long as I can remember I’ve characterized myself, and others have characterized me, as anti-social. I avoided going to parties or any other social gathering, including my senior prom. Why? Because being with groups of strangers makes me anxious. I have no skill at small talk and hate talking about myself.

It wasn’t until I read a story about football star running back Ricky Williams that I found a better label for myself than anti-social. Like Ricky and 15 million other Americans, I suffer from Social Anxiety Disorder.  \

So today I was quite surprised to read The Wall Street Journal article Networking for Actual Human Beings, The research is clear: People don’t mix at mixers, and don’t feel good about trying. But there are better ways to make meaningful connections by David Burkus.

A significant body of research demonstrates that networking—making and strengthening connections to others—is vitally important for professional success. But there’s a problem: Most of us hate doing it. We dread the awkward small talk with strangers at a noisy cocktail party, the pressure to deliver our “elevator pitch” and to “work the room.”

One such study cited in the article, a 2014 study published in the Administrative Science Quarterly, found that adults felt “morally tainted” just by thinking about job-related networking.  I’m not sure what that “morally tainted” means but it certainly isn’t my problem. However, a study at the Columbia Business School found that:

Even though almost all of the executives said that they wanted to attend such events to build new business ties, it turned out that they spent, on average, around half their time in conversation with people they already knew. As the study’s authors put it, people just don’t mix at mixers.

Yep, I’d probably try to spend 100% of my time with people I already knew!

The author provides three ways to cope with networking anxiety:

  1. Spend more time reconnecting with friends than meeting new people This is a terrific idea. In fact an old colleague looked me up recently and we both enjoyed getting together again. This made me think about other people I’d lost touch with over the years whom I felt I could reconnect with.
  2. Seek out shared activities instead of unstructured events. The Columbia study suggests that we don’t really make good use of freewheeling social events with strangers. A productive alternative is to focus on an activity. I found this to be very true, as I’ve attended workshops at MIT with lots of strangers, but working in small groups on solving a problem together eliminated my social anxiety.
  3. Ask better questions. This is also a great tip when you are at an event with total strangers, one I figured out for myself, as I depend on my ability to ask good questions when I mentor entrepreneurs. And most people, unlike me, do enjoy talking about themselves!

All of these helpful recommendations for dealing with networking are from Mr. Burkus’s new book, Friend of a Friend: Understanding The Hidden Networks That Can Transform Your Life and Career, published by Houghton Mifflin Harcourt.

Here’s some ways I’ve found to cope with my anxieties about networking.

  1. Go with a friend who’s an extrovert. You can shadow your friend and join into conversations he or she starts or joins. It also gives you both a topic for small talk, “How did you two get to know each other?’
  2. Join an existing conversation. I’ve learned from attending a lot of meetings that knots of people will emerge, often around a charismatic, talkative individual or two. It’s much easier to join an existing conversation than to start one yourself.
  3. Think about the reasons you are attending and be ready to talk about it. I find it’s a lot easier to talk about why I’m at a networking event than to talk about myself. For example, I’ve said that I are looking for good candidates for my stratetic advisory board. And if you force yourself to talk to enough people you might even accomplish your goal by networking!

 

Red flags in the sales & business development process

red flags

Recently one of my mentees thought they had lined up the perfect customer. I told them that my only concern with the deal was that it seemed too good to be true. My father warned me about things that appeared on first look to be just right for me but upon deeper examination or just the passage of time were not as good as they appeared. This has proven correct, especially in my experience with sales and business development. So if your deal seems too good to be true it probably isn’t.

I’ve found the following signals to be red flags when trying to close a sale or strategic alliance as a founder of a newly hatched startup working with large established companies.

Your prospect has just joined the company

I’ve found that new hires in large companies tend to be very risk averse. They fear doing a deal with a startup could blow up in their faces, getting them off to a rocky start in their new job or even getting them fired. They also don’t know the internal politics of their  new company and may attempt to do a deal with you only to be shot down. Finally they may not have the authority they thought they have to sign off on a deal. These same issues can also be true of new transfers. While they may know the company they may not know the  division or subsidiary they just joined.

There’s been a recent reorg or acquisition

Be careful if your prospective customer or partner has landed in their current position from a reorg or their company has been recently acquired. Even if they aren’t worried about taking a misstep in their new position, sign-off authority on purchases or business partners may have gotten changed due to the reorg.

The company has no experience working with startups

There’s a real risk that your deal will fall apart if you are working with a company that has never purchased from a startup or partnered with a startup. Your prospective customer or partner may mean well but other people in the decision process – most likely the CFO or CIO – can hold up the deal or kill it outright.

You are perceived as a competitor by an internal group

IT groups tend to be able to say no, but can’t say yes. I’ve had deals go south when the IT group is brought in last to vet the technology and they say no to the deal, clearly because they view my startup as a threat to them. They will often either denigrate the technology or claim they could build something better themselves, and of course, in far less time! So if you are selling technology make sure the inside tech departments are brought in early and you are prepared to prove to them that you will work with them and aren’t trying to compete with them. This threat perception can also hold true for BigCo’s marketing departments, especially if they are new to using technology to improve their marketing reach and effectiveness.

Your prospect hasn’t gotten buy-in from senior management

Depending on the size of the deal CFOs, COOs, CIOs, and even the CEO may end up killing your deal. Don’t invest a lot of effort in a sale or partnership if there is any chance someone from the C-suite can kill your deal at the last minute. Find out if they have to vet any deal from the get-go.

The asset that is least available in startups is time. You can not afford to waste your precious time on a deal that will not get consummated due to one of the above problems. Your ideal customer has actually tried to solve the problem your product solves and failed. They have then made the make or buy decision: they need to buy! Then your job is simply to convince them to buy from you and not a competitor.

If you plan to be a B2B company these are just some of things to be aware of before you expend lots of time and energy trying to close a deal. There’s one more BigCo issue that can bite a startup after the close the deal: large companies can take forever and a day to pay their bills. Cash flow isn’t a big problem with big companies and their CFOs love to stretch out payments to their vendors to 60 or 90 days, or even longer. But cash is king in startups, so try to negotiate a payment schedule that works with your cash flow.

One key responsibility with both sales and partnering efforts is qualifying the customer. That means flushing out red flags before you start investing time in selling the customer.

Your company should have a set of qualifying questions, such as Have you ever partnered with a startup before? That need to answered early in the sales or bus dev process. In virtually every sale their are business decision makers (like the department head), economic decisions makers (like the CFO), end users, and influencers.  Make sure you learn who’s who!

Finally I’ve found the bigger the company the more staff they bring to the first meeting. Don’t take this meeting alone! And don’t let the attendees get away with just introducing themselves by name and title. Find out what their responsibilities are and where in sales process, if anywhere, they will be involved. Most people  like talking about themselves so it shouldn’t be hard to find out who’s a player and who’s just a looky-loo.

And remember, as my dad said, If it seems to good to be true it probably isn’t.

Partnering – how to keep the band together

 

heartbreakers

I was reading obits for Tom Petty who died this week and came across a great quote from Tom: It’s easier to form a band than keep it together. Having worked with dozens of bands as a sound engineer in my 20’s ,I saw a thin slice of band life, basically how bands get along during their sound checks. Aerosmith, for example, were incredibly professional. They were extremely particular about their drum sound. In live sound reinforcement the hardest instruments to mike up are acoustic: drums, acoustic guitars and the human voice. Steve Tyler, the lead singer was a former drummer so he would sit in the drum chair while Joey Kramer, Aerosmith’s drummer supervised the sound mix. Then Joey would take over the drums and Steve would listen and perhaps ask for some slight adjustments. Only when they were both satisfied did the full band start their sound check. Other bands, whose names have been omitted to product the guilty, spent their time bickering over set lists, the relative loudness of their instruments, and how the stage should be setup.

So what does this all have to do with founders? Well first of all, musicians who form bands are founders! And they are certainly entrepreneurs as well. And like all talented people they have outsize skills and personalities to match. So much of what I learned about dealing with big egos in the music business helped me with big egos in the high tech world.

I often see startups racing to set up partnerships without thinking through the key strategic and tactical issues involved in partnering. So here’s a few principles to keep in mind.

  • It’s not a real partnership if money doesn’t change hands. In my first startup I tried hard to get IBM as a strategic partner, as at that time they dominated the personal computer market. But all I managed to get done was to have an IBM executive write the forward to one of our texts on how to use a spreadsheet in business. If your partnership is just about co-marketing and not helping the partners actually make money it’s unlikely your “partnership” will last too long or help your venture succeed. The pressure to generate revenue for both startups and establish companies is too strong.
  • Startups can’t help startups. There’s no doubt that incubators and accelerators like Y-Combinator and TechStars have proven that their networks of successful startups can help each other. But if you aren’t a member of one of these powerful keiretsu then it’s unlikely your fellow startup venture can help you make money. Why? Because they are too busy trying to stay afloat themselves. And partnering with another startup can end up being a major distraction for both parties. So while all rules have exceptions, focus on established companies that have capital to spend and credibility to share.
  • Have a company champion. The bigger your partner the more you need a single individual as contact point. But more importantly that single individual needs to believe in your company and be personally motivated to help you succeed. At Course Technology, an educational technology publishing company, we found that the directors of educational marketing at companies like Lotus Development were are obvious product champions. The champions will help you navigate the organization, get in front of decision makers, and get corporate attention – all very hard to do on your own.
  • Figure out what’s in it for them.  This is my basic rule of all business relationships, it’s not just applicable to partnerships. But without understanding what benefits will accrue to your partner you won’t be able to craft a mutually beneficial relationship. We always created partner presentations that closed with two slides: Financial Benefits and Strategic Benefits. The former is obvious, how we would help the partner generate more revenue. But strategic benefits may be more important for a big company. Your efforts may hardly move their revenue dial, but if they can learn something that they don’t know that they need to know that can be very valuable to them. For example, if you are a company that is using AI to improve some aspect of finance you may be an attractive partner for banks, private equity, and other financial players who may lack any in-house AI expertise, but who realize this is the hot trend today and you can help them get up to speed.
  • Set measurable goals. You need to have a written document that sets up what each party will be responsible for – who does what, when – and most importantly, how results will be measured. It is critical to manage expectations and the best way to do that is to agree on goals and metrics from the get go.
  • Communicate early and often – in writing. There are so many great communications tools today that there is no excuse for miscommunications. But if you have a meeting or phone call with a partner, make sure you follow up immediately with a written summary that includes todo’s for both parties. It’s far too easy to get into “I thought you said… but I thought you said!” type disagreements if you don’t document what you might consider casual conversations. There’s no such thing when it comes to partnering.
  • Keep Tom Petty in mind. The hard work in a partnership is sustaining it. If you don’t have the resources to keep up a partnership you are better off not entering into it. Partnerships take time and effort to provide fruit. Often big companies move much more slowly than startups. So you need to be patient, but persistent. Don’t over run your headlights. And make sure you are responsive to their needs.
  • Date before you marry. Partnering can be a great path to being acquired, as it gives you a opportunity for a test drive. The most important factor in making an acquisition successful is corporate culture and a partnering test drive will enable you to learn if your partner’s corporate culture is compatible with your’s. Likewise it gives the potential acquirer the time to truly understand your value and how your venture will fit in to their culture successfully.

Last night I watched the two-part series on Netflix, History of the Eagles. It’s a great documentary that will show you just how hard it is to keep a band together. And there are lessons to be learned about how to keep your startup together, as well as how to keep a partnership together. Even if you are not a fan of their music it is still worth watching to see two powerful founder/entrepreneurs in action.

Eye opening advice from a tech billionaire

 

camping

I read a lot of stories about startups and watch many videos from Y-Combinator and others and frankly I haven’t come across much that is new and different lately.

I was hoping to find a nugget in the article I camped out with a tech billionaire. The advice he gave me was priceless by Adam Naor on freeCodeCamp. Three out of four tips were the same old same old: embrace change (what choice do we have? fight it?); embrace lifelong learning (this has become a truism, valuable though it is); and invest in skills that the future will value (sure, if you can predict the future please give me a call!)

But one piece of advice, or values, as the author calls them, was an eye opener for me:

Value #2: Create new markets, not just new products

He observed that most people focus on just building new products, apps, or software. Instead they should be aiming to create new markets that have never existed before.

Imagine what markets might exist in the future, and ask why they don’t yet exist. Leverage existing technological trends to power futuristic ideas that can give birth to new industries.

He observed that “the most valuable companies and ideas spark entirely new industries.”

Frankly I’ve had my head down trying to help my mentees understand the difference between creating a product and building a company. But creating a new market? Wow – now that is thinking big and thinking big is what investors are looking for. Go big or stay home when it comes to VCs.

I wish the author had given some examples of this “value” – but it’s an excellent exercise for me and the reader to come up with some. Going way back to my start in the personal software industry Microsoft is a great example. Bill Gates and Paul Allen didn’t just port BASIC to the Altair – the first commercially available personal computer – they created an entire market for programming languages which generated the cash flow, and more importantly gave birth to the OEM bundling model that made Microsoft king of software even before they launched PC-DOS for the IBM PC.

Today the valuation of Tesla is based on Tesla creating not one, but at least three new markets: one for electric cars that outperform fossil fuel autos; two, solar energy, including replacing your roofing shingles with solar tiles; and and three, developing new batteries at monstrous scale – its so-called Giga-Factory. No wonder Tesla’s market cap has just exceeded Ford’s and GM’s.

One way to create a new market is to create a platform, as Jeff Bezos has done with AWS – he created a market for cloud services which has grown to rapidly and so profitably it has attracted Microsoft, Google, and others.

The key to creating a market and not just a product or even a company is to create an opportunity for others. Apple’s App Store has created a multi-billion dollar market for iOS app developers while putting 30% of those revenues in Apple’s pocket.

And while Google began life as a search engine in fact the company has lead the way in revolutionizing advertising and has become the world’s largest ad agency in the process, whilst enabling thousands of smaller businesses to benefit from Google’s core technology.

eBay, yet another very successful platform play, that while started as an online auction house, has in the process created a market for thousands of small companies to do business online.

Amazon has generated billions of revenue for itself by opening up it’s ecommerce platform for third party sellers.

So start thinking beyond your product, beyond a company, to creating a market. And one way to do that is to think about platforms and marketplaces and what’s in it for other players in the market you are creating. Building value for others will build value for your company.

Tips on dealing with large companies

whale

Many startups endeavor to work with large companies, usually as channel partners, e.g. ways to acquire customers cost effectively. As posted previously, I’m not a fan of this strategy for early stage companies, much better to wait until you have customers and revenue before trying to partner with large companies.

Back in my days as a serial entrepreneur I spent much of my time on business development with large companies: Apple, Netscape, Lotus, Microsoft, WordPerfect, Fujitsu, Ernst and Young, Reed Elsevier, Silicon Valley Bank, and many others.

Here are some tips you may find helpful as you try to convince large companies to work with you:

  • Most importantly, learn how to pitch your company convincingly. Get lots of practice with investors, job candidates, mentors and others who will give you good feedback.
  • Do an out of town try out. Don’t try to go directly to Broadway, in other words try your pitch with smaller companies and modify it as necessary based on your success with them before you try it with big companies.
  • No one likes to go first. The first question most big companies asked me was “Who else is working with you?” That’s where having some success with smaller companies with good reputations can really help you. Best yet is if you are working with their competitors – that will get their attention!
  • Don’t try for the market leader right off the bat. Market leaders tend to be very arrogant, hard to reach, and generally feel like they don’t need any help from anyone, let alone a tiny startup. The companies in 2nd, 3rd or 4th places are looking for ways to catch up with number one. Generally for that reason they are more receptive to meeting with a startup than the market leaders.
  • Figure out what’s in it for them. This is actually my first rule of business development. You should know what’s in it for you: “what’s the ask?” Don’t ever schedule any meeting where you don’t have a clear objective for the outcome. But in bus dev you need to study the large company and figure out what you have of interest to them. That can be your technology, your business model, or your means of customer acquisition. You do have to be careful as large companies often just copy the successful approaches of startups. After all, do you have the hundreds of thousands of dollars or even millions it will take to sue them? I didn’t think so. So your pitch needs to be tantalizing but don’t give away your trade secrets.
  • Find and cultivate someone to champion you. In my case, being in the education market, I found and cultivated the directors of education marketing at the BigCos. I gave a lot of thought to how I could help them succeed at their companies. You also need to arm your product champion – he or she is going to battle with senior management on your behalf. So make sure you have a great web site, one page executive summary, and slide deck at the least. Even better is a demo, prototype or shipping product your champion can show their manager.
  • Be persistent but not annoying. Getting a meeting with large successful companies in your market can be difficult. Set up a Google alerts for the company, their product, and their competitors. You may well find something in the news that you can use as a door opener. For example, if you are in the educational market and you see they just hired a new director of education marketing that new hire may well be more receptive to meeting with you than someone who’s been on the job for years. It may take a lot of calls and emails to reach the right person. As with investors a warm introduction – an intro from someone who knows your target personally – is always best. Just blasting emails to everyone on LinkedIn who is of interest to you will waste your time and effort.
  • Set up meetings at conferences. Most people going to conferences expect to meet new people there and set aside some time for such meetings. It can be a lot easier to get a meeting at a conference or trade show than at corporate headquarters where your target person’s schedule may be booked solid for weeks or even months.
  • Make friends with the administrative assistant. AA’s are the gatekeepers for the schedules of senior managers. Treat them with respect and kindness – they have a tough job and are often taken for granted. AA’s can be a good source of info – is the manager you want to meet with going to Comdex, for example. If an AA takes a liking to you they might just squeeze you in for a quick phone call where someone else might just be told, “sorry but my manager is totally booked out this week.” If you can get an AA excited about your product they  are much more likely to help you out than if you just take them for granted.

Finally, don’t neglect the two prime objectives of any startup: ship a product that people will want to use and get to know your customers. That may well generate incoming calls from someone at at BigCo who wants to learn more about your company and product. One incoming call is worth a thousand outbound calls.