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.

The one business parameter that will determine your customer acquisition strategy

valley-of-death

As a mentor for the past 8+ years at the MIT Venture Mentoring Service (VMS) I have seen a very wide variety of early stage startups – and with a few exceptions all my mentees are at zero stage – idea conception or stage one – idea validation.

There’s one question I ask these very early stage startups to answer for me, but more importantly for themselves: Are they a high volume, low price business or a low volume, high price business? For example, creating apps for iOS and/or Android is a very high volume business – you will need thousands if not hundreds of thousands of users to succeed, because Apple and Google have set the pricing for apps incredibly low – a few dollars per app at the most. Conversely developing drugs for very rare diseases for a very small number of patients results in very high prices – as much as thousands of dollars per month.

Typically high volume, low price businesses are in the B2C market. There the cost of customer acquisition has to be very low. You can not afford a sales force if you are selling an app that cost $3. So it’s absolutely critical that you have a very well thought out customer acquisition strategy or another way to make money, such as in-app purchases. Typically consumer apps need to go viral – customers sell their friends and zero cost to you (search for viral on Mentorphile to see several posts on this subject). Conversely, if you are selling a very high end product you will probably need either your own sales force to call on the relatively few prospects you have, or a partner who does. The valley of death is littered with those companies try to do both: “We’re all floor wax! No, we’re a dessert topping!” Only on Saturday Night Live can you be both!

The reason Apple is a money machine and the most valuable company on earth is that they have succeeded in being a high volume, high price business! But that has only taken the genius of Steve Jobs and Steve Wozniak and thousands of brilliant designers, engineers, marketers, and executives and over thirty years to achieve.

So please, early stage founders, stay out of the valley of death! Determine if your business will be selling to millions of consumers who won’t pay more than $X or $XX, or a business that will sell to hundreds or perhaps thousands, but where customers will pay $XXX or even $XXXX+ for your product.

Why people don’t change

trying

Abbey Lossing

I just got around to reading last week’s Sunday New York Times business section and was amused to find the article Why Trying New Things Is So Hard to Do by Sendhil Mullainathan. I just wrote about how people hate to change three days ago!

Professor Mullainathan’s article is written from a first-person viewpoint. He admits to having a massive Diet Coke habit – two liters a day – and uses that as an example of why people don’t change. He points out that he could easily and cheaply experiment by trying a cheaper, generic soda. If he liked it he’d save a lot of money over years of soda drinking. And if he didn’t he could either try another generic soda, maybe a store brand, or go back to Diet Coke.

He points out the relative upsides and downsides of experimenting:

When the same choice is made over and over again, the downside of trying something different is limited and fixed — that one soda is unappealing — while the potential gains are disproportionately large. One study estimated that 47 percent of human behaviors are of this habitual variety.

Keep that number in mind if you decide your latest greatest invention will require consumers to change their behavior!

There are at least three reasons people don’t or won’t change their habits:

  1. Habits are powerful. We persist with many of them because we tend to give undue emphasis to the present. Trying something new can be painful: I might not like what I get and must forgo something I already enjoy. That cost is immediate, while any benefits — even if they are large — will be enjoyed in a future that feels abstract and distant.

  2. Overconfidence also holds us back. I am unduly certain in my guesses of what the alternatives will be like, even though I haven’t tried them.

  3. Finally, many so-called choices are not really choices at all. Walking down the supermarket aisle, I do not make a considered decision about soda. I don’t even pause at the generics. I act without thinking; I automatically grab bottles of Diet Coke as I wheel my cart by.

There’s a strong bias on the part of consumers as well as government policy makers in favor of the status quo. So again, founders beware – if your invention is going to require any change in government policy, rules or regulations. This is one reason why biotech companies need to raise so much capital – the very high cost of experimentation and attendant government regulation.

Oddly Professor Mullainathan, who is an economist, never brings up the scientific method, which is truly the bedrock of scientific progress and is built on the process of experimentation. He sees things through a personal, not scientific, lens:

Experimentation is an act of humility, an acknowledgment that there is simply no way of knowing without trying something different.

Understanding that truth is a first step, but it is important to act on it.

Founders must realize that though you may follow the scientific method with your startup: creating a hypothesis, designing an experiment to test it, gathering data, analyzing the results and deciding if the hypothesis was correct or not on those results, this is NOT how your customers either think, decide, or behave. Perhaps I’m biased by my undergraduate degree in social psychology, but I believe that understanding the social sciences, in particular psychology, sociology, and cultural anthropology can help founders better understand their customers and as a result of that understanding, better serve them.

Self-confident or arrogant?

kickass

I wrote a post earlier this year Self-confident, conceited or charismatic? Yesterday I attended a 90 minute workshop on mentoring confidence put on by The Sandbox Fund at MIT. The presenter was Alyssa Dver, Chief Confidence Officer. At the rate CXX titles are growing pretty soon employees without a CXX title will be a minority! Be that as it may, she has a research and coaching certification from the AmericanConfidenceInstitute.com and has a book and blog entitled Kickass-Confidence.

She defines confidence as Being certain and acting according to your own values and beliefs.

You might consider this post a continuance of my previous post. What I found most useful from the work shop was a listing of characteristics of confident people. They:

  • Stay calm
  • Listen better than most
  • Are diplomatic, but decisive
  • Apologize appropriately – no dissembling!
  • Are not defensive
  • Are eager to learn – are curious
  • Sit up or stand up straight – they don’t slouch
  • Make good, appropriate eye contact
  • Don’t speak either too softly or too loudly

I think that every mentee who has anything to do with sales in any manner, shape or form, from direct sales to customer support, could benefit from this work shop. Sales people must not only appear confident, they must be confident – about their product and their company.

Ms. Dver ran through a number of role playing exercises with volunteers from the audience, most were directly at how to deal with people who are not confident. They may be cocky, be bullies, be indifferent, rude or worse. The value of silence was brought up several times. I’ve written about this myself in the post Silence is Golden. What impressed me the most was she was willing to admit there are some situations in which you just can’t win over a bully or indifferent person and it’s best to realize that and ask if perhaps there might be a better time to meet. When one or more people insist on talking over you and/or constantly interrupting you this may be the time to excuse yourself from the meeting.

Ms. Dver had four recommendations for training in confidence

  1. Awareness – make sure the mentee knows what the potential risk/pain is and mitigate it with logic
  2. Structure – identify specific memories that remind the mentee of his/her ability
  3. Small win – break the solution into smaller parts
  4. Accountability – identify how to measure and report back to you with progress

Where I do differ somewhat from Ms. Dver is in two areas. One, I believe that to be a successful entrepreneur you have to be on the verge of arrogance if not past it, because it takes some arrogance to believe you can build a product better than X Co, Y Co or any other company in the world! Just being confident may not be enough to overcome the massive hurdles that face every startup founder. The other issue is that I find that practice breeds confidence. As a New England Patriots football fan I closely follow 40 year-old quarterback Tom Brady, who makes it plain that the reason he is so confident is that in his 18-year pro career he’s seen every possible defensive scheme, live and on video, multiple times. And he out-practices everyone, every day.

In fact I encourage my mentees to practice their pitches over and over again. Even Steve Jobs, one of the world’s best presenters ever, spent hours practicing his keynotes. And believe me, from just meeting with him briefly, he exuded confidence – as well as charisma.

So whether you are a mentor or a founder, confidence is an important ingredient in the stew of entrepreneurial success and an attribute that should not be taken for granted, nor assumed to be wired into one’s DNA, or not. It can be learned, and should be, if you want to be a successful founder or mentor.

Baking the network effect into your product

team photo - article

I’ve written three posts on this subject, though the term I used was “virality” vs. “network effect”. The latter term is perhaps better.

How Snapchat succeeded without built-in virality

Everyone talks about virality but no one knows how to create it

B2C – build in virality or bust

What’s really interesting in the article  by Alexei Oreskovic The founder of real estate website Trulia has a new twist on startup investing – and it involves building his own products is not so much the fact that they are hiring their own engineers, it’s what those engineers will be doing.

Flint, and the other cofounders of venture capital firm NFX, are on the hunt for “network effects” – products that increase in value as more people use it. That’s what propelled Microsoft’s Windows operating system to become the dominant computing platform , years before the internet was a factor. And more recently, it’s the secret to the success of giants like Facebook, Airbnb and Uber among others.

NFX recently closed a $150 million fund to invest in early-stage startups that fit the bill. The firm says it has identified 13 types of network effects, in industries ranging from synthetic biology to machine learning and blockchain .
I’ve found that customer acquisition is both the most difficult and most expensive part of building a startup. So by building in virality or the network effect into your product from the get-go you can let the product create its customers. What used to be called word of mouth.
It will be interesting to see how well NFX companies fare, and if indeed baking in the network effect into their products does eliminate or significantly cut down the cost and time to acquire customers.

Dealing with exclusivity agreements

ofo

 

Felice Gammella looked at the Ofo bike at a T-stop in East Boston by Lewis Street DAVID L. RYAN/GLOBE STAFF

The article in The Boston Globe entitled Is Boston headed for a bike-business border battle? by   got me thinking about the issue of exclusivity in contracts for emerging companies. Once you’ve achieve product/market fit and a customer base you may well start entering into agreements with third parties for distribution of your product.

Here’s what happened in Boston, Cambridge, Somerville, and Brookline: they all signed an agreement with Hubway, a provider of rental bikes that are dependent on docking stations. So bike renters have to return their bike to a docking station. This might have seemed like a good idea at the time. But like giving taxis a monopoly it has proven to be an impediment to providing biker riders in these cities with a much better way to rent bikes: dockless systems that enable riders to leave their bikes almost anywhere.

And typically bureaucrats defend their decision to create yet another monopoly. As after granting taxis monopolies, cities and towns followed up this practice by granting monopolies to cable TV and Internet providers. After all, when you think about it, government is itself a monopoly, so they find it perfectly natural to enter into exclusive agreements with companies large (Comcast) and small (Hubway).

Cara Seiderman, a transportation planning manager in Cambridge, argued that since Hubway is publicly owned, there is greater accountability. And Denise Taylor, a city of Somerville spokeswoman, brushed off the lack of competition to Hubway in her city.

Our Hubway contract precludes other bike-sharing options, but we don’t see this as a hindrance, as Hubway has been a great partner and is working well here,” Taylor said.

Taylor’s defensive statement is particularly uninformed, as clearly dockless systems like Ofo provide a better solution. Seattle, rather than handing out a multi-year monopoly to the new dockless bike sharing companies, wisely “allowed three companies to launch dockless systems for a one year test.”

Transit director Andrew Glass Hastings said dockless systems are easier to manage. Rather than pay to operate a traditional system, Seattle now regulates the dockless companies — which pay the city a fee.

Partners like big cities will demand exclusivity. If you are a small startup it’s highly likely that you’ll be dealing with a bigger, more powerful company that has far more leverage with you. I found this many times in negotiating with companies like Apple, IBM. Microsoft, and Fujitsu. Exclusives are rarely viewed as beneficial to startups. However, if you are expecting your partner to expend signifianct resources to help you distribute your product, as Hubway does in Boston, then it can be beneficial to have your partner focus 100% on you rather than other companies.  Whereas in Seattle three companies will be competing for the city’s assistance.

So assuming you are faced with an exclusivity demand, how do you handle it? The best path is to determine how to put bounds on the exclusivity. Here are the most common methods.

  1. Time: limiting the term of the contract is the most common method. Generally one year, as in Seattle, is the minimum period. Partners may push for more and three to five years, as in the case of Boston, is standard. The big issue here is the rate of change in products and markets. The faster the rate of change, the shorter the term limit you should try to negotiate.
  2. Geographic area: we see this in the city by city agreements for Hubway. However, both parties will have to realize there will be “leakage” – either customers from other geographic areas coming into the agreed upon territory or products being resold outside the agreed upon territory. This is quite common in consumer electronics and products sold outside of the negotiated territory are called “gray market.” Companies try to combat the gray market by not covering these products with a manufacturer’s warranty or otherwise restricting access post-sales support.
  3. Customer type: here we start to get into the “gray areas” – areas that may be more difficult to define. A typical distribution agreement may forbid direct sales to consumers, but permit sales to retailers. And the gray market may raise its head as retailers may “dump” excess inventory to unauthorized resellers.
  4. Product type: at Software Arts, our distributor, Personal Software (later renamed as VisiCorp) had exclusive rights to the electronic spreadsheet, VisiCalc, that we developed. But we were free to develop other software for PCs, as was VisiCorp. But exclusivity can rapidly get muddy, as VisiCorp developed an all-in-one product that included a spreadsheet, called VisiOn. Was that a violation of the exclusivity agreement? Well it ended up in court and eventually both companies died due to their deadly embrace.

So the obvious bottomline with exclusive agreements is that they require policing, otherwise the bounds become meaningless. Emerging companies lack the resources to police a distribution agreement. Your best option is to avoid exclusives if possible, but if not, to put the burden for enforcing any restrictions on the larger partner.

The best way to handle this type of negotiation is to get both parties to focus on the customer and customer benefits, rather than their own benefits. The Hubway/Ofo issue is a great example.

Chris Dempsey, director of the nonprofit advocacy organization Transportation for Massachusetts, likened the bicycle conflict to a two-wheeled version of the Uber-versus-taxis dispute. He encouraged the Hubway municipalities to be open to dockless bikes “as an opportunity to give people more choices, just as Uber and Lyft did.”

Is your product a pain pill or vitamin?

Screen Shot 2017-08-30 at 8.04.33 AM

If you spend any time around mentors and founders you’ll hear this question all the time: Are you a pain pill or a vitamin? The question behind the question is: Is your product a must have or nice to have?

This is certainly a good question. But it is worth drilling down a bit. Just because someone has a pain doesn’t make them a good customer. There are two important dimensions to customer pain: magnitude, how big is the pain? how much does it hurt? and frequency, how often is the pain experienced? So for example, in a retail store, if a product is out of stock that causes pain to the retailer, as it may result in lost sales. However, if this only happens once a year and the price of the item is low you have a low level of pain that happens infrequently – the exact opposite of the ideal customer. Then there might be a retailer who suffers from employee theft. This may be going on constantly and include expensive products, so it results in significant financial losses plus the intangible loss of trust in employees and cost of tracking down the culprit or culprits.

So while it’s necessary to find your customer’s pain point, it is not sufficient. You need to ask the questions, How serious is this problem? and How often does it occur?

This is a process known in sales as qualifying the customer. Sales people don’t want to waste time and effort (or even money in terms of travel expense) on prospects who are not qualified. Of course, there are other key elements to qualifying a customer, such as ability to pay – do they have the funds in the budget to purchase your product? Length of the sales cycle, the lifetime value of the customer, the likelihood that the customer will act as a reference for you, or better yet, as an evangelist for you product, the need for customer support, and more.

However, you need to be careful when probing customer pain, it can hurt! Customers may not want to admit that they have must have one or more employees who are stealing, for example. One way to get answers to touchy questions like this is by story telling. “You know Bob, one of our customers for our in-store security system found that it wasn’t customers who were responsible for inventory shrinkage, it was employees. He was really surprised, but glad to get to the bottom of a serious problem.” This may prompt your prospect to respond in kind. And if not, you can always follow up with, a question such as “Any ideas on what’s causing your inventory shrinkage? We certainly don’t want to sell you a security system if it turns out your problem is actually a bug in your inventory management system or data entry errors. We want to solve real problems for you.”

So as in medicine, pain is a symptom. And like a doctor, your job with your customer is to diagnose the cause of the pain and provide a solution, which if you have done your homework, should be your product or service.

Business megatrends can lift all boats

 

amazon

It’s a dirty little secret that investors – and veteran entrepreneurs as well – look to build companies on the back of a business megatrend. This strategy is based on the truism that “a rising tide lifts all boats.”

But what is a business megatrend and how do you know you have found it? First of all it’s not a technology megatrend, like AI which plateaued for  decades until finally the intersection of rising computer power and the dropping price of data acquisiton and storage enabled it to finally take off. Business megatrends affect customer buying behavior and supplier selling behavior. You don’t have to be a technologist to understand a business megaTrend. But if you are a technologist who ignores a business megatrend your venture is missing out on the opportunity to draft behind very powerful forces.

Self-service

Self-service was the business megatrend of the last century. Whether it was ATMs or self-checkout at supermarkets, this megatrend caught on for the simple reason that it benefits  both two sides of the business equation: supply and demand. From the suppliers’ viewpoint self-service cut costs. Why pay a teller when you could replace one with a machine that never took sick days or vacation days and didn’t mind standing in a cold vestibule or even outside! ATMs, like many tech advances, follow the hockey stick curve, very, very slow growth followed by an inflection point where they take off and become ubiquitous.  From the demand side, otherwise known as the customer, self-service saved time, which has become the most valuable commodity of the past and this century. Why stand in line when you could just scan your items yourself at your super market and check out yourself? Fast and equally importantly, simple and easy. The key with megatrends is that they always have secondary characteristics that make them very attractive to one or both sides of the business equation.

While many businesses initially worried that self-checkout would result in customer theft what they found instead was that it cut down on employee theft (and errors).

So today we just take self-service for granted as it spreads from airline ticketing kiosks to smartphone payment systems. Fast, easy, simple for the customer; saves costs, collects data, and reduces losses for the business.

Personalization

Personalization has superseded (NOT replaced) self-service as the megatrend for the 21st century. Burger King encapsulated this trend with the ad slogan “Have it your way!” The beauty of mass production for the supply side was economies of scale, from the supply chain to the manufacturing floor to the retail store. Mass production greatly benefited the supply side by cutting costs, helping to ensure quality and cutting down on returns and customer complaints. But the prmiary characteristic driving personalization is novelty. Customers seek novelty – they always have. Otherwise teenage men could have done just as well with just a single copy of Playboy rather than a subscription. “New” is probably the second most used and powerful sales term after “Free”. Trendsetters are on a constant prowl for what’s new. But what happens when the masses all discover what’s new? It’s no longer cool. Enter personalization. Amazon proved to be a master of self-service with it’s invention of the “one-click buy” – a business process it even succeeded in patenting. But Amazon soon discovered it could use it’s massive amounts of customer data to personalize the buying experience by providing recommendations for additional purchases – known as upselling- based on what the customer was buying. Real time personalization! While Spotify was a great success, where  it has hit its inflection point has been its successful implementation of personal playlists for its customers. So just as fast and easy is the secret sauce of self-service, finding what’s new is the secret sauce of personalization. And what could be better than “what’s new FOR YOU?” Talk about reducing returns and customer complaints, personalization greatly benefits the supply side. With AI finally coming out of its doldrums, coupled with big data, businesses will be able to harness the power to personalize more and more of the customer experience, because it is based on the customer’s own behavioral data. Google now uses its knowledge of your prior searches to personalize your new searches. Soon AI-based systems will achieve the ultimate in personalization: they will know what you want before you do!

The bottom line

While there are many reasons for the amazing success of Amazon, you don’t have to look to far beyond the two megatrends of self-service and personalization, which Jeff Bezos harnessed so brilliantly to achieve his relentless focus on the customer.

So if you are doing a startup today, take a step back. Does your venture take advantage of the power of self-service by saving the customer valuable time? Is it simple, easy and quick to use? Does your product or service utilize customer data to personalize the product or service so each customer gets their personal and optimal buying experience?

What will be the next business megatrend?

It may well be the demise of cash and credit cards – supplanted by Bitcoin or its cousins. But while you may win big betting on the next megatrend will be, the safe and sound way to go is to capitalize on the proven megatrends of today and yesterday: self-service and personalization. There are still billion dollar businesses to be built on top of these two megatrends.

 

Develop respect for domain expertise

Late Night with Jimmy Fallon - Season 5

Reid Hoffman, founder of LinkedIn, has a new podcast called Masters of Scale in which he talks to friends about how they grew their companies from zero to massive scale and what we can learn from them.

According to this article on Time.com, in his most recent episode he asked Bill Gates what he would tell his younger self about hiring.

Gates responded by saying that he wished he had hired more people with a narrow but profound knowledge of a certain subject, like sales management. He thought he’d be able to handle something like that himself, but he was wrong.

“I thought partly because of myself, or misperceptions of self, ‘Hey I can learn sales, what is that? Profit and loss, you take sales and subtract the losses…Do you need to go to biz school? I don’t think so,'” Gates said. “I didn’t have enough respect for different deep knowledge. I didn’t have enough respect for good management, what really good management is.”

Having worked with engineers for about 40 years I feel safe in saying that Bill Gates lack of respect for the sales profession is endemic amongst engineers. Engineers tend to regard sales people as mere order takers. The engineers build a great product and if they weren’t busy doing great things they could take those orders just as well themselves. Sales people are a necessary but vastly over-paid evil in their estimation.

When I was working with Bill Warner at his incubator Warner Research, I heard a great story about engineers and sales from Eric Peters, co-founder and CTO of Avid Technology  about an Avid sales call in Vermont. As I recall, the sales guys (and they were all guys) at Avid got sort of tired of being dissed by the engineers and one of them decided to invite a few engineers along on a visit to a sales prospect, a video editing suite in Vermont that was testing the Avid system. (If you aren’t familiar with Avid it was the first commercial grade video editing system used by Hollywood and TV studios to edit films and TV shows) now the world leader.)

The owner of the editing suite gave the engineers a tour of his facility, all the while criticizing the Avid System every which way to Sunday. He didn’t have a single positive thing to say about it and many negative ones. Finally, after the tour and his total smackdown of Avid, the owner invited the salesman and the Avid engineers into his office to wrapup. After a few more negative comments directed at the salesman the Avid engineers were all hanging their heads – staring at the floor. The system they had worked so hard on was a failure, there was no way they would make a sale here! The Avid salesman looked the video suite owner in the eye and said, “Thanks for all of the very valuable feedback. We all really appreciate it and we’ll get to work fixing those issues right away. Now, how many systems did you say you were going to buy?” The owner looked at him, paused, and said, “Well, I think I’ll start with six.” That was the last time anything negative was ever said or even implied about the sales team at Avid!

Start with a niche but be careful…

niche

I almost always advise my mentees to start with a niche, even if they think everyone who can walk and chew gum at the same time is in the total addressable market. But what is a niche anyway?

The dictionary define it as:

a specialized segment of the market for a particular kind of product or service:

But let’s take that further: a niche is determined by a significant commonality amongst prospects – those people you hope will become your customers.

There are several characteristics that may define your target niche:

  • Geographic – for many startups, especially service ventures, starting locally, e.g. in the same locale as the company, is one way to start with a niche. Once you dominate the local scene for say hairdressers, you can then expand to other locales.
  • Purchasing power – Uber started with a black car – limousine service. A very easily defined niche for high end customers. Once they worked out their operations they were able to expand to take over the taxi industry. How do you find high end customers? The same way Uber did – by other high end products or services they consume that are related to your product or service.
  • Vocation – workers in specific jobs may be a good target for you. For example, say you had a great speech to text app for mobile phones that could be customized by the user with industry specific terms. Construction workers or architects, who often have to work on a site, take notes quickly without having hands-free, and use a lot of industry-specific terms may be a good niche for you.
  • College students – startups often target college students, and for good reason. They tend to be early adopters as they are driven by FOMO – feat of missing out. They also tend to be willing to experiment with new offerings as they haven’t developed fixed buying habits as older adults may have. And they can be easily located – on their college campuses.
  • Associations and Affiliations – If you have an application or service for those interested in environmental sustainability your might try to reach them through the Sierra Club. There are thousands of associations and there are even directories of associations. 

The key aspect of your niche is that the members are easily definable and reachable. It doesn’t help  to define a niche if it’s going to be very costly and time-consuming to pursue it. And keep in mind, you either have to solve a problem for your niche market or offer them a compelling new opportunity, otherwise why would they be interested in your offering?

There is one danger of the “dominate a niche then expand from there” strategy. I just ran across this with one of the ventures I’m mentoring. They found a great niche for their product. The prospects were very enthusiastic about their  offering.  The company started getting so involved with this niche that they began adding features requested by these customers. Then when they started looking for funding investors pigeon holed them as just targeting a narrow vertical –  too small a market to interest an investor. So make sure you don’t fall into the trap of customizing your product or service for your niche in ways that won’t be of interest of use to other users.

Entrepreneurs hear a lot about listening to their customers and evolving their products based on customer feedback. But if a new feature is only going to be useful for a very specific market segment, unless you plan to build your entire business on that segment, resist the urge to add that feature.

Finally, your niche should be early adopters. Check out my post Who are your early adopters? for details