Fred’s Got it Wrong About the Lowest Common Denominator

Caught VC Fred Wilson’s post today about the importance of not ignoring the lowest common denominator.  In this case he’s talking about SMS and Twitter.  Simeon Simeonov concurs, and its easy to agree with this approach, but let me be a dissenting voice on this kind of strategy.

It’s tempting, oh so tempting, to want to pull in the lowest common denominator.  It’s the theory of getting a few percent of an incredibly large market.  Absent real information, you may as well swing for the big market fence, even though the lights on the stadium are turned off, it’s pitch black, and you have no idea how far out there that fence may be.

Sometimes this strategy works, but most of the time it doesn’t.  Why?  Because the early adopters generally aren’t on the lowest common denominator.  They don’t care about it.  Throughout the years, the winning strategy has been to build something for next year’s highest common denominator.  That’s right.  Build software that doesn’t even work very well on what we have today, trusting that by the time you need a big market to be there, you would have created the perfect product for it.  Go ahead.  Use too much memory.  Use too much cpu.  Use graphics that won’t render on the cheap cards.  It doesn’t matter.  The early adopters already have the more powerful machines, and by the time you have crossed the chasm, everyone else will too.  The origjnal Macs barely ran at all as did the original Windows PC’s.  You see this pattern over and over in the technology adoption cycle.

Fred is talking about Twitter and SMS in his post.  He admits probably less than 15% of Twitter posts use SMS.  What kinds of handsets do you think the vast majority of real live (not the ones who signed up and went away, which may be 2/3’s of the Twitter audience) Twitter enthusiasts have?  Motorola Razors that need SMS?  Or smartphones of one kind or another like the iPhone that don’t? 

His best example is how easy it is to sign up for Twitter with SMS.  That’s great when the Twitterati is at a cocktail party and a bunch of buds are gathered around to see the wonders.  They can be signed up instantly no matter what phone they have (though I don’t ever remember seeing anyone do this even in Silicon Valley, but hey, it’s a good anecdote).  But what are the chances they actually matter?  What are the chances they use the service?  This is resource put into lowering the friction to look, but not to adopt.  As I’ve written before, this is Twitter’s biggest problem.  They did a great job lowering the friction of trial, but the friction of extracting value is still way to high.

Twitter is showing in spades that the problem for a startup is not just to get noticed and tried, it is also to do something so insanely great that people stick to it and care.  As Scoble says (and he refers to Twitter), all the PR hype in the world isn’t enough to build your business.  That’s not to say a lot of people don’t care about Twitter (I’m one of them, BTW), but getting people to care is hard.  It’s a never ending process.  It is not based on balance, diversification, or lowest common denominators.  It is based on focus and value creation.

The Mobile Web is incredibly accessible, but there is growing evidence that it lacks usability and value creation in a major way.  Sarah Perez writes that the success rate for performing various tasks there is only 59% versus 80% on the PC.  Her post is appropos of the common denominator:

Surfing the web with your hot pink Razr’s built-in browser is an experience that leaves a lot to be desired.

It is, in fact, the rise of the smartphone that has made the mobile web such a popular destination on both consumer devices and those designed for business use, like the Blackberry.

Successful apps aimed higher.  They aimed for the Smartphones and the better user experience they provide.

Isn’t it interesting to note how often the more successful and happy Twitter users have to augment Twitter with external clients?  The Tweetdecks of the world?  What if the effort expended around adding SMS support to Twitter had gone to something sexier?  Facilitating real conversations or doing any one of the myriad of things that people turn to these clients to do?

This issue of lowest common denominators is related to diversification, focus, and military strategy.  It comes up in so many ways that are related.  Seth Godin writes constantly about the need to really find your focus carefully and not succumb to too broad a spread.  Mike Speiser on GigaOm writes a great post on how diversification leads to mediocrity.  And military strategists have been avoiding the lowest common denominator for years.  They try to focus strength at a weakpoint, create a breakthrough, and expand that breakthrough to win the battle.

Startups are weak organisms.  Most of the time they can’t afford to chase the lowest common denominator.  There is opportunity cost there that can be fatal.  It is the opportunity cost of failing to diversify, failing to do something really different, and failing to grab your audience in a way that convinces them they just can’t get what you have anywhere else.

In Search of Enterprise DNA for Social Software

Some Enterprise Irregular bloggers recently raised some interesting questions about CubeTree, a new Social Software startup for the Enterprise.  In general, they were reacting to a video of SAP talking about the product that they regarded as a bit too enthusiastic (some called it creepy in that cultish sort of way).  They went on to argue that the video didn’t answer a lot of important questions one would have about any startup, but that are particularly important for Enterprise startups.  Rather than pick exclusively on CubeTree, there was concern about whether any Social Enterprise startup could make it in the wake of these challenges:

-  How are they differentiated?  CubeTree is fast following something, but what?  Is it enough just to bring together more Social features that others have already implemented in various point solutions?  Only if we’re early in the hype cycle.

 

-  How do they get enough credibility so big companies will buy them?  CubeTree have started well by getting adoption at a Lighthouse account like SAP.  But will the video play well?  Will they get other Lighthouses?  Is it a one off based on some personal relationship?

 

-  How do they protect themselves against competition?  The IP question.  Note that there are two strong protections available to startups:  IP is the obvious one, but the right partnership strategy can also be very effective.  Hence my company’s partnerships with Salesforce and Oracle.

 

-  Is their timing right?  Too soon and the big guys have to do it before the startup has any critical mass.  Too early and nobody has a clue what they’re on about.

 

Startups all grapple with these to a greater or lesser degree.  I’m on my fifth startup with Helpstream, and I can tell you they are absolutely critical questions to answer.  But there are other questions specific to the Social Enterprise space that I think are more interesting.  What I see as a bigger problem when selling to the Enterprise among these Social startups is a lack of Enterprise DNA, and equally, a lack of savvy about platforms versus applications. 

To an extent the Enterprise DNA problem for Web 2.0 companies may be a result of youth.  How much can you know about Enterprise software if you’ve never built any and never worked for an Enterprise?  In the case of CubeTree, they actually do have some good Enterprise experience on board, which is rare for this sort of company.

 

If you look at Enterprise software, there is a certain critical mass of features needed to get through the IT gatekeepers (if you view it cynically, or simply features needed to be effective in the Enterprise).  They’re obvious things that people working in the Enterprise world know about almost instinctively.  Things like how the security and permissions features have to work, for example.  A lot of Social software has extremely vestigal permissioning that most Enterprises will find unacceptible.  How many, as they review a promising new piece of Social software spend time to really understand permissions as opposed to the streaming or microblogging features?  Another big issue discussed among the Irregulars was data import and export.  The export, in particular, is a matter of particular concern regarding SaaS and Cloud applications. 

There is a lot else and most of these folks have never had an IT department conduct due diligence on their products.  They’re suprised to learn that consumer-grade LAMP stack software doesn’t impress IT. 

 

The application vs platform issue is another one.  For a long time I’ve made it a practice to always build a platform and not just an application.  Do this not because you want to go sell the platform, the market will decide whether you ever get the opportunity.  Rather, do it because it makes evolving the product dramatically faster and easier.  Plus, it is more likely to lead to real IP and the kinds of capabilities IT and the big accounts will insist on.

 

It is very hard to build platforms using LAMP as well.  LAMP is your platform.  The good news is your productivity is boosted through the simplicity of LAMP and the ready availability of lots of off-the-shelf components you can plug in.  But the bad news is you’re essentially trying to build something industrial grade with scripting software.  So we have PHP and PERL based Social software.  Java would have been preferred, with Ruby on Rails as a nice alternate.

This DNA goes well beyond just how the application is built, and into how it is sold and what it does.  The CubeTree video was way over the top and gushingly frothy.  But that’s been the rule for Enterprise 2.0.  The trouble is, except for those individuals in large corporations interested in self-promotion (and there are more than a few of those around), Enterprise is not gushingly frothy.  It speaks in sober terms of Business Process and Return on Investment.  It asks, in short, for you to demonstrate real value and not just enthusiasm. 

 

The ability to deliver that real value in the cold light that separates the hype from the reality is what the Enterprise craves for full adoption.  Anything else is just good fun and fashion.  The blogosphere is beginning to conclude it’s about time to separate ourselves from the seamier hype-laden side of the business.  I completely agree with that sentiment.  Various vendors are dealing with it in ways that range from getting less and less ink, to being in outright denial and attacking the Enterprise and established institutions like Business Process. 

 

At Helpstream, we’ve addressed both the issues of permissions and import/export with Enterprise-grade solutions (we have a lot of Enterprise DNA!) as well as a whole lot more.  We have a platform approach to architecture that has greatly assisted our ability to rapidly evolve the product over time.  We’re seeing firsthand the benefits of Enterprise thinking for the Cloud, SaaS, and Social Software.  But most importantly, we have a singular focus on creating a powerful alloy of tried and true Business Process with the new technology of Social Software to produce a combination that is more powerful than the sum of its parts.  We measure that power not with enthusiasm, but with ROI.  In fact our customers demand it.  Helpstream sells to Customer Service organizations.  If you’ve ever dealt with one you’ll know that Service professionals of all kinds (including Professional Services) are some of the most hardened skeptics out there.  They have heard it all.  They are extremely process and metrics focused, because that’s how you run a Call Center.  They’re unwilling to trust their business to enthusiasm for the most part.  Their thinking is along the lines of Robert Heinlein’s quote, “If it can’t be expressed in figures, it is not science; it is opinion.” 

Towards that end, analytics is the constant companion to Business Process, and another one of those things Enterprise DNA will insist you must have out of the box.  To satisfy our customer’s needs for metrics, we’ve built comprehensive analytics into the product, and we’ve thought hard about how to set up the analytics so any customer can see a real time view of their ROI.  This is more than just a sales gimmick.  Customers and Helpstream use these reports to tune up the performance of their Customer Service communities.  In fact we’ve been able to develop several innovations and measure their real impact since introducing the reports, and there are more on roadmap to come.

Depending on where the market really is on Geoffrey Moore’s Chasm-crossing Rubicon, CubeTree and it’s video may just be the Swan Song for how this software has been sold to date.  They’re totally horizontal, not focused on any particular business problem or business process, and they have plenty of gushing hype.  Nice product, but their tactics seem timed poorly versus where this world is relative to the Chasm. 

More Enterprise DNA, less hype needed.

A Stimulus Plan for Silicon Valley Is Needed

A stimulus plan for Silicon Valley is needed, despite what Sarah Lacy and Fred Wilson may think, but it isn’t in the form of the $20B author Thomas Friedman writes for the NY Times.  It’s much cheaper and simpler than that.  Change Sarbanes Oxley so small companies can afford to go public again.  That’s all it takes.  Simple, straightforward, and to the point.  I’ve already proposed this, so I won’t belabor it further here, but it is worth another mention.  Sarah and Fred think there is already too much money chasing too few deals, but that isn’t the problem.  The problem is liquidity is scarce because SOX has made it too hard to IPO deals.  Look at the exits for the VC’s and entrepreneurs.  Drying up capital is not going to change the problems of liquidity and lack of vibrant IPO markets.  If the VC’s want an industry that boils down to selling companies for $20M to $100M and forgetting about IPO’s, it isn’t going to be much of an innovation engine and most of the VC firms will die.  As Don Dodge points out, VC’s are chasing wealth, not job creation.  Wealth is an interesting proxy to job creation, but it isn’t the same thing.  Opening up the IPO markets again lets market forces drive job and wealth creation in tandem.

It’s Tough to Be a Big Company: They Don’t Get No Respect

Om Malik recently tweeted:

I think google has no big ideas. this morning they announced a to-do-list. FGS. [For God Sake] Remember the Milk MUCH better.

This touched off a backlash from Google’s ardent supporters who beg to differ, and Om writes about it this morning.

I like Om’s definition of what he means by “big ideas”:

For me, startups and products such as Skype, Flickr and YouTube represent big ideas. Why? Because they not only redefine our notions about certain technologies, but they also change our behavior and cause massive disruption.

Google veteran Matt Cutts responds with what he thinks of as Google’s latest big ideas:

* Google is funding research on the Singularity.
* Google mapping the oceans for Google Maps.
* Google’s research into deep web/dark web.
* Gmail’s offline availability.
* Google tool to measure broadband, especially useful now that more and more broadband providers are looking to shift to a metered broadband model.
* Google’s Android Mobile Operating System.
* Google Chrome, a fast web browser with a distinct philosophy of ease-of-use and radically improved security abstractions.

Om tries hard to be magnanimous with these, but I’m sorry, none of them resonate with me as a Big Idea.  None of them are redefining or disruptive.  Many of them are just Google’s version of something somebody else did first.  Android is just another Smart Phone so far, and the iPhone or earlier the Blackberry get the prize for being redefining and disruptive.  Chrome?  Some interesting features, but as Om points out, not redefining or disruptive any more than Mozilla or other browsers.  Mapping the oceans?  Oh come on.  I’ve been able to buy ocean maps at the Monterey Aquarium for a long time now.  Sure its cool to have them online and free, but redefining?  Disruptive?  I don’t think so.  Gmail offline, not close.  Most of the blogs posts about it were along the lines of “finally, Google does what others have been doing.”

This talk gives me a strange sense of Deja Vu.  I’ve heard it all before.  The best example, back when people used to talk much about it, was Microsoft.  “What is Microsoft going to innovate?” became, “When is Microsoft going to innovate?” which ultimately became, “Microsoft doesn’t innovate.”

And there you have it.  It’s tough to be a big company.  As Rodney Dangerfield used to say, “They don’t get no respect.” 

Just one more downside of the Innovator’s Dilemma.

In Microsoft’s case, the speculation was that it was the culture.  To much command and control.  Too top down.  How can this be true for Google?  It’s just the opposite, some would say to a fault from the standpoint of economic efficiency.  They have all that 20% time available to innovate almost anything. 

Yet is isn’t happening, because real redefining and disruptive innovation is really really hard and very rare.  It can’t be scheduled.  It’s not a job and you can’t hire for it.  It’s a passion.  It’s vision not mechanical process.  It is more than just craftsmanship and building it.  It is art and creation.  It burns in the belly of whomever has the real innovative spirit.  It seldom happens with the same person more than once.  It’s problematic for large corporations to nurture it, although there are notable examples of corporations that have managed to including Xerox with PARC, IBM, and Bell Labs.  In many cases those same organizations failed to capitalize on their innovations, but at least they were making them.

What was it about their cultures that spurred innovation so unusually well?  I don’t have the recipe.  Perhaps there isn’t any recipe and those organizations had so much innovation just because they were lucky.  Lucky to have a bunch of innovators all in one place for a time.

If there were a recipe, I suspect one ingredient it would have is to avoid doing the same better.  Once a thing is mainstream, better is not innovation.  Start from things not mainstream.  Start from things perhaps not even possible in the mainstream.  Take a ridiculous amount of computing power for the day, give it to one single person, and ask how that changes the software for that computer.  You’d be looking at something similar to what happened at Xerox to create windowed user interfaces.  Or, you’d be looking at the first Macintosh, which was astonishing, but almost didn’t work it was so close to the limits of what was possible in that time.  Look for things people say can’t be done, and do them anyway. 

Forget profit.  Forget stock options.  They don’t factor into innovation in this sense.  The failure rate will be huge.  But the rewards if you succeed will also be huge.  If nothing else, you’ll have satisfied your passion.

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Dare misses the plot by ignoring “disruptive” and focusing on original.  Om is still right about Big Ideas.  Being original but not disruptive is doing something nobody cares about.  If you’re disruptive, its because your customers love you.  He labels the iPod and iPhone as not original, and therefore not Big Ideas.  But they were different enough and disruptive enough to be Big Ideas.  They were not just the same thing better.  My first iPod bore no resemblance to my Nomad MP3 player, which I liked very well at the time.  But the Nomad just wasn’t a Big Idea.

Interview with Zuberance’s CEO Rob Fuggetta

I recently had a chance to meet with Rob Fuggetta of Zuberance, a fascinating startup that has managed to raise a $4M round even in the depths of this economy.  I’d been hearing good things through the grapevine about Zuberance, so the news of their round together with those good things led me to reach out for an interview.

Rob, give me the basic profile of Zuberance

We were founded in February, 2007, we raised a $4M round on November 14, 2008 from Emergence.  We’re located in San Carlos in the former Obama campaign headquarters…

<Interrupting> Wow, that’s some good karma, eh?

Yes, absolutely.  A lot of what we do and how we operate is very similar to how Obama approaches things.

We have 12 employees, and 10 large Enterprise customers including Symantec, Polycom, and TomTom.  Our customers tend to be large enterprises with 1000’s to millions of end user customers.  We have a couple of mid-sized organizations like Vertical Response, but we fit best with medium to large enterprises.

What does Zuberance do?

We enable customers who are genuinely and authentically enthusiastic to share that enthusiasm with others.  As I mentioned, we see a parallel with what Obama has done with his followers.

How much does the service cost?

It starts at $5000/month.  There is typically a one time $10,000 configuration fee.  So, that’s about $70,000 a year.  You can unleash an army of advocates for less than the cost of a single sales person.

Tell us more about how Zuberance works

We call ourselves a customer salesforce software company.  It’s a very pragmatic positioning.  Many CEO’s have said to me, “Our highly satisfied customers are our most effective salespeople.” 

That’s truer today than ever before because customers have never been more distrustful of paid media.  69% of consumers do not believe advertising according to the big advertising firms.  In general, most leads from lead generation programs result in less than 1% qualified leads.  Sales and marketing productivity has been plummeting because of mistrust.

In place of paid media, we turn to networks of trusted friends.  Word of mouth has always been the most powerful convincer, but now it has moved online through services like TripAdvisor for hotels or Yelp for restaurants.  People will at least search Google, or go to LinkedIn for a reference on a candidate.  Consumers are tuning out paid media and tuning in these networks of trusted peers and colleagues.

What Zuberance does is we give sales tools to your customer salesforce.  We give marketers management and tracking tools to manage this salesforce.  If you buy our system, you could increase leads and sales in the same quarter using your best customers as a volunteer salesforce.

How does all this fit with social media?

I didn’t mention any of the faddish things people are talking about.  We believe social tools, online communities, and tools like Facebook are just tools to get something done.  We leverage those technologies to arm and empower customers.

<At my day job, Helpstream, we’re big on the idea that communities need a reason for being.  Generic communities can be hard to harness effectively for business results.  I think what Rob is saying is that Zuberance is a way to give Generic communities a purpose so that they can be empowered.>

Make it real.  What do I see when I use Zuberance?

The Enterprise subscribes to Zuberance just like they would Salesforce.com or WbeEx.  We’re SaaS, and our SaaS apps enable 3 things:

- Identify

- Mobilize

- Manage and Track

The first step is to Identify the advocates.  We enable brief online surveys via emails or web banners.  We ask the ultimate loyalty question:

How likely are you to recommend us to a colleague?

Zuberance launches those 1 question surveys.  Customers who answer 9 or 10 are considered advocates.  Advocates are then given an invitation to join an online community of advocates.  They register, upload a profile, and then they are given access to sales and advocacy tools.  This is the Mobilization phase.

Here are 3 examples of our sales and advocacy tools:

- Advocates can create a review.  They fill out forms, and then, with their consent, we publish the reviews to places like Amazon and CNet.

- Advocates can share a promotional offer with a friend or colleague.  Exclusive promotional offers for friends and family are a powerful tool.  They get to send a coupon to someone in their personal community.

- Advocates can answer a prospect’s questions.  For example, with Symantec, you can talk to a Norton customer now.  To ask a question, the prospect provides their email, so that results in a lead.

The advocates get poins.  We have an application called ZPoints.  You can redeem points for discounts, or to make donations to non-profit organizations.

Can they get cash for points?

No.  It’s bad business practice to give cash, but it is good business practice to recognize advocates.  We prefer to give them special or preferential treatments.

<The recent debacle with Belkin, where people were being paid to post reviews and positive comments, is a good example of why paying cash is a bad idea!>

And what about managing and tracking your advocates?

We provide a management portal for marketing to manage their advocate community and track their results.  They can see the content the advocates are creating and they can create promotion offers.  This is another big difference with our service: most social media is not trackable or manageable for a business.

<Amen!  Helpstream is all over that manageability and trackability.  So much so that our latest release actually gives you a report that shows the ROI of community for your Customer Service web portal.>

Is this service like Facebook Beacon?

There are big differences between Zuberance and Beacon.  I said Beacon is doomed to fail because Beacon didn’t respect the users.  It was a service that was meant to benefit brands only.  Our belief is that you have to deliver equal value to brand, advocates, and in-market buyers.  If you don’t maintain the balance, it won’t work.  

How is Zuberance going to market?

Our advocates are doing our marketing for us.  We started with Symantec.  They have 22 million active subscribers to Norton.  So they launched Norton Advocates in beta in June of last year.  They started by surveying 100,000 customers.  They got several thousand advocates almost immediately.

How did you get your first customers, before you had any advocates?

We used Direct Sales, and augmented that almost immediately with advocate leverage.  Look for our Zuberance Zealots program soon.

What has been the impact of the Economy?

This is the worst environment I’ve seen in 2 decades of Enterprise marketing.  100% of CMO attendees at a function I attended last night are losing budget.  It’s a tough environment.  Products and services without provable ROI will go by the wayside in 2009.  In our case, we can deliver results this quarter.  Customers get 10x ROI on their investment in our solution.  Plus, it makes so much sense.  CMO’s get what we do because they already have the religion.

Conclusion

Zuberance is a fascinating company.  Their story certainly made sense to me, and resonated with a lot of what I’m hearing from others.  In this economy, it is extremely hard to get new customers.  You need to focus on keeping your existing customers happy, driving repeat business from those customers, and I would say, leveraging those customers to find your new customers.  Zuberance helps with all of that.

Too Much Cash Bad for Internet and Enterprise Innovation?

Fascinating post by Larry Dignan where he looks at Bernstein analyst Jeffrey Lindsay’s musings.  Lindsay likens Microsoft, Google, and Yahoo to Ford, GM, and Chrysler.  His premise is that all of their cash is buying up successful Internet plays faster than VC’s are funding new ones, and that this is similar to what happened in the early days of the automobile industry.

Lindsay goes on to say that he thinks having too much cash is causing these big players to do the wrong thing.  Microsoft loses $1.5B a year just to keep their hand in the Internet game, while all three are playing a cut throat price war on advertising.  Meanwhile he thinks Google wastes too much money on inefficient internal product development.  I remember a lot of complaining back in the first dot com bubble by people like Andy Grove about how strange things get when the cost of capital falls to nearly zero.

Adding to the general blight on innovation is Lindsay’s contention that the big players don’t do anything once they’ve acquired the innovative companies and their management teams.  Not only do they not do anything, but they simply copy each other’s strategies.  Lindsay says they’re like yesterday’s unsuccessful media conglomerates, and blames this tendency for AOL and Yahoo’s downfalls.

I tend to agree with what’s been said here.  I’m not completely sure it’s bad for innovation though.  At some point, companies quit innovating as much and just focus on execution.  Provided they are acquired after that point, it may actually benefit innovation.  After all, the creative people who built the company may then go on to do something else innovative.  But it does tend to mean that the particular product, strategy, or niche plateaus and goes nowhere. 

The other thing that struck me about the article is that it applies to Enterprise software just as much as Internet software.  There are big companies like Oracle waiting for their next acquisition fish to grow big enough to be worth hooking.  Meanwhile, there are relatively few new plays being funded by VC’s.  The SaaS crowd is very promising, but the dot com bubbles (there’ve been two now, haven’t there?) have starved the formation of new Enterprise plays.  In fact, the SaaS group is not very far along taking over from the perpetual license companies precisely because there are not yet great SaaS companies in every niche.

One of the things I keep waiting for is for the tech industry to show signs of maturity in understanding how to manage acquisitions.  There are some great models out there like General Electric, Johnson and Johnson, or 3M.  Most Tech Industry acquisition doesn’t have that great “collection of independent companies under one big brand” approach.  Our methods are more about milking companies that have peaked.  This is certainly a lucrative business (Oracle doesn’t do badly at all!), but I’m not sure it is as successful as what we see outside Tech.  The closest thing we have to it so far seems to be Cisco in terms of its ability to keep acquired franchises relatively vital and growing.  Does anyone know of other great examples in the Tech Industry?

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Washington is Killing Silicon Valley:  Amen!

Now is a Great Time to Join or Found a Startup

This is a great time to join or found a startup.  Why?  Because a bad recession is like a treadmill EKG for companies, and especially for small companies.  It puts everything under so much stress that when you see a consistent source of good news, you know that company is strong.  In good times, the rising tide lifts all ships.  How do you know whether that sock puppet selling dog food on the Internet is really a good idea, or just the product of the Bubble?  There are no sock puppet opportunities that do well in a bad economy.

The key question to ask yourself is whether you have enough visibility to tell whether a company is doing well.  This will vary based on the position you’re hiring for, but just the fact a company is hiring is a signal of some sort.  Another is that the company just raised money in this climate from a recognizable VC firm.  I’ve been keeping a list of those to monitor myself to see how the companies do.  In terms of founding a startup, the question is going to be how quickly you can get to an indicator in this economy.  You have to either raise money or sell something.  Only third party credibility will do.  If you’re hunkered down building software and living on canned goods, you have the benefit that there probably aren’t competitors being funded, but you don’t have the third part read on your own success.

I joined my last company Callidus software in November, 2001, right after 9/11.  That was a bad economy.  I saw a middle-stage startup that was able to sell multi-million dollar software to telcos.  At that time, everyone thought all the telcos were going bankrupt, and some did.  So I knew that if a troubled business like a telco couldn’t wait to buy a multi-million software license in those hard times, that company was a pretty good bet.  Sure enough, we went public in 2003, about 2 years after I joined. 

It was the best possible time to look for a job.

Greed Will Mark the Turnaround, But Quietly

This morning I watched a video of Kleiner Perkins Uber VC John Doerr giving his advice for startups.  It’s good advice, but it left me flat.  Why?  Because there’s nothing new or insightful there.  It is the diary of a very smart and experienced business person who is scared and doesn’t know what will happen next, so they’ve broken out the standard list of prudent measures that smart business people take.

Fred Wilson says the conventional wisdom will be wrong, whether it is fund managers or VC’s talking.  He quotes Max Levchin about the desirability of ignoring everyone and being contrarian in times like these and goes on to say:

Listen to everyone. Read everything you can. And then come to your own conclusions. It is better to be contrarian in times like these. But do it wisely and don’t bet the farm.

I will admit, this sounded to me like the first stirrings of greed, but greed in a good way.  For it is greed and not fear that wil mark the turnaround.  Fear will keep us bottled up and focusing on tactical execution and cash conservation.  That’s what Doerr’s 10 points are.  Greed is about looking for opportunity at this time instead of hunkering down and wishing it would be over.  Only greed can turn around the vastly negative sentiment that grips so many and leads to a self-fulfilling prophecy.

Where fear is concered, as Fred Wilson says, “It’s amazing to see how everyone is saying the same thing.”  I see the same, don’t you?  The advice from all these VC’s so far has been nearly identical, until this piece from Fred.  He is beginning to talk about the smarter move: 

When everyone is doing the same thing, consider doing something different to gain an advantage.

At the same time, do it quietly until you’re sure it’s working.  And don’t bet the farm.

Isn’t it interesting that the real superstars, the Warren Buffets of the world, are not paralyzed with fear?  Buffet has been aggressively buying the most troubled sector, financials, for a little while now.  And now here is Fred Wilson, sitting in the middle of the Big Apple, financial sector meltdown ground zero, making some positive noises.

This turnaround will be led by a little bit of greed and a lot of hope.

What can you do differently?

Why Are Startups Running at a Level Where They Can Lay Off 1/3?

Hard times are on us, and we’re all watching with some concern how this impacts the High Tech Startup World.  It’s terrible to see the grim heart to hearts investors are having with their portfolio companies, and worse still to read the constant announcements where another startup is laying off a bunch of people.

I was chatting with someone recently about exactly how they were determining who should go.  It should be a terribly difficult thing to decide for a startup in my view.  After all, startups should be lean and mean, right? 

If you’ve ever been at a large company that had to layoff, you’ll be familiar with the notion that you can always cut the bottom 10% and little harm wil be done.  One hears this refrain constantly in those situations, and its accurate.  But I have a hard time understanding why it should be accurate for a startup.  When we’re talking about laying off 1/3 rather than 10%, it becomes even more outlandish to contemplate.

Startups need to have laser like focus to succeed.  They need to find leveraged ways of doing things.  It’s useful to outsource anything outside the startup’s distinctive area of competence.  These days Cloud Computing makes it possible not to even have to own a data center.  We know that smaller more agile development teams work better.

How then are we still creating startups that can afford to shed 1/3 of their staff and still survive? 

It would seem to me that the goal for any startup should be creating an organization that wouldn’t survive if 1/3 of the people had to go.  After all, startups should be lean and mean.  They should be focused on being nimble and doing less with more. 

How to go about doing that?  Here are some thoughts:

-  Hire fewer, more senior people.

-  Hire doers, not managers.  Every person in a startup should be capable of producing some form of content–writing code or at least specs, helping test the software, closing deals, writing marketing content, and so on.  It’s a warning sign if you have someone in the organization who has to look to others either inside or outside the company for every single deliverable.

-  Outsource everything that isn’t your distinctive competence and that you can find competent outsourcers to handle.

-  Analyze every new hire by asking whether they are better than the median person in their group.  If so, you’re raising your standards, and that’s a good thing.  If not, why are you making that hire?

-  Look for people comfortable wearing more than one hat.  It makes load balancing much easier and it improves organizational harmony by getting more people working together outside their silos.

-  You should almost never hire capacity in anticipation of demand.  Fill all the basic functions well with good people and then hang on to the tiger by the tail.

-  Do not measure people by how quickly they hire.  Measure by how well they hire.

These rules apply even in good times, but most of all in bad times.

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Mike Arrington says, “Some CEOs see this as a once-in-a-startup opportunity to get rid of the deadwood in the company.”  Wow.  I couldn’t ask for a better reaffirmation of what I’m saying above.  Why did you hire that deadwood, Mr Startup CEO?  Worse, why did you let it stack up so high?  Granted, some startup CEO’s are very inexperienced, but hiring someone is a very serious matter.  There are few decisions you’ll make that matter more.

Seth Godin weighs in very much in the same camp I am with “too small to fail.”  He points out that even when a company is relatively big, there is tremendous advantage in thinking small.  Read his great post for more insights.

Startups Buying Startups…

Lots of news lately about startups buying startups: Strands acquires Expensr,  Zyb bought Immity, BuzzLogic acquires ActiveWeave, yada, yada.

Why do it?  Why would a startup want to be acquired by another startup?  Where’s the liquidity in that?  Why would a startup want to acquire a startup?  Isn’t that eye off ball?

Increasingly, one hears about these transactions, and the VC’s are quite interested in talking too.  And why not?  Startups are companies too, and they can use acquisitions to gain most of the same advantages big companies gain through buying other companies.  Let’s look at just a few of the reasons it might make sense:

Liquidity

Let’s dispatch this issue up front.  Immediate Liquidity is usually not on the agenda for a startup acquiring another start up, but it may be greatly accelerated and it may beat the alternative.  If a struggling startup is having a hard time getting to the next stage, it may be easier to merge with a stronger startup than to keep going it alone.  This is particularly true in this age when many companies are building products that are more like features or modules of a larger suite.  If their market is hot, they can make it all the way to buiding their own larger suite.  If it isn’t, or if they’re too late to the party, they may have to join someone else’s game.

From the acquiree’s perspective, it’s all about it being better to have a smaller slice of a much bigger pie.

Talent and Technology

When I was working for Borland back in its heyday, this was the number one reason we acquired so many little startups.  Our ideal profile was to identify a team of brilliant technologists who had built a wonderful product but just couldn’t manage to develop the sales and marketing chops needed to hit it big.

Finding great talent was hard, and building out a great product even harder.  Acquiring a little startup that had already gotten critical acclaim from customers was a way to shortcut the need to start from nothing. 

Often such acquisitions make it possible to tackle new markets that weren’t in the original plans, or they may simply make it possible to accelerate the plan of record by not having to build everything from scratch.

Market Share / Critical Mass

This is another motivation for acquisitions that I’ve seen taking shape.  Momentum is everything, and if a couple of strategic applications can rapidly pyramid the momentum, it’s well worth it. 

Filling Out the Story

Very often customers are telling the larger firm they’re missing an important piece of the puzzle, and some smaller entity may already have the piece in hand.  It takes a lot of work to build out a big vision and all of its pieces.  If a smaller firm is available that answers a question your customers are asking that you can’t currently answer, why not do a deal so you can give it to them?

Expect More Startups Acquiring Startups

Expect to see more startups acquiring startups, it makes sense for many of the same reasons bigger transactions have made sense.  The real issue will be getting all the parties aligned on the transaction.  The critical issue in every acquisition is valuation.  Nobody wants to acquire a company that everyone agrees is worthless.  But, will the acquirer have an over-inflated sense of its own worth relative to the acquiree?  Can the respective Boards of the two companies grasp the vision for synergy and figure out how to do a deal that makes sense for everyone?

That’s the real challenge, and those who are good at it will have a powerful new tool to grow startups faster at their disposal.