Startups
Strategy and tactics for startups, especially in software or other enterprise technology.
Customer-funded development — structuring a deal
This is the second post of a short series about what I think is an underused business model among software entrepreneurs, namely sponsored (i.e. customer-funded) development. Key points of the first post included:
- If you have an invention you can’t fund yourself, having your first customer(s) pay for development may be the key to realizing your dreams.
- Likely prospects are companies that:
- Are sufficiently hard-core technically to value your bleeding-edge ideas …
- … and to be willing to invest in projects with obviously high risks of failure.
- Are sufficiently limited technically to believe that your team is significantly stronger than what they could hire and deploy themselves.
This post covers the nitty-gritty of sponsored-development deal-making.
As per the previous post in this series, suppose you are fortunate enough to identify the right customer for a sponsored-development relationship. Then the deal process is likely* to go something like this:
- You start as you would in any other unproven-vendor sales cycle.
- You politely turn down the inevitable offer to simply hire you and your team onto their payroll. 🙂
- You explain that you have to keep the intellectual property yourself. This is crucial. If they don’t firmly agree, walk away from the sales cycle at that point.
- You ascertain whether there’s really a deal to be done. This is harder than it is in other kinds of sales cycle.
- You get to the neighborhood of “Yes”.
- You politely reject the first offer they make to fund you, because one of terms will be that, if all goes well, they can buy your company at a price in the range of 3-5X what they will be investing. That’s not nearly enough upside for you.
- You do a win-win deal.
*Actually, the deal process is likely to fail. Most deal processes do. But if it does succeed, it’s likely to look like what I just outlined.
Two of the bullets above allude to challenges in agreeing on deal terms. The first concerns IP ownership. The structure you should insist on is: Read more
Customer-funded development — overview
This is the first post of a short series about what I think is an underused business model among software entrepreneurs, namely sponsored (i.e. customer-funded) development. Key points include:
- If you have an invention you can’t fund yourself, having your first customer(s) pay for development may be the key to realizing your dreams.
- Likely prospects are companies that:
- Are sufficiently hard-core technically to value your bleeding-edge ideas …
- … and to be willing to invest in projects with obviously high risks of failure.
- Are sufficiently limited technically to believe that your team is significantly stronger than what they could hire and deploy themselves.
The second post in the series discusses the substantial complexities that an actual sponsored-development deal might entail.
Suppose you have a great idea for a software product that you want to develop and sell. How do you get initial funding? In some cases the answer is straightforward.
- Companies with ongoing software businesses might fund new development as normal R&D.
- A conventionally-wonderful-seeming team, possessing both business and technical credentials, might raise venture capital in the usual way.
- Individuals who made a lot of money in previous start-ups might fund a new venture themselves.
Even better, the product might be fast and cheap enough to bring to market that even a non-wealthy person might be able to self-fund. Examples include:
- A lot of things sold at consumer kinds of prices.
- A number of data center tools during the mainframe era.
If you’re in such a situation yourself, congratulations — you’re in a great situation for successful entrepreneurship.
Suppose however that you’re an inventive engineer, with:
- A strong track record in developing great software.
- Limited business skills.
- An idea that requires more person-years to bring to fruition than you can self-fund.
- No obvious choice for “business-y” co-founder.
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Your first customers
A couple of the raw startups I advise have recently asked me about a hugely important subject — dealing with their very first customers. The big deal here is that initial customers can offer three different kinds of valuable resources:
- Money, in forms such as:
- Ordinary licenses or sales.
- Custom product development.
- Equity investment.
- Credibility,* to audiences including:
- Press and analysts.
- Angel/seed/venture investors.
- Potential customers who are just reading/hearing about you.
- Potential customers who do detailed reference checks.
- Product feedback and advice.*
*Confusingly, both credibility and product feedback are sometimes called “validation”.
Questions of money are of course heavily influenced by how complete your product or service is. In particular:
- It is common not to get paid until your product works and is either in late beta or else early general availability.
- It is common for early customers to want big discounts even when they do pay you.
- Somewhat contradictorily, it is also not uncommon to get a lot of payment from your earliest customer(s). Reasons include:
- They’re getting technology that is, at the moment, unique.
- You’re willing to somewhat tailor the product to their needs, and to provide very high levels of attention and service.
Equity investment by your early customers and partners is problematic. In particular: Read more
| Categories: Startups, Technology marketing | 23 Comments |
Should you start a tech company?
I occasionally get very hands-on in accelerating a raw start-up. Typically this is when an engineer comes to me with an unquestionably clever idea and asks me — sometimes in very broken English 🙂 — whether and how he can get rich from it. So let’s collect some thoughts on the subject.
This post can be construed as fitting into my “not-very-organized series” about the keys to success. In particular, it draws on my July, 2014 post about judging opportunities.
The product plan
A start-up product idea needs to satisfy multiple criteria. Awkwardly, they’re rather contradictory to each other.
- It should be obviously appealing to sufficiently many customers, and be worth sufficiently much money to them.
- It should be something the startup can do with very few resources …
- … but which much larger potential competitors cannot.
That usually means that the idea:
- Should be based on an architecture that is anti-strategic to incumbent players …
- … but which fits customers’ technology strategies just fine.
Criticisms I’ve made repeatedly of specific ideas include: Read more
| Categories: Startups, Technology marketing | 24 Comments |
Marketing advice for young companies
Much of what I get paid for is advising early-stage companies, especially on messaging and marketing. So let’s try to pull some thoughts together.
For early-stage companies, I’d say:
- Even more than for larger companies, the essence of messaging is to achieve the contradictory goals of excitement and credibility.
- If one of those must be sacrificed, sacrifice excitement. It is by far the easier of the two to regain.
- Note: Both your product and your company need to be credible. When your company is new, both parts of that are formidable challenges.
- Notwithstanding how limited your resources are, don’t rely too much on outside PR. You need to control messaging and key influencer relations yourself.
- Notwithstanding how limited your resources are, you need to address multiple audiences, at least:
- Investors.
- Prospective employees.
- Knowledgeable influencers.
- Not-so-knowledgeable influencers.
- Sales prospects (business folks).
- Sales prospects (technical folks).
Of course, these subjects are much discussed in this blog. The top three overview posts for young companies are probably: Read more
Judging opportunities
This is the first of a not-very-organized series of posts on two related subjects:
- What are the keys to success?
- Which efforts are (how) likely to be (how) successful?
Most of my posts can be said to touch on those areas, especially the latter one. But in this series I’ll try to be more direct about it.
Useful background may be found in:
- The strategic worksheet, perhaps my best-received post ever. Many companies and individuals tell me they have profited from working through it.
- The less well-known execution worksheet that followed it.
- My recent post about kidding oneself, Pitfalls for Pollyannas.
For a new company in a new enterprise IT product category, the path to success may be oversimplified as:
- Achieve early/visionary/bleeding-edge adoption.
- Then achieve substantial adoption in several niches.
- And then achieve either substantial adoption in many niches or …
- … dominance in at least one niche.
| Categories: Startups, Technology marketing | 20 Comments |
Marketing in stealth mode
I consult to ever more stealth-mode companies, so perhaps it’s time to pull together some common themes in my advice to them. Here by “stealth mode” I mean the period when new companies — rightly or wrongly — are unwilling to disclose any technological specifics, for fear that their ideas will be preempted by rival vendors’ engineering teams (unlikely) or just by their marketing departments (a more realistic concern).
To some extent, “stealth-mode marketing” is an oxymoron.* Still, there are two genuine stealth-mode marketing tasks:
- Recruit employees.
- Prime the pump for post-stealth marketing.
Further, I’d divide the second task into two parts — messaging and outreach. Let’s talk a bit about both.
*I am reminded of my late friend Richard “Rick” Neustadt, Jr., whose dream job — notwithstanding his father’s famous book on presidential power — was to be a US Senator. So he needed to punch his military duty ticket, and got a billet doing PR for the Coast Guard. (One of his training classmates was Dan Quayle.) His posting was to a classified base, and so his PR duties consisted essentially of media-mention prevention. But I digress …
Stealth-mode messaging
As I wrote in a collection of marcom tips, the pitch style
“We’re an awesomely well-suited company to do X.”
is advantageous
- In stealth mode, when you don’t have anything else to say …
- … but not at first product launch, when you finally do.
For small start-up companies, this message is most easily communicated through highlights of the founders’ awesome resumes, for example:
Our CTO personally stuffed and dyed the yellow elephant for which the Hadoop project is named.
But that still begs a central question — how do you describe what your stealth-mode company is planning to do? I.e. — in the quote above, what is the “X”?
When I am a VC overlord
When I am a VC overlord:
- I will not fund any entrepreneur who uses the word “disruptive”, unless she has actually read at least one book by Clayton Christensen.
- I will not fund any entrepreneur who mentions “market projections” in other than ironic terms. Nobody who talks of market projections with a straight face should be trusted.
- I will not fund any software entrepreneur who is unfamiliar with “The Mythical Man-Month”.
- I will not fund any software whose primary feature is that it is implemented in the “cloud” or via “SaaS”. A me-too product on a different platform is still a me-too product.
- I will not fund any pitch that emphasizes the word “elastic”. Elastic is an important feature of underwear and pajamas, but even in those domains it does not provide differentiation.
- I will hire a 16 year old intern of moderately above-average intelligence. I will not sign or propose any contract that intern finds difficult to understand.
- I will hire a second intern of moderately below-average intelligence. I will not fund any product whose documentation that intern finds difficult to understand. Exceptions may be made for products sold to orienteering athletes, crossword puzzle solvers, or engineers.
- When a board on which I sit approves revenue targets for the year, I will further stipulate that the year-ending sales pipeline must comprise more than a Chinese hair salon, an Italian pushcart vendor, the CEO’s brother-in-law and a bankrupt bait shop in Nome.
- I will only hire a CEO who can explain the technology at his previous company. A CEO who doesn’t know what his products do can’t sell or market them either.
- I will only hire a CEO who can also walk me through a sales cycle at her previous company. A CEO who doesn’t know how a customer buys may well have trouble producing revenue.
- I will support any plan that I agree is good for a company I have invested in, nor matter how modest or how bold. I will participate in any funding round that I think is profitable for my limited partners.
- I will remember that a board of directors has a fiduciary responsibility to all shareholders, and not just to the preferred ones.
Please offer your suggestions below. An associate will get back to you with our decision.
Related links
- The original “When I am an Evil Overlord” list
- A rival list
| Categories: Startups, Technology marketing | 5 Comments |
Marketing communication essentials
I’m often asked how early-stage IT vendors should prioritize their marketing communications, and specifically their investment in collateral. They don’t have nearly the budget or management bandwidth to do everything; so what should they do first?
Most commonly, my answer is a variant on:
- Of course you need basic website content. For starters, your website should at least feature:
- Answers of one paragraph or less to the top four strategic worksheet questions.
- A several-paragraph description of your product/technology.
- Management bios, contact information, and other obvious stuff.
- You also need a fairly technical company white paper. At some point in your sales cycle, there will be a technical evaluation. A white paper can answer a lot of early questions. What’s more, many of your early sales will be driven by people who think new technology is cool. Make it easy and appealing for them to learn about your cool new tech.
- Many people like videos. Whether it’s a link to a conference presentation or a white board talk or whatever, it’s good to have some kind of video. Some people, however — I’m one of them — don’t like videos, so don’t do anything essential in your videos you don’t also convey in writing.
- I further favor having a low-post-count blog. Notes on that include:
- Almost nobody has the time to do a lot of blogging.
- Even so, a blog is the most flexible and best way to communicate things that seem harder to say in other formats.
- In particular, this can be a “poor man’s” way to make up for what is surely a distressing lack of resources in pre-sales support personnel, other collateral, and so on.
- The goal isn’t to build a consistent readership. (You’re not going to invest enough effort for that.) The goal is to put up a few posts, then call influencers’ and prospects’ attention to them by email.
Beyond that, I’d say:
- Of course you want to generate leads. I don’t have strong opinions as to whether to make some of the items mentioned above require registration. But beware of the absurdly extreme position that says marketing serves solely to feed the sales pipeline.
- Supervise your PR very closely. Do much of it yourself. Indeed, strongly consider doing without a PR firm altogether.
Where, by way of contrast, do I favor being frugal? Read more
Strategy for IT vendors: a worksheet
Much of what I do for a living* boils down to critiquing IT vendors’ strategy — for sub-10-person startups, for the largest companies in the IT industry, and for companies at all stages in-between. In the hope of making strategy analysis simpler, I’ve compiled a list of questions that every enterprise IT vendor has to answer, if it is to understand its own business. They’re posted below. If you can’t answer these questions, you don’t really have a strategy.
*E.g., consulting via the Monash Advantage and predecessor services. Every question on the list below has arisen recently in the course of my work, most of them many times over.
If you run an IT vendor, help run one, or aspire to do so, then I encourage you to give these questions a whirl. If you don’t think the answers are all knowable — either now or for the foreseeable future — it’s still advisable to make working guesses. Flexibility is a virtue — but even so, having a tentative strategy is far better than having no strategy at all. Strategy is to execution as design is to coding. The best time to fix software bugs is before you start coding; the best time to fix a bad strategy is before you’ve committed yourself to executing it. Yes, both the design and the strategy will need to be changed over time; but a smart, internally-consistent strategy is a lot better than a contradictory one, than an obviously hopeless one, or than no strategy at all.
This is a really long post, so I’ll summarize it up here. Explanations of each point follow below. Read more
| Categories: Layered messaging models, Startups, Technology marketing | 56 Comments |