jump to navigation

How Telecom carriers are fighting the “dumb pipes” narrative with their own OTT services June 6, 2014

Posted by bernardlunn in Telco.
Tags: , , , , , ,
add a comment

Facebook’s $19 billion acquisition of WhatsApp put the spotlight on the competition that OTT (Over The Top) ventures pose to Telecom carriers. Consumers love WhatsApp pricing at $1 a year and have no love for Goliath Telecom carriers, so we tend to cheer for upstart David vs Telecom Goliath. However, some Telecom operators have been quietly creating their own OTT services and, since WhatsApp is now owned by Facebook and Skype is owned by Microsoft, the story is really now Goliath vs Goliath.

ReadWrite has already covered 5 alternative messaging services to WhatsApp from start-ups (Kik Telegram, Tango, Line and Wickr).

This post covers three more from Telecom operators – Orange with Libon, T-Mobile with Bobsled and Swisscom with io.

Each of these Telecom operators has its own unique story to tell and a shot at winning over a lot of consumers. They need to do this. Whatsapp with its 200M base has moved more messages in the last 12 months than all the operators in both US and China combined. Battle has been joined. The Telecom carriers cannot afford to be “dumb pipes” that are used by other companies that reap the value. This has been going on for a while; the Facebook WhatsApp deal just put the issue on the front page and top of the agenda for Telecoms carriers.

Two major European carriers have adopted the same fundamental strategy. France Telecom created the Orange brand to go after global markets and Deutsche Telecom created T- Mobile to do the same thing. Both have an OTT play.

The Orange OTT service is called Libon. It has a free ad-supported and a Premium paid service. That was conventional Freemium wisdom in SaaS, but may not work so well in consumer communications services. Ads interrupting us when we are communicating are unpopular and at $1 per year who would not choose the paid option? The WhatsApp $1 per year price with no ads or stickers or gimmicks may be the communications equivalent of the Google price or China price, too low to undercut.

What is clever about Libon is that in their recently released 3.0 version, you don’t need to download an app to use it. There is only one thing worse than high costs for roaming, texting and international calls and that is not being able to communicate with people outside your walled garden. The telephone system,for all it’s faults, connects anybody via their unique number. Multiple apps that only communicate with each other would be a seriously retrograde step. Facebook is betting that this won’t matter because all 7 billion folks on this planet will use WhatsApp. You cannot fault Mr. Zuckerberg for lack of ambition! With Libon you can message somebody using their phone number. They get an SMS message that links them automatically to Libon’s cloud based service, without any need to register. It’s disruptive because it avoids the friction created by having to download an app. The app game tends to winner takes all, and the Telecom carriers cannot win that.

Deutsche Telekom may be the incumbent Goliath in Germany, but in America T-Mobile is seen as David challenging the AT&T and Verizon Goliaths on their home turf. Back in 2009 I covered how T-Mobile was challenging the incumbents using their WiFi phone, so they clearly view disruptive technology as their friend rather than their enemy. T-Mobile is the carrier for people who don’t like carriers.

The current T-Mobile OTT service is called Bobsled. It is a free service and if works on most devices but favors Android for more advanced features such as group messaging. T- Mobile is an innovative company, but they don’t appear to have cracked the code with Bobsled, there is simply not enough differentiation.

The Swisscom io strategy looks different. Swisscom did NOT launch a separate brand to go after global markets. It is very clearly branded Swiss. Why would anybody use Swisscom outside of Switzerland? One reason is simply friends and family of people living in Switzerland, but with such a tiny population (about 8 million) that is hardly an exciting story. The two other reasons are a) voice calling and b) privacy.

As I do a lot of international business and have friends and family all over the world, I have been a huge Skype fan for a long time. My perception is that Skype call quality is now declining (no data on that but I am hearing this anecdotally from others). It is certainly true that the mobile user experience of Skype is a bit clunky compared to born-mobile services such as Swisscom io. This is the other part of this story. WhatsApp maybe the leader in texting but they are playing catchup in voice (it’s coming we are told).

The other Swisscom story is about privacy. Many people do not trust Facebook with privacy. The question is, how much do consumers really care about privacy? We may say that we care about privacy and make a fuss occasionally when Facebook changes the rules, but when faced with even the smallest inconveniences or cost to get privacy, most people choose easy and free and forget about privacy. A messaging service like Telegram should do well if people are worried about privacy and they did see an uptick when Facebook bought WhatsApp. Telegram has the most rigorous approach to privacy and as is a non-profit there is no amount of money that will change their minds. It is significant that Telegram comes from Germany where memories of both Fascism and Communism make people guard their privacy more zealously than people in America who have not suffered in the same way.

The reason that OTT messaging apps take off like a rocket is simple – they get access to our mobile contacts. That makes them easy to use. To give a service access to your contacts you have to either not care at all about privacy or you have to trust that service. Swisscom io also accesses your contact data. The privacy angle relates to a) trust that Swisscom has no business model linked to selling your data (as Facebook does) and b) the Swiss legal protection for privacy. America may be the last place where Swisscom io gets traction as fewer Amercans care about privacy; it is possible that it will get traction in Germany first.

None of these services has yet leveraged the real strategic advantage that Telco carriers have, their subscriber and billing relationship with consumers. We are entering a period of disillusionment with the app economy; the degree of control exerted by Apple for example and the % of revenue going to app stores and the winner takes all nature of these stores are aggravating a lot of people. This is a window of opportunity for Telcos.

If your enterprise software brings revenue it is worth a lot more than if it just cuts costs – the revenue model shift from Subscriptions to Transactions June 4, 2014

Posted by bernardlunn in Corporate Strategy, Enterprise Sales, SAAS, start-ups, Strategy Workshop.
Tags: , ,
add a comment

Historically, the objective of enterprise software was to make employees more efficient by automating tasks. The software industry moved from cutting G&A costs to making people at the front line more efficient through software such as CRM, Marketing Automation, Business Process Management and Collaboration.

In all cases, the business model was licensing. The licensing model moved from perpetual to periodic (monthly or annual). Seen in this context, SAAS is just an evolution of the old licensing model (plus bundling the hardware into the price). Consumerization of software is a natural response to the risk/reward shift of periodic pricing in SAAS. When vendors got all the money upfront, they could afford an expensive sales process. SAAS shifted the risk to the vendor who got investors to fund the cash flow gap. Investors were happy funding that cash flow gap because periodic SAAS revenue is more predictable and therefore more valuable. To reduce the cost of sale and therefore minimize dilution, entrepreneurs created consumerized services and Freemium.

That about brings us up to date.

So, what’s next?

What’s next is usually an evolution when it comes to enterprise. There may be a disruptive 10x technology shift driving the change, but big companies tend not to make big disruptive shifts. There are exceptions of course, the most famous being Intel’s shift into semiconductors under Andy Grove. That is such a compelling story (told in Only The Paranoid Survive) and so many enterprise executives reference it in glowing terms that we can easily believe that it is the norm. It is not the norm; it is “more honored in the breach then the observance”. Enterprises have built-in inertia, because senior managers are incentivized to optimize short-term profits.

The next iteration will continue the risk/reward shift that was started by SAAS. This will change the revenue model from licensing to % of transaction/revenue (in any shift we see hybrids of old and new so many ventures will mix subscriptions with transaction revenue). I am observing a few innovators who are combining digital consumer marketing techniques with selling a partnership model to enterprise. This is where the puck is going. These ventures get their revenue from a % of the transaction/revenue. This is obviously highly scalable. These ventures take on more risk and have to generate more value before they get paid, but if they can get there they have great scalability and moat.

The idea is simple. You create a consumer service and get enough users that you prove the proposition. Then you scale by partnering with enterprises. One way to look at this is as a technique for crossing the chasm. You can easily find early adopters online. (I say easily, it is of course not easy, but the techniques for doing so are well understood and documented). However, scaling beyond that is hard. Only a tiny % of ventures, blessed with great virality and addictiveness, cross the consumer chasm. As always exceptions (such as Facebook) prove the rule while blinding us to the rule with their brilliance. Many other ventures will cross the chasm by partnering with enterprises. One reason that enterprises are so big is that mainstream consumers trust these large enterprises.

If you prove the proposition directly with consumers you have created a lot of value. You can exit at that point. You can sell to a company that can cross the chasm to the mainstream consumer. Or you can partner with the enterprises that have access to those mainstream consumers in a shared revenue model and scale to become a large enterprise. You will typically be making one or more of these propositions:

  1. Get more revenue from their existing customers. You are accessing their customer base and they are using your service to get extra revenue from those customers.
  2. Bring them new customers. This is where the big $$$ prize lies. If these new customers represent the early adopters, the enterprise will be worried that eventually their mainstream customers will “see the light” and want to switch to your model. If they see that they will buy you for a big premium or partner on terms that are more advantageous to you; in this situation you have real clout.

You can create these partnerships on a white label or co-branding basis. Obviously you get higher margins if you get co-branding. There is a spectrum of co-branding. The more traction you have with consumers, the more clout you will have in those co-branding negotiations. Once again, Intel was the thought-leader, with their Intel inside campaign. These negotiations are fundamentally about “how big is my logo vs your logo?” Screen real estate is precious, so this matters. If you have 1 million consumers and the enterprise has 1 billion consumers you have reasonable clout if your 1 million represent early adopters and they can see their 1 billion moving to your model at some point. If you have only 1 thousand consumers, you will be limited to offering a white label service.

Back in the days of the Dot Com Boom/Bust era we saw the concept of B2B2C. Like many concepts from that era, it is easy to ridicule this one, because it did not happen then. That may simply be related to the % of people online. Now that more than 50% of the global population have mobile phones, the concept of tiny ventures getting millions of consumers directly is no longer a pipedream. However it is not wise to ignore the power of the incumbent enterprises. Rather one should get enough traction with consumers to have some clout when negotiating revenue sharing partnerships with those enterprises.

Who will create the Netscape of the Blockchain era? May 27, 2014

Posted by bernardlunn in capital markets, Fintech, Globalization, India.
Tags: , , , ,
add a comment

The Blockchain is exciting because The Perfect Copy Machine has its flaws.

Let me unpick that, starting with an anecdote.

In 1992, somebody showed me the Internet (thanks Charles Rawls). I ignored him. Silly me! The reason I ignored it was that I am not a developer and could not see how to use it.

The next time I saw the Internet was in 1996. I was in India and needed to use email in an Internet cafe. A developer showed me Hotmail.

The rest, as they say, is History.

In between those two events, a student at University of Illinois at Urbana–Champaign co-wrote the first browser for the Internet (thanks Marc Andreessen).

The Blockchain does not need a browser, but it needs something like a browser that makes it accessible to ordinary people. Today we only know the Blockchain because of Bitcoin. Now I will play the Long/Short game that FT journalists use in interviews:

Blockchain: Long

Bitcoin: Short (it’s primary value is to teach us that Fiat currency is like Winston Churchill’s description of democracy “lousy but better than any of the alternatives that have been tried”).

My inner editor is saying, get to the lede  (thanks Owen Thomas). What is wrong with The Perfect Copy Machine of the Internet? Simple: I cannot value something because it can be copied for free. That has been a dream opportunity for developers to make fortunes by offering ways to navigate the oceans of freely-created digital data. It has been a nightmare challenge for creative people, who had over time learned how to control of the analog copy machine, but then lost control of the digital copy machine.

However that is not where the Blockchain is needed. Creative people will finally find ways to make a living using The Perfect Copy Machine (as musicians are finding with iTunes and Spotify and writers with Createspace).

That is a First World problem and it is being solved.

I think the Blockchain will find use in the Rest of the World. Then it will come back to the West.

This is a “First the Rest then the West” story. To think about this, travel to Kenya and see where a digital currency/mobile wallet accounts for 30% of GDP. No, it is NOT Bitcoin. It is M-Pesa, derided by techies as utterly simplistic but massively useful to the billions emerging into a global middle class (which is the biggest story of the 21st century). One reason that M-Pesa works is because individuals can prove who they are using the most basic mobile phone. Yes, that is right your mobile number is your identity!

Like the other 7 billion people on the planet, I am unique. That is scientifically true, check my DNA. But my identity can be copied and my work can be copied. Again that’s a Western World problem and I can live with it. What if the title to my house or the access to my bank account could be copied? That is not fanciful; anything that has access to the Internet is accessible to criminals who can steal any of my assets that are recorded digitally (stealing is another way of saying copy it without my permission).

What if there was a way to protect the uniqueness of assets (creative or land or financial or whatever) that was not controlled by anybody other than you? That would be a powerful enabler for the billions emerging out of poverty who will then buy the products and services that our children and grandchildren in the West will be creating in order to make a living.

The Blockchain could give me the same control over all my assets as WordPress gives me for over my scribbling. 

That is why I am excited about the Blockchain. Other people share this excitement, but it strikes me that it is like the excitement for the Internet around 1992 before the browser made it accessible. Making the Blockchain accessible to the 7 billion people who will soon have mobile phones (it is over 5 billion today) will create a seismic shift.

If you are building something like that, I would love to hear about it.

Emergent Business Networks May 27, 2014

Posted by bernardlunn in Corporate Strategy.
add a comment

As my blog title is Emergent Business Networks, I need to explain what I mean by that. I have been groping around this story, like a blind man around an elephant. Prodding, pushing and pulling on the beast, it has seemed very different depending on the point of view:

  • New networks for buying and selling. What used to be done within a company needs to done across companies. We will see more platforms and networks that create trust, aggregate demand and enable transaction efficiency.
  • Leveling of the playing field between big and small companies. This is a golden age of start-ups. 50 years ago, small businesses accounted for 2/3 of economic activity. Today it is 1/3. That trend maybe reversing (I hope so).
  • The end of information arbitrage. This makes the end consumer more savvy and hard to sell to. The buyer is king. This forces innovation by suppliers who collaborate faster and more efficiently to deliver what is needed.
  • Reduction in transaction cost. Vertically integrated firms arose because it was usually more efficient to transact internally than externally. The Internet changes that calculation.
  • New markets for investing/raising capital. As more start-ups get created in more places, the capital markets need to adapt with new ways to raise and to get liquidity.
  • Globalization. This opens up new opportunities to source and sell but also reduces barriers to entry and ratchets up competitive intensity.

I first tried to define this in a post on Read Write Web in September 2007. A year later when the financial markets went into meltdown, it became apparent that the pace of change was accelerating. The meltdown looked like a symptom of a deeper wave of change.

This is what I am trying to chronicle.

Here are some other posts around this theme:

http://www.readwriteweb.com/archives/teaching_elephants_to_dance.php

http://www.readwriteweb.com/archives/enterprise_20_nature_of_the_firm.php

http://www.readwriteweb.com/archives/saas_traditional_enterprise_it_vendors.php

http://www.readwriteweb.com/enterprise/2009/07/who-is-pouring-enterprise-weedkiller.php

http://bernardlunn.wordpress.com/2010/01/30/punk-manufacturing-the-next-industrial-revolution/

http://bernardlunn.wordpress.com/2009/11/29/talking-to-john-hagel-about-emergent-business-networks/

 

My SAAS Writing on ReadWrite May 27, 2014

Posted by bernardlunn in Uncategorized.
add a comment

I wrote a lot about SAAS on ReadWrite, this is just me being a diligent digital archivist of my own work. I trust WordPress to always be here in some form and to always let me be in control, so no reason not to archive here. Some posts are like looking at bad fashion pics, “you had to be there at the time” in order not be too embarrassed now. Some are keepers IMHO.

My Posts On SAAS for RWW:

Yammer: The Story Behind Their SaaS Traction

How Much Venture Capital Should You Raise For Your SaaS Venture?

Study: SaaS Pricing Is Still Opaque And Freemium Is Rare

10/28/09: Email + CRM + LinkedIn + Twitter = Hustler’s Power Drill
10/27/09: Calendaring, Scheduling Meetings: Timebridge CEO Interview Reveals Strategic Importance of This Space

10/14/09: Google Should Stop Playing Around With Wave and Focus on Spreadsheet

07/18/09: Who Is Pouring Enterprise Weedkiller and Why?

07/17/09: InterWest Partners: Investing in Enterprise SaaS

06/26/09: Why Enterprises Don’t Like SaaS

05/ 5/09: Where Is My Dashboard Aggregator?

05/ 4/09: Why Push Gmail for Blackberry Is a Big Deal

03/23/09: Salesforce.com Integrates Twitter
12/16/08: Top 10 Enterprise Web Products of 2008

11/20/08: 10 Things to Know About Salesforce.com

11/14/08: When The Browser Doesn’t Cut it: Basecamp’s Lack of Mobility

11/ 3/08: Facebook Puts On Suit, Dances With Salesforce.com
11/ 3/08: Salesforce.com Says Hello World

10/29/08: The New Stack: SaaS, Cloud Computing, Core Technology
10/28/08: Who is Not Afraid of the SaaS Wolf?

10/ 8/08: Why Some Traditional Enterprise IT Vendors Are Scared of SaaS

09/23/08: Zoho Part 2: The Cookbook

09/18/08: Zoho: The Little Engine That Could (Take on Both Microsoft and Google)

08/21/08: 11 Things Startups Should Know About Enterprise 2.0
08/20/08: Enterprise 2.0: The Nature of the Firm

08/13/08: Google Should Buy eXpresso
08/ 1/08: Breaking Free of Outlook

06/10/08: Where Are We in The Enterprise 2.0 Wave?

01/22/08: eXpresso Takes The Enterprise Route to Web Office

12/ 3/07: 2008 Will Be The Year of Business Networking
12/ 2/07: The Business of Teaching Elephants to Dance

09/ 9/08: What do CIOs Think About Social Media?
06/12/08: LinkedIn Could Replace Outlook and SalesForce

02/22/08: Why Google Apps is a Serious Threat to Microsoft Office

08/ 8/07: Who Will Be Your Web Office Provider?

 

Four Gates That Multi-$billion Software Ventures Pass Through. May 11, 2014

Posted by bernardlunn in Corporate Strategy.
add a comment

Think of these Four Gates like a funnel, with lots at the top and very few at the bottom (just like a sale funnel):

  • Gate #1: Conceptual Clarity.

  • Gate #2: Prove the Concept.

  • Gate #3: Scale within Niche.

  • Gate #4: Expand and Dominate.

It takes totally different skills to go through each of these four gates. Few founders have all the four different skills needed, which is why so many ventures fail as they attempt to pass through these gates. Even harder is the fact that the skills, techniques and attitudes that make you successful going through one gate are exactly the opposite of the skills, techniques and attitudes that make you successful going through the next gate. Each gate requires a wrenching pivot.

Gate #1: Conceptual Clarity.

This is the “fit to the future” phase. This is where you have a vision of “a world where….”. From this you have a mission for the venture along the lines of “in this future world, we will…”. Finally, you have a strategy, as in “we will do this by….”

There has been a lot of fruitless debate about whether concept or execution is more important. This debate is silly, because you must have both. A bad concept that is brilliantly executed will be nothing more than a tough uphill slog with relatively little reward at the top if you get there. On the other hand, a brilliant concept with weak execution is nothing more than “woulda, coulda, shoulda”.

In consumer web ventures, the investment in this phase is coding an early version of the service; these ventures are usually founded by developers who can invest their moonlit coding time, knowing that the best way to articulate the concept is to show something. In enterprise software, the investment in this phase is talking to lots and lots of potential customers to really understand their pain points both now and the likely pain points in the future world that you envisage. The founder is often a sales executive in an established company who keeps hearing the same request from customers that his/her current employer has no interest in fulfilling. They start with a crystal clear understanding of the pain, but only when they team up with a great developer do they create a solution to that pain. The established vendors are nor being totally blind, nor are they only inhibited by the innovator’s dilemma from cannibalising their core business. Usually a technological breakthrough is needed as well. Thanks to Moore’s Law the world is awash in technological breakthroughs but most of them are solutions looking for a problem. What differentiates the great enterprise software ventures is a crystal clear understanding of the problem, because they have heard the pain described by so many customers and prospects.

Conceptual clarity must address these 3 dimensions:

  1. Huge market. A niche might make for a great venture that can be bootstrapped or flipped, but  these are criteria for ventures that can “go the distance” through the four gates into multi-$ billion in value.

  2. Massive disruption hitting that market. This is the kind of disruption that creates an existential threat to the major players in the market – think of Skype vs telephone companies or Google vs traditional advertising. If it is not disruption of that scale, the existing vendors will add the features they need to stay competitive (“adding that feature” may mean acquiring your venture, so this is fine for ventures that will be acquired before they go through all these gates).

  3. You have a 10x proposition. You have to be 10x better or faster or cheaper than the incumbents. That seems like a high bar, but it needs to be this big to overcome the start-up risk that you are asking customers to take. Tactically you may start by offering say 3X knowing that as the technology rolls onwards you have much more in reserve, but you must see where that 10x is coming from.

Here are the two things you do NOT need to have at this stage:

  • A strategy that seems viable to most people. Most great ventures look totally ridiculous to most sensible people in their founding days. You do need a couple of smart people to believe in the strategy, whether they be co-founders or investors. But get comfortable with the fact that most people think you are crazy (unless you actually are crazy, there will be times when you doubt yourself and when you think most people are right).
  • Any proof that any of the three things on that checklist are true. Anybody who asks for proof at this stage does not know how this works and does not deserve to be your partner.

Many great entrepreneurs have conceptual clarity but are weak at articulating it, or too busy executing on the next phase. At this stage nobody cares about your concept. Only after you have passed the next gate does anybody care.

Gate #2: Prove the Concept.

This is the “fit to today’s market” phase. This is also what VC call “traction”.

Enterprise software ventures focus their pitch on the immediate needs of customers who are ready to make a commitment now, leaving out all the futuristic, big picture stuff which would only scare potential customers. Consumer ventures seed the market and prove the value proposition in a tiny little niche; at launch all the market will see and all the entrepreneur is thinking about is that tiny niche.

However, somewhere in the back of their mind, the great entrepreneurs carry a conceptual vision that is a lot bigger than the immediate solution that they offer to get through Gate # 2.

Many entrepreneurs stumble at this point because they are not consciously making the transition from thinking about the future to executing on the present. The future that you envisage may or may not come to pass. If it does, you may strike gold. However that won’t help you get traction with customers today. All they are concerned about is problems they have today. Your customers maybe happy to “shoot the breeze” about the future, but they will only spend their money on problems that they have right now.

That almost certainly means you get traction in a niche that is tiny compared to the big vision in your concept. This process of digging deep into a niche and focussing 100% on the present day needs is a vital step in turning dreams into reality. It is also 100% opposite to what you do to get through Gate #1.

In enterprise software, getting through Gate #2 means getting the first three paying reference customers. This is a tough job because most customers prefer to wait until you have these three references before committing; one way to drive enterprise software founders crazy is to ask them about this chicken and egg problem. These need to be real enterprise-wide deployments with customers paying 6 figures. A few logos of customers deploying the software in one small area and paying a few thousand dollars won’t make the grade. Lots of enterprise software ventures reach this stage and become cash flow positive without raising any VC, but then stumble at the next Gate.

In consumer ventures, getting through Gate #2 means month to month growth rates in attention. I am using the word attention because the specific metrics such as page views, uniques, downloads, active users tend to change a lot as people “game” the old metrics.

Gate #3: Scale within niche.

This is the “make it work as a business” phase.

For consumer web ventures, the big obstacle at this Gate is proving a scalable and profitable revenue model. There are now trade offs and conflicts to be managed between the needs of free users and the different needs of paying customers (i.e advertisers) and that is often hard for the entrepreneur who won in the last Gate through their self-proclaimed single focus on user experience.

Some enterprise software vendors that made it past Gate # 2 get acquired for their R&D value with a bit of credit for the quality of your customer relationships. If you raised VC, the acquisition value will be a disappointment to investors. As VCs usually get liquidation preference, this will be an even bigger disappointment to founders and management. If you bootstrapped past Gate # 2, the value you will get from the trade sale will still be life-changing as you don’t have to share the spoils with VC. However the big money, the fame and fortune, is reserved for those who make it to Gate # 3. One way to look at this is, don’t raise VC unless you are determined to make it past Gate # 3.

Consumer ventures can exit for great multiples at Gate # 2 as deals like Instagram and WhatsApp show. However these deals are few and far between, it only ends that way if you get massive growth in attention at a time when a big acquirer is facing disruption (think Facebook facing disruption from mobile and thus paying a big premium for both Instagram and WhatsApp).

Enterprise software ventures that make it through this gate need to make the tough transition from founder-led sales to a scalable, professional sales team. This is harder than it sounds for reasons that I describe in this post.

Businesses that make it through this phase are “in the catbird seat”. You have a profitable, scalable model that you can grow with internal resources as long as you like. You will be fending off acquisition offers all the time, both from financial buyers (private equity funds) as well as strategic buyers (the enterprise software Bigcos). You get to choose when and who you sell to. Or you may choose to go all the way to Gate # 4.

Gate #4: Expand and Dominate.

This is the post IPO sustainable public company phase. This is where ventures grow into their original conceptual potential, moving beyond the niche orientation that you need in order to get through Gates 2 and 3.

For consumer technology ventures, consider the difference between Apple and Google and many of the batch of 2011 IPOs. Apple and Google look good on all financial metrics, they built a superb monetization engine, not just superb products.

In the enterprise software space, only one company has broken through into the big league during the last decade and that is SalesForce.com. There have been plenty of SaaS IPOs, but only a few of them have escaped the “small cap hell” by getting a valuation over $2 billion. It is possible that Splunk and Workday will grow into their premium valuations and join the big league.

The “expand and dominate” Gate #4 is about getting back to that original founding conceptual clarity, of realising the big picture potential. All the long years of the earlier Gates are simply laying the groundwork to make this possible. This is another wrenching pivot. The skills, techniques and attitudes that got you through Gate # 4 are all about focussing on a niche, constraining ambitions for the future while concentrating on the immediate opportunities. If you have done a good job in the transition through Gate # 3, you will be able to leave the quarter by quarter growth to a highly competent team. That frees the founder CEO to focus on expanding into adjacent markets and dominating their market. Dominate may sound harsh to some ears but it is what public market investors expect, that is what the high valuations given to fast growth tech companies are based on.

Entrepreneurs that make it through Gate # 2 get the opportunity to exit and that can be a good result if they have bootstrapped to that point. Entrepreneurs that make it through Gate # 3 get the opportunity to exit and that is a good result for founders, management (this is when those stock options become life-changing) as well as any investors who are fortunate enough to be along for the ride.

The Silicon Valley VC orthodoxy for a long time was that no founder has the right profile to make it through all the 4 Gates. Therefore VCs have usually tried to either sell the business at each of these Gates or find professional management to replace the founder CEO. (I refer to the Founder CEO as the key, even though there are often co-founders it is one of them who emerges as the leader). That conventional wisdom is being seriously questioned today as we witness the failure of “professional managers” from big companies to drive the growth of start-ups. When you look at the really great success stories, you tend to see one highly charged entrepreneur who takes it all the way through these 4 Gates – think of Gates, Ellison, Page, Zuckerberg, Bezos, Jobs, Benioff. Their ability to pivot and personally change at each of these Gates is the story of their success. It would be crazy to see these entrepreneurs in their founding days and envisage them as the CEO of a multi-billion $ publicly traded company, yet some of them actually do that. The current VC fund structure, with its need for exits to return money to the Limited Partners, is not conducive to backing entrepreneurs all the way through these four Gates. So we are likely to see some innovation in this area as the rewards for backing entrepreneurs through all four gates is very big.

Piketty is wrong because he misses the capital destruction caused by capital efficient digital disruption May 9, 2014

Posted by bernardlunn in Globalization.
Tags: , ,
add a comment

Before Piketty’s famous book, Capital in the 21st Century, came out, his ideas and research had already influenced Occupy Wall Street. In 2011, I found myself sympathetic to the 99% and their story, but around that time I went to a meeting where I learnt why Piketty is wrong; his book is brilliant research and insight – looking in the rear view mirror.

The meeting that changed my perspective was at a Wealth Management firm whose mission was to preserve wealth for future generations. Looked at from the perspective of the barricades in Zucotti Park, these were the folks ensuring that the 1% won and that we drifted into Oligarchy.

The Wealth Management firm had put up a list of their highest conviction stocks. Right at the top of the charts was a mega big Global 100 type company that had just that day had some horrible story that had decimated their share price. Oops. When questioned they responded:

“Stuff like that happens, it’s impossible to predict that kind of thing where rogue employees run amok”.

Yes that is true and the rationale for putting that stock top of the charts based on financial metrics was impeccable. Yes, the problem that crashed the stock that day was a Black Swan event and they are by definition impossible to predict. The rogues were fired. Story over? No. Nobody could predict who would go rogue and when and in what form, but it was reasonably predictable that somebody would go rogue fairly soon in some way. It was an inevitable event even if it was not an imminent event where you could predict the timing. The reason that the employees went rogue was that their business was slap bang in the path of digital disruption. It was a great big firm, run by an awesome entrepreneur and yet it was roadkill in front of the digitization truck. The boss refused to accept this, they were the #1 winner dammit! So he piled on the pressure to hit the numbers any way they could. That leads to employees cutting corners and if they get caught it’s labelled as rogue behavior. Anybody who has toiled in the management ranks of big corporations will recognise this.

If you distrust anecdotal evidence, consider the trends about how fast companies are entering and exiting indices of bigness such as the S&P500 or the Fortune 500. Or look at the time taken to get to $100m in revenues for digitized consumer ventures. Look at how many now get t0 over $100m, in some cases nudging $1 billion, within 5 years. That is disruption at work. The pace of change is accelerating now that 50% of the 7 billion people on the planet have mobile phones. It’s no longer just book shops that worry about being Amazoned, it is now also WalMart heirs who have to worry about that as well. I am writing this on the day the Alibaba IPO prospectus loaded, so now Amazon has to worry about being Alibabaed.

What’s a poor trust fund kid supposed to do?

What does this have to do with Piketty? The simple concept is about what happens when R exceeds G. R is Return on Capital. G is GDP growth. His thesis is that when R exceeds G we drift to Oligarchy. That makes sense. If Capital gets 6% Return when GDP is 3%, then Capital gets a bigger share of a smaller pie, which leads to increasing inequality.

But what if R is only 3%? What if R cannot even keep up with inflation? What if the trust fund gets wiped out over time by inflation, fees from all those fund managers and tax? Plus the fact that the wealth managers will do the prudent thing that they are paid to which is to invest in those safe solid companies with wonderful financial metrics – some of which will be slap bang in the middle of the road waiting to be run over by the digitization truck. Those $ billions in revenue created by digital start ups do come from somewhere, it is coming from the big companies that are maladapted to digitization that the trust fund kid is invested in. This leads to “shirtsleeves to shirtsleeves in three generations”. That is as it should be. People should work for a living. It gives them self respect and a purpose in life. “Shirtsleeves to shirtsleeves in three generations” means we have something close to an equal opportunity society and we avoid the drift to oligarchy. I would not wish for my children to live isolated lives in compounds protected from poor people because they are rich enough not to have to work. I would wish for them to do work that is fulfilling to them, with peers that they like and respect, in a society where most people are doing the same.

The obvious answer for the trust fund kid is to put money into the start-ups that drive the digitization truck, to get the massive returns that go to backing the winners. There are three problems with that:

  1. Venture Capital is a totally Darwinian game, the lion’s share of the returns go to a tiny number of Funds. These top tier VC Funds don’t need money from the trust fund kid, the partners invest their own money and tap a few investors who put money into their first fund and so have the right to put money into other funds.
  2. If you invest in a first time fund, you take a massive risk. If you invest in second tier funds you may, if you are lucky, make the same returns as an S&P Index Fund and quite likely you will lose money. If you invest directly in startups as an Angel you may get very lucky (the same is true in Vegas) and you may get non-financial benefits, but your chances of accelerating the destruction of your wealth is statistically far more likely.
  3. Digital startups are naturally capital efficient. That is why they are so disruptive. So they don’t need a lot of cash from the trust fund kid. That makes it really, really hard to make high R on large amounts of capital; it is far easier to get high R on small amounts of capital. If you are investing large sums you tend towards investing in big old companies that are roadkill in front of the digitization truck. Those big funds, whose managers make money on the amount of funds under management are the funds that our trust fund kid gets invited to invest in. Building a digital business is not like starting a factory or a diamond mine or some other 20th Century type enterprise. With smarts and hustle you can now reach billions of consumers directly. The cost of building the technology to do this is pathetically small. Its all about the smarts and the hustle (plus a sprinkling of luck). Founders of tech start-ups increasingly view capital as the least interesting ingredient in the cake they are baking. If asked could they have $50m or a co-founder like Steve Jobs, most would choose the latter because you cannot buy that kind of talent. That world – where talent is more important than capital – is not the world that Piketty is describing

It is not a coincidence that Piketty is French and his biggest fans are in America. When an economy is in slow growth mode, the people with the money use political power to grab an increasing share of pie. It is a diminishing pie that is based on the old 20th century businesses, but the pie is still very big.  The License Raj in India up to 1990 was the archetypal example of this.

The reason that this power grab cannot last long in the 21st century is that digital bits don’t stop at borders. The digitization tsunami amplifies the globalization tsunami and vice versa. India could hide behind the License Raj import substitution walls for decades and by doing this the people who were close to the political power became vastly wealthy while the rest of the people were relegated to poverty. This was a classic example that illustrates Piketty’s thesis – R was a lot more than G if you knew who to bribe in the License Raj.

However as governments learnt in the Arab Spring, you cannot turn off the Internet for long. If you turn it off or regulate to death the disruptive startups that use it, you kill the chance of the kind of wealth creation that you see in Silicon Valley and that other regions of the world want to emulate.

Piketty’s France is known for being run by a political elite. It is a slow growth economy where enough money is redistributed to keep voters happy. France today is similar to India in the License Raj days; it is only nominally a free enterprise society.

How can you see America in that context? America has nothing in common with socialist France and License Raj India, surely? Well in GDP terms, America is now a slow growth economy. And one can see a power grab by people with control of 20th century businesses like the Koch Brothers. That is why Piketty’s book is selling and being talked about so much and why Zucotti Park was crowded.

Yet America is also the home of innovation, the place where most of the digitization trucks get built. This is the real battle for the future of America. Forget about Democrats vs Republicans, that’s just a battle for who controls the spigots of the 20th century economy. The real battle is between 20th century America and 21st century America.

Ground zero in this battle for 21st century America is Stanford University. In 1999, two Stanford kids started Google. Ever since then, VC Funds (some of which are trying to make sure that the trust fund kid’s R is more than G) have camped outside Stamford dorm rooms waving check books. That has led to some embarrassing wealth destruction in ventures such as Color and Clinkle. Investing early in the great digitization winners is not a simple “wash and repeat” formula.

Who can blame parents for wanting to get their kids into Stamford? This is a return on education which is increasingly a return on capital since tax-payer funded education is in decline in America and many other countries. So once you get into Stamford you are made for life? Well no, not if you think you are made for life. That won’t make you work hard and will make you think like an insider when the disruption always comes from a well educated outsiders.

For this insight I am in debt to another book that covers similar territory to Piketty but in a very different way. This is Christina Freeland’s Plutocrats. She looks at where the first generation Plutocrats come from and that is very consistent all over the world. They come from smart, driven people who got a great education outside the elite centers of power. Yes there is an increasing return to education, but the results are better if that education is in a place where kids feel like outsiders who can only make it if they disrupt the existing order.

The poster boy for this is Marc Andreessen. Educated at Champaign-Illinois, in the midwest of America, he went on to found Netscape (and thus help start the digitization wave) and then started one of those top tier VC Funds (Andreessen Horowitz, where he coined the phrase that “software is eating the world”). He is now an insider in Silicon Valley, helping to build those digitization trucks that wipe out the inherited wealth invested in the 20th century economy. So it is significant that he shared his worry about the sense of entitlement at Stamford in a series of tweets (I am paraphrasing, check him out on Twitter, he is usually thought-provoking).

His tweets, inspired me to write this on a 12 hour flight from “old Europe” to “new California” without the distraction of Internet access.

Disclosure: I have NOT read Capital in the 21st Century. I am quite willing to admit that, I am no longer at College so I don’t need to prove to my Professor that I read the book. I got the “fundas”  by watching this Moyers interview with Krugman. I recommended it to all who have an interest in the subject but are too busy to read a 700 page book. I did read Plutocrats and highly recommend it (an entertaining read while also being very insightful).

Thought leadership selling for enterprise software creates a qualitative feedback loop that can get marketing & product management on the same page. May 5, 2014

Posted by bernardlunn in Blogging, Enterprise Sales, Enterprise Web 2.0, SAAS, start-ups.
Tags: , ,
add a comment

There are two core jobs in enterprise software; you either code it or you sell it.  All the other jobs, vital as they are, facilitate those two core tasks. In the great companies there is a culture that synthesizes the best of the coding world and the best of the sales world. In those companies both techies and hustlers respect each other and know that they depend on each other like mountain climbers roped together.

Sadly that kind of mutual respect culture is all too rare. For the first generation of enterprise software, the sales guys ruled and they often abused that privilege. It is therefore no surprise that in the next generation, characterized by SaaS and consumerization, many technical founders sought to write the sales guys out of the script.

In the consumer world, there is no selling (door to door salesmen are only in history books), there is marketing and that is tightly integrated with the product (lots of AB testing to find out what gets consumers to hit the buy button).

Marketing has become a science. The creative folks and their hustlers that we watch with such amusement on MadMen have been banished to the history books along with door to door salesmen. We now have a perfect quantitative feedback loop of Analytics feeding into Marketing Automation feeding back into product feeding back into Analytics….

That would be OK if selling to the enterprise one user at a time – the consumerization story – was all that was needed. It is a venture lifestage issue. You get early traction, the foot in the door, one user at a time using Freemium. To grow your share of budget you need at some stage to engage with the people who manage these enterprises (or sell to an acquirer who can do this but that is a very limited pool of acquirers).

So what you need is a qualitative feedback loop integrated with this quantitative feedback loop. You need to hear what people are thinking and feeling about your product, what would entice them to buy more. When you find this out you need to quickly integrate this into your product and your marketing; this has to be an agile feedback loop. For this you need humans who can understand the nuances of the enterprise you are selling to, the geography and the trend line dynamics in the niche you are focused on. They also need to be credible inside your company so that the voice of the customer is heard.

Thought leadership selling is a forgotten art. I think of it simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. This Forbes article outlines it well, the key quote is here:

“Take Salesforce.com as an example. This was an organization that took cloud-based software-as-a-service for customer relationships into the mainstream marketplace. There are several elements to its success, namely a strong product, but it also has an army of thought leaders who specialize in app development, sales lead development, sales management, etc. that helps customers do their jobs better. Salesforce’s model, driven by product success and thought leaders, has led to a familiarity with “the cloud” and a willingness to accept it in a corporate environment. These achievements not only helped the cloud computing industry with adoption rates, but helped make Salesforce a leader in the cloud-based CRM space.”

I think of this simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. It is no longer OK for customers to read interesting blogs on your site and then meet sales people who cannot continue the conversation because they follow the old fashioned scripted model of selling. This is particularly true when crossing the chasm through the bowling alley of niche markets. Of course in the early days, the founders do this and in very late days you can hire teams of sales people who follow a more scripted approach, but you need thought leadership selling to make the tough transition from the early days of founder led selling to mature enterprise sales processes.

Next post in series 

Enterprise Sales FAQ May 5, 2014

Posted by bernardlunn in Enterprise Sales.
2 comments

This is the final # 12 in a serialized book called Enterprise Sales for the Digital Age, delivered here as 12 blog posts. You can get value from each in isolation, but if you really need to understand enterprise sales, reading the whole series is worthwhile.  You can buy an improved version, neatly printed and bound, for $6 from Amazon.  

Enterprise Sales FAQ

Q: When should I go to my contact’s boss without his/her permission?
Background. You have spent a long time building a relationship with somebody at a prospect who always says the right thing, but the months roll by and nothing substantive happens. You know the boss’s name but you want your contact to make the introduction, to “take you up the chain”. Again, your contact makes lots of placatory noises, but it is not happening.


A#1: don’t get in this mess in the first place, call high from the start. The worst that can happen is that you learn quickly that there is no budget or that an incumbent has a lock-in. This is far better than taking a long time to learn the same thing.

A#2: if you are in that mess, the old proverb “if you are in a hole, stop digging” applies. Do it and do it now. Don’t warn your contact, he/she will only make it harder. Maybe use somebody in your management team or Board to make the call to the senior guy, but before you use your precious relationship capital, think about whether it is worth it for this account. There are only two outcomes a) you were wasting your time, the deal is not qualified b) they are seriously interested and you have a bridge to repair with your contact (if your contact is political player, he/she will be careful and respectful now that you have a relationship with the boss).

Q: When should I hire a VP Sales vs hiring an individual sales contributer?

 

A. This is a tough one. A VP Sales should have at least 5 sales people to manage, otherwise it is a wasted cost. In a well-run sales operation, the span of control should be 10 or more. It works for 5 in a startup where the VP Sales takes a hands-on lead from the front role.

 

This is where raising Venture Capital can help get over this hump. You then have the cash to hire a VP Sales and 5 sales people. You – and the VC obviously – have to be very confident that you have product fit to market and that the only thing needed to scale is a sales team.

 

Without that luxury, hire experienced individual sales contributers who do not need a lot of supervision. Sometimes one of them is willing to mentor/coach a more junior sales person and may want to become the VP Sales when that position opens up. However one mistake to avoid is being unclear on roles. Don’t hire somebody who really wants to be VP Sales and give them VP Sales type tasks when what you really need is direct sales. That person will tend to focus on the management tasks of the job they aspire to and not do enough to directly win customers.

Q. When do you force something to a Yes or No binary decision?

 

A. Earlier than you intuitively feel comfortable with. The motto is; “yes is ideal, no is manageable, maybe is the one thing that is impossible to manage”. Whether it is investors or customers, a “maybe” closes off other options. This is where the old-fashioned sales motto “always be closing” comes from. Whether it is a time for a meeting or a signature on a contract, you are always looking for certainty. If it is no, move on. That is what a funnel is all about. If you have lots of “maybes” you might not fill the top of the funnel properly because you hope that your maybes are for real. This is also where a conditional close works. If the maybe is based on a real issue you ask “if we could fix issue x, would you be willing to go ahead?” 

Q. What is the right CAC target?

 

A. You define this as a % of the License Fee. In a SaaS venture you do it as a % of Life Time Value (LTV). This is usually shown as the CAC/LTV %.

 

A. It depends on the stage of the venture/product in the market. In a mature business, the CAC % should be around 25% ie all your sales and marketing costs should not exceed 25%. In a simple model, you allocate 25% to Sales & Marketing, 25% to R&D and 10% to G&A, leaving a 40% operating margin. That is at maturity. Very early on, CAC is over 100%, that is why you raise capital. How soon you move from over 100% to 25% is a future growth vs current profitability debate that you must have with investors; in a massive market it may pay to keep investing and delay profitability (but you obvously have to be properly capitalized to do that).

 

Bootstrapped ventures have to keep CAC below 100%. Assuming an even split between R&D and S&M, around 40% each and 10% for G&A leaves you with 10% operating margin. That its hard to achieve and that is why in big, high growth markets, VC (or early exit) becomes essential.


Q. Should we put up a “give us your contact details” gate before delivering valuable content such as White Papers?

A. For startups, the answer is almost always no. Users will click away because you are not yet a trusted brand. You have to earn their attention and trust. Your sales people will have to use the proactive lead gen methodology outlined in an earlier post in this series. 

Q. When should I fire a non-performing sales person?

A. In general, earlier than most entrepreneurs do. Get a round table of entrepreneurs together and ask them to relate mistakes they wished they had avoided and “delaying firing when I knew in my gut it was the right thing to do” comes up a lot. It is painful. Most people want to “give them another chance”. This is a natural human instinct, but delaying is bad for everybody in the rest of the company and it might be bad for the individual as well. Everybody can be successful somewhere. Maybe they are not “cut out for sales” or maybe they can be successful in sales in another more mature company (where, for example, there is more structure, support and training).

 

Have a Performance Improvement Plan. See what can be done to get the person back on track. But track this rigorously and keep it short.

 

You cannot build an A Team if many slots are filled with B and C team players.

 

If most or all of the sales team are underperforming – look in the mirror. Maybe it is the product, maybe it is you, maybe your targets are wrong? But if most sales guys are hitting target, the decision is simple.

 

Q. Should I use domain or technical experts as sales people?

 

A. This is another tough one. The ideal candidate sits at the venn intersection of a) great sales skills b) great domain and tech knowledge. Good luck, those candidates are rarer than hen’s teeth. Occasionally you get somebody who moves out of a tech or domain role into sales and succeeds, but this is surprisingly rare. In the very early days of a venture, tech and domain skills matter more than sales skills; this is during the 3 projects to a product phase and the person is usually a co-founder. However, when it comes time to scale, it is much better to have a pair of individuals who work closely together – sales and sales support. The tech and domain skills reside in the sales support guy who manages the middle game of proving fit to enterprise need through proposal, demo, POC etc. Great enterprise software ventures are often defined by a superb working relationship of mutual respect between sales and sales support.

 

Q. Should I use Freemium or Free Trial?

 

A. The classic enterprise method was a Free Trial that you have to get via a sales person. The positive is that it puts the sales person in control. The negative is that it loses all those innovators in your customer’s (which may include the “innovator with clout” who holds the key to the enterprise-wide 8 figure annual relationship) who just wants some quiet time to experiment (to self educate in your product) before speaking to anybody. Which you choose fundamentally depends on how confident you are about the product. If you think it is the best, Freemium is the way to let it shine. If you think that there are “better, cheaper, faster” alternatives out there but you have the big enterprise brand and the market clout today, use Free Trials to control the process until your R&D/Product team can catch up with the innovators.

 

Q. Should I use a Proof Of Concept (POC) or go straight to Paid Trial ?

 

A. The POC has now become too widely accepted; “the POC is the new demo”. This means that too many vendors either a) spend far to much on POCs, killing their CAC metrics or b) skimp on the POCs so that they are not effective. Both are start-up killers. Weak sales people offer POCs far too early. It is free to the customer and looks good in the CRM metrics (“three prospects at POC stage”). Start-ups cannot win with skimpy POCs, you need the time to build something that proves to stakeholders that you have the secret sauce that their recipe demands. A Paid Pilot can also be called the first sale. It is a real sale with real benefits to the customer to real revenue to the vendor. By calling it a Paid Pilot, you signal a) your mission to be an enterprise-wide approved vendor (the Paid Pilot is a step in that direction) and b) you create a real dialogue/relationship with the stakeholder who is paying for the Paid Pilot by focusing on their ROI.

 

If you have any questions not covered here, please let me know in comments and I will do my best to answer them

Enterprise start-ups need thought-leadership selling, a mix of sales, marketing, technology and strategy May 4, 2014

Posted by bernardlunn in Corporate Strategy, Enterprise Sales.
Tags: , , ,
1 comment so far

 

This is post # 11 in a serialized book called Enterprise Sales for the Digital Age. You can get value from each post in isolation, but if you really need to understand enterprise sales, it is worth reading the whole series.  You can buy an improved version, neatly printed and bound, for $6 from Amazon.  

There are two core jobs in enterprise software; you either code it or you sell it. All the other jobs, vital as they are, facilitate those two core tasks. In the great companies there is a culture that synthesizes the best of the coding world and the best of the sales world. In those great companies, both techies and hustlers respect each other and know that they depend on each other like mountain climbers roped together.

Sadly that kind of mutual respect culture is all too rare. For the first generation of enterprise software, the sales guys ruled and they often abused that privilege. It is therefore no surprise that in the next generation, characterized by SaaS and consumerization, many technical founders sought to write the sales guys out of the script. This is the world of Dropbox, Evernote and Yammer, using one click at a time to break into red ocean markets.

Marketing has become a science that is tightly integrated with the product (e.g lots of AB testing to find out what gets consumers to hit the buy button). Consumer marketing techniques have been translated to B2B. We now have a perfect quantitative feedback loop of Analytics feeding into Marketing Automation feeding back into product feeding back into Analytics….

This consumerized approach to the enterprise works well in red ocean markets, but even in those it is a venture life-stage issue. You get early traction, the foot in the door, one user at a time using Freemium. To grow your share of budget you need at some stage to engage with the people who manage these enterprises (or sell to an acquirer who can do this, but that is a very limited pool of acquirers). When you reach this stage, you can take an arrogant approach as in “your users already want this, your job is just to enable more of them to get it” or a more solution oriented approach as in “what big problems could we solve for you if we made this an enterprise-wide solution?”. The latter is more likely to work and it requires some real solution selling.

Even before you reach the stage of CIO conversations, the bots alone are not enough. Humans are needed to create a qualitative feedback loop integrated with this quantitative feedback loop. You need to hear what people are thinking and feeling about your product, to understand what would entice them to buy more. When you find this out, you need to quickly integrate this into your product and into your marketing; this has to be an agile feedback loop. For this you need humans who can understand the nuances of the enterprise you are selling to, the geography and the trend line dynamics in the market that you are focused on. They also need to be credible inside your company so that the voice of the customer is heard. In other words you need thought-leadership selling. Or you could have a marketing person do this, or product management person or a developer or the CEO or whoever can do this job well. This is a task that crosses what are today’s job description boundaries; to do this well, you need a mix of sales, marketing, technical knowledge  and  a head for strategy. The end game is to close a deal, deliver great software, get a happy reference customer, get cash; that is a classic sales job description. If your Product Manager can do this, great. It does not matter what the job description is, the reality is that it will involve both selling and thought-leadership. 

So, what is the difference between thought-leadership selling and solution selling? One answer is “none”. The aim of thought-leadership selling is to solve a big problem for a big client and get paid big bucks, which is a definition of solution selling. The other answer is “everything”  because “the Internet changes everything”. The twin tsunamis of change – digitization and globalization – create radical, disruptive threats and opportunities for enterprises. Solutions require radical, strategic thinking. It is no longer enough to shave a small % off G&A costs, you have to show how you can enter  new markets, fix existential threats  and transform the business. One way to look at the difference is simply that “thought-leadership selling is solution selling on steroids”.

Thought leadership selling is also key to creating a market-dominating company by helping to create a message that really resonatesThis Forbes article describes how Salesforce.com did it:

“Take Salesforce.com as an example. This was an organization that took cloud-based software-as-a-service for customer relationships into the mainstream marketplace. There are several elements to its success, namely a strong product, but it also has an army of thought leaders who specialize in app development, sales lead development, sales management, etc. that helps customers do their jobs better. Salesforce’s model, driven by product success and thought leaders, has led to a familiarity with “the cloud” and a willingness to accept it in a corporate environment. These achievements not only helped the cloud computing industry with adoption rates, but helped make Salesforce a leader in the cloud-based CRM space.”

Marc Benioff is a salesman. He is also a technologist, thinker, marketer and strategist, but at heart he is a thought-leadership salesman. You can think of thought-leadership selling simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. It is no longer OK for customers to read interesting blogs on your site and then meet sales people who cannot continue the conversation because they follow the old fashioned scripted model of selling. This is particularly true when crossing the chasm through the bowling alley of niche markets. Of course in the early days, the founders do this and in very late days you can hire teams of sales people who follow a more scripted approach, but you need thought leadership selling to make the tough transition from the early days of founder led selling to mature enterprise sales processes.

Enterprise software market leadership starts with mindshare. Winning the mindshare battle requires intense clarity about your message. If you can distill your message into a single word or phrase that defines your market, you have a big competitive advantage. That is what Marc Benioff did with Salesforce.com.

Of course it is not easy to do that. Thousands of marketing professionals get paid millions of dollars to come up with cringe-inducing phrases and tag lines that last as long as snowballs in hell. What makes it so hard is that messaging clarity has to be based on a very deep understanding of the dynamics of your industry and the position of your company within that industry and the customer’s pain point and your technology secret sauce. If your message does not seem real, it does not stand a chance. In fact it has to seem so real and obvious that when people hear it they assume they have heard it before.

History Lesson – Information Bus

That final touch of clarity that is enshrined in a single phrase or word, can make all the difference. I learnt this the hard way in the early days of the market for real-time application integration middleware, when technology such as Publish & Subscribe, real time messaging bus and Enterprise Application Integration was being adopted on a large scale in the first vertical niche market – financial trading rooms on Wall Street.

My company, Aregon, was an early innovator with solutions dating back to 1984 that were the first implementations in the industry. We were the technical pioneers. However when customers started to ask us whether we had an “Information Bus”, a term invented by a rival company, things started to go wrong.

How To Respond When A Rival Has Mindshare?

None of our responses was very effective.

For example, “no, that is not what we call our technology, let me explain” left people cold. Customers saw the Information Bus concept and automatically “got it”. They did not want to waste time understanding some new concept. Coming up with an alternative message is doomed unless you catch things very early and you are very, very good at coming up with an alternative that will crush the concept invented by your competitor. I mean crush, mindshare is not a game of percentages.

Replying that “yes, we have an Information Bus and ours is better for the following reasons” will get you sales, but will automatically relegate you to the position of follower. You can build a good business as the number two or three vendor in the market and, if you time it right, you can sell out at the right time for a reasonable valuation. That is what happened to Aregon. However that is a far cry from being the market leader in a large market that you define, which was what happened to Teknekron, which was later renamed TIBCO (as in the The Information Bus Company). They invented the market-defining messaging concept andthen became the leader in the booming enterprise integration market.

Why Was Information Bus Messaging So Powerful?

The payoff from getting it right is huge. However there are very, very few examples of great successes. Why was Information Bus so powerful as a message?

  • It was simple and easy to understand for the target audience. This does not mean “dumbing down” for everybody. This was a technically sophisticated audience, so TIBCO could count on a base level of knowledge.

  • It was based on a genuine “aha moment”. As related by Vivek Ranadive, TIBCO’s founder, the moment came when he asked a software expert to describe why so many software projects failed. As a hardware engineer by training, Vivek, could not understand why well-tested components could not simply plug into the system Bus. Why not do the same with software?

  • TIBCO created a clear and simple visual diagram of the Information Bus that anybody could draw on a napkin and understand in a heartbeat.

  • The company executed by ensuring that everybody stayed on message. Execution consistency is critical to success. The phrase enabled a dialogue that went into increasing levels of details as the company engaged in customer dialogues. Yet at every level they could come back to the simple Information Bus concept and diagram.

Think SAVE – Simple, Aha, Visual, Execution.

Thought-leadership sales guys are critical to Messaging Execution at the early stage

The best messages come from a synthesis of what you are hearing from the customers and an understanding of your technology secret sauce. You cannot rush that process.

If you force it and hire a lot of standard sales guys to deliver the message, it is unlikely to resonate in the market, you will just blow a lot of capital on sales and marketing. Hiring external consultants to create your messaging is usually a mistake. At best external consultants can act as facilitators, drawing out what is already known but hidden. Great messages cannot be forced out; they have to emerge. You cannot set a firm deadline and it is better to have no message (just great technology and a solution-selling mindset) than a bad one.

This is why you need a breed of thought-leadership sales guys at the early stage who are totally different from the standard sales guys who help you to scale once you have got a message that resonates. Standard sales guys deliver a message, thought-leadership sales guys help to create the message.

Many entrepreneurs fail by not hiring sales people that fit the life-stage of the venture.

Don’t rush to replace the passion and creativity of the founders – the thought-leaders who got those critical and tough early deals – with too much process too soon. This is a chasm that many entrepreneurs fall into. You have to replace the passion and creativity of the founder-led sales in order to build a valuable business, but if you rush that transition you end up destroying what made your company viable .

Everybody wants process – for the other guy!

Developers want to see sales guys follow a process, so that they sell what can be delivered. Sales guys also want developers to follow a process so that the customers they sell to get quality deliveries on time. Both tend to underestimate the amount of art vs science in the other person’s job. That lack of respect can lead to toxic behavior that damages the business.

When you see how the really great developers are not just a bit more productive than the average, not just 2x more productive but 10x, you would be crazy to load process onto their creativity.

Working with armies of average developers requires boatloads of process, but that is typically the maintenance type of work that is sent offshore. It is all about where you are in the life-cycle. Early in the life-cycle, you want to give individual creativity full rein. A bit later you have some light processes for small teams – that is what Agile is all about. In the latter stages it is all about metrics and scalable, repeatable processes. You move from artisan to factory worker.

The same is true in sales. By the time the product is a market leader in a big mature market, the sales teams need lots of process. You can visit the sales teams of companies like Oracle and IBM to find out how to do this well. However, if you are bringing a new product to market, you need to unleash the creative drive of a few great thought-leadership sales people.

Enterprise software is complex. A simple concept/name/diagram like Information Bus is just the enabler for productive conversations that go into greater detail on the value proposition and technology. It takes years for a concept like Information Bus to become fully realized in the market and in those years you need thought-leadership sales guys who don’t expect all marketing material to be delivered in a neat package, they are comfortable with the uncertainty of refining materials on the fly (those final adjustments in the taxi on route to a meeting and the post meeting debrief where you change a message that clearly did not resonate).

Startups need thought-leadership selling because “you have to capture mindshare before you capture market share”. That may sound like marketing, but the thought-leader sales people are also marketers. They don’t expect brochures and canned messages to deliver. They create the messages based on a thoughtful synthesis of their company’s value proposition and the pain that they hear from the market. Startups need to see evidence of that kind of thought-leadership selling before hiring.

Follow

Get every new post delivered to your Inbox.

Join 1,510 other followers