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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 Bernard Lunn in Corporate Strategy, Enterprise Sales, SAAS, start-ups, Strategy Workshop.
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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.

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 Bernard Lunn in Blogging, Enterprise Sales, Enterprise Web 2.0, SAAS, start-ups.
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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 

Introducing Enterprise Sales for the Digital Age April 25, 2014

Posted by Bernard Lunn in Deal-making, Enterprise Sales, SAAS, start-ups.
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This is # 1 in a series of 12 blog posts. You can get value from each 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.  

This series is written for technically-oriented founders of enterprise software ventures who need to hire & manage sales people and to hire & manage the people who manage those sales people. If you sell enterprise software for a living, you may also get value from thinking about how the game of sales has changed since you went on those early sales training courses; the Internet changes everything, including sales.

The techniques for enterprise sales were created in the years when companies like IBM and Oracle were rising to prominence. These techniques worked very well. They were encoded into books, CRM systems, training courses, methodologies and the daily work of countless sales executives and sales managers. If you wanted to close complex, big ticket enterprise sales you used these techniques.

Then something happened. That something is called the Digital Age, the convergence of mobile, social, real time and big data. This resulted in techniques such as SaaS,  Freemium, Marketing Automation, Growth Hacking and Viral Marketing. It seems like it is time to throw out the old and bring in the new.

Not so fast.

Ignoring the new techniques of the Digital Age is not smart. Nor is it smart to use those techniques alone and ignore the wisdom of the past that created the enterprises that dominate our landscape today.

My aim with this book is to marry the best of the old with the best of the new. There are other people thinking about this, the entrepreneurs who are creating the Salestech ventures that I profiled in a series of posts on ReadWrite.

I have created this book as a series of blog posts, a serialized book in the tradition of Victorian novelists like Dickens who originally published each chapter in monthly magazines. (I did this before with the Startup 101 book that lives at ReadWrite). The content will always live here online thanks to WordPress. If you want the convenience of a PDF copy that you can print, please send me an email.

There are six reasons why many entrepreneurs need this guide now:

  1. There is a Renaissance in Enterprise Software. Or as the VCs would say, “this space is hot”. Or to put it another way, Google, Facebook and Twitter sucked the air out of the indirect/ad-driven model for debt-burdened consumers, so lets get direct revenue from where the cash hoards are overflowing in big companies.
  2. It is different this time. Consumerization, SAAS, Freemium, social networking – none of these were around when the early enterprise sales guys were learning their game. Big enterprises are facing existential crises related to the twin challenges of digitization and globalization. That’s good news, there are plenty of problems to solve with tech. The bad news is, don’t expect to get attention/budgets selling the “same old, same old”. The Big Old Vendors have got same old, same old sewn up. Don’t extract a sales team from those Big Old Vendors and expect them to meet today’s challenges with today’s tools for your startup.
  3. Most entrepreneur’s sales skills atrophied during enterprise software’s decade in a coma. I call the last decade a “coma” in enterprise technology, because there was very little innovation, just big old vendors selling the same old stuff to the same big old enterprises in the same old way. Most founders in the last decade were developers who did not want anything to do with sales; who wanted anything that looked like Glengarry Glenn Ross? Although it is different this time, there are still some old-fashioned sales skills that few entrepreneurs can ignore. Not quite everything is different. This series adapts the timeless verities of sales to the modern world.
  4. Developer entrepreneurs need to be at least be Consciously Incompentent in Sales. Developer entrepreneurs are mostly Consciously Competent in development (good and always figuring out how to get better), but need just enough to be Consciously Incompentent in Sales (know what you don’t know so that you can hire well). That is why I keep each chapter to the length of a blog post; you don’t have time for a PHD dissertation on sales and our attention spans have become shorter thanks to the Internet. The aim of this series is to save you from being Unconsciously Incompent (the one fatal quadrant).
  5. Your product will not sell itself.  Even if you opt for a sales-lite (try it online) model, you may need to sell to channel partners and you may need to sell the first few customers yourself (“do things that don’t scale”). Even if a consumerized Freemium model is your foot in the enterprise door, you may later need to meet the folks who control the big budgets in order to scale that.
  6. Despite all the great marketing technology, the bottom of the funnel needs attention. Despite the revolution in consumer marketing that we see from inbound marketing and the scientific processing of leads through Marketing Automation, the impact on B2B has been light and the impact on the enterprise end of B2B has been virtually non-existant. The attention today is on the bottom of that funnel where leads become sales – or don’t.

I am not the only person observing the increased focus on sales. This is from Businessweek:

“In the past few years the number of sales programs at colleges and universities in the U.S. has exploded, according to the “Sales Education Program Landscape Study” done by the Center for Sales Leadership, run out of DePaul University’s College of Commerce. In 2007, courses in sales were offered at 44 U.S. schools, a number that jumped to 101 schools in 2011. Now 32 schools offer a major, minor, or concentration in sales, up from nine just four years ago, the study found. Even MBA programs are starting to get into the game, with 15 now including sales courses as part of their graduate programs in 2011 and six offering an MBA with a sales concentration.”

The first four posts describe the key stages of the sales cycle. These posts follow the enterprise sales process, which is like a game of chess

Beginning: how you get leads, your opening moves.

Middle: proving product fit to that enterprise’s need

End: closing, getting signature and cash.

As a tech entrepreneur you may have to do some of this yourself. You will certainly have hire people to do this. It is useful to understand what the people who you are hiring will be doing.

The key management concept is CAC – Customer Acquisition Cost. You aim is not just to sell but to sell with a low enough CAC. If your CAC is too high, investors will conclude that “it may be a good product, but it is not a good business”.

We start at the beginning, like the opening moves in a chess game. How do you get leads? More importantly how do you do this cost effectively:

How do you get Enterprise leads that generate the right Customer Acquisition Cost (CAC)?

Then we focus on what you do once you have made contact and you are in the sales process.

Once you are through the door, focus on the buy process to reduce your Customer Acquisition Cost (CAC)

When you are deep in the middle game of chess, it gets horribly complex. It is the same when you are trying to prove product fit to an enterprise’s requirements, there are too many variables to manage. This post gives you a way to focus and KISS.

Deep in the complexity of the middle game, keep focus by imagining the press conference and concentrating on the “power of one”.

Finally, nothing happens until you negotiate and close. There are so many books, courses, seminars and theories about negotiation. Much of it “does not stick”, because in the heat of the moment you need to make instant decisions. One way for negotiation tips to stick in the mind is to relate them as stories, particularly stories where somebody screwed up really badly or did something clever to gain advantage in a difficult situation. These are the the subject of:

Negotiation Ninja Says: Tips on Closing from those with scars on their back

We then move onto management subjects. The first in the management series tackles the toughest question:

How to hire the A Team sales guys

The next post describes how to manage these rain-makers. How do you manage enough to meet company objectives without “crimping their style”:

How to manage a sales team in the era of bring your own everything

Is forecasting a science or a black art? It is certainly something that keeps CEOs of startups up at night, a lot of resource allocation (what a CEO does) depends on forecasting. Yet most forecasting systems are “garbage in, garbage out”. This post recommends a different way of thinking about forecasting.

Forecasting: Keep all stakeholders on the same page by rewarding accuracy

Before starting at the beginning of the sales process, the first post asks a clarifying strategic question:

Is your strategy really enterprise-first and is your market red ocean or blue ocean?

 

Oculus Facebook deal will accelerate equity Crowdfunding and change the world. March 30, 2014

Posted by Bernard Lunn in capital markets, start-ups.
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The Oculus founders got $2.4m of free seed funding via Kickstarter. Let’s say that had been a traditional Angel or Seed VC equity round for 25% of the company. Those seed funders would have got, in aggregate, 25% of the $2bn that Facebook paid, which is a substantial $500m.

I believe that the Oculus Facebook deal will accelerate the equity Crowdfunding revolution. Yes, this is good news for the future, even if a lot of people who gave free funding to Oculus via Kickstarter in return for a beta product and a T Shirt feel a bit burned today.

FWIW, the terms were clear, the folks who ponied up cash were promised an early version of the product and got what “it said on the tin”. As Matt Asay points out on ReadWrite, this is the same issue as people who contribute to open source and watch an entrepreneur get rich.

Personally I think how millions of people make a living as we emerge out of the Great Recession – the crowdfunding story – is more interesting than how a bunch of overstimulated people ramp up the stimulation to the max on the dial – the VR Oculus story. Page views – the currency of the Internet – will undoubtedly prove me wrong.

Tales of an early stage/seed funding bubble get a wry laugh outside Silicon Valley. The Oculus story is also about a “unicorn” ($1 billion plus exit) spotted outside the Valley. Unicorns are rare enough, but Unicorns outside the Valley leads one to refer to Skype – and who else? Well now it is Skype and Oculus. Oculus is from Southern California, which might as well be Ulan Bator (capital of Mongolia) to the Sand Hill Road VCs. If Oculus had been in the Valley they would have easily got Angel funding – and given 25% to those Angels.

Hmm, being outside the Valley is better, you just get free equity financing via Kickstarter?

Not so fast, this is the last deal like this. Nobody wants a bunch of T Shirts plus being the first kid on the block with a new toy for $500m of equity value.

Kickstarter, which was born in New York, is an unexploded bomb on the tree-lined streets of Sand Hill Road. The economic impact of Crowdfunding will be felt outside the Valley. It is a simple need issue. Crowdfunding is much less needed in the Valley compared to Europe, Asia and other parts of the world that have so far been less impacted by the digital revolution. Or compared to LA or New York or New Jersey or (a few other places in America where most people live).

However we are still in the really, really early days of crowdfunding, the days when we have not yet moved from the “first they laugh at you” phase. There are also different forms of crowdfunding. As an adviser to startups, I recently had conversations with two entrepreneurs both of whom were looking at Crowdfunding as a way to get their dreams realized:

1. Niche electronic product, using Arduino. The entrepreneur lives in UK and has no access to the VC world.

2. SaaS product. The entrepreneur lives in New Jersey, close enough to some good VCs. The bigger problem is that he is older than is considered optimal by VC. Of course no VC would reject him for that reason, other reasons would be given (as this article on ageism in the Valley describes so vividly).

The old joke from the early days of the Internet – “on the Internet, nobody knows you are a dog” – has a new life for entrepreneurs who are not young white males living in the Valley. Crowdfunding means that nobody knows that you are old, female, colored or live in the middle of nowhere when you are seeking funding. You can pay a friend to star in the Kickstarter demo video.

The fact that Kickstarter is now in the UK is a big deal, a sign that this is a global revolution, but it is only a start, we need to see this in every remote corner of the globe. An entrepreneur in Africa (where mobile money disruption is happening for real) should be able to tap into both local and global markets using these networks.

This has revolutionary implications for the VC business. The cost of building the first MVP has already plummeted to the extent that, in many cases, no external funding beyond Friends & Family is needed. The Angel/Seed VC round is now needed to fund the go to market phase. If Crowdfunding takes an axe to those go to market costs, the balance of power between talent and capital will shift dramatically.

The SAAS entrepreneur does not need funding to develop the product, he has built it on his own time. He is looking at crowdfunding as part of his go to market strategy, by selling equity at a bargain basement price to early adopters in his niche who will give him good feedback and evangelize the product after launch. Selling Equity is not part of a capital raising strategy, it is part of his go to market strategy. After the Oculus Facebook deal, this could become the norm. Peter Lynch, a legendary investor who is up there with Warren Buffet, advised investors to invest in what they knew (check out the company that makes a product that you and your friends love). The gaming enthusisasts who backed Oculus on Kickstarter knew what was good well before the VCs who made money by watching them. Many VCs today are like an A&R guy watching the audience for a hot new band and recording the enthusiasm on his clapometer – “the kids seem to like these Beatles”.

These days, retail investors have to wait until the easy money has been made by VC, in order to invest at IPO time. Yet these are the people who spot the brilliant new products well before the VCs do.

This brings our attention to which Crowdfunding networks will win and how will they evolve? I tend to think of Kickstarter and IndieGoGo when I think of Crowdfunding. That will annoy all those building other networks, but this is a classic winner takes all network effects market. I can envisage two maybe three networks in ten years time, but I cannot envisage 5, let alone 10 or more. The winning networks will have to scale to cover all the Four Crowdfunding options which are:

1. PreOrder Plus Reward. This is how Kickstarter and IndieGoGo work today. This is how Oculus got funded via Kickstarter. This is relatively easy from a regulatory POV as it is about e-commerce rather than financial markets, so this is easy to globalise.

2. Equity. This is where regulatory complexity arrives (for good reason, this is where scam artists will operate). Even if the primary use is PreOrder Plus Reward, you may still want to offer Equity and it makes the process dramatically easier if this is done on a single platform. The JOBS Act in America leads the way. Even though other countries pioneered this, most countries will take the lead from America or miss out on the wealth/job creation from innovation. I think that networks that combine PreOrder Plus Reward with Equity will win out over pure Equity funding platforms such as Angel List. This is where the Oculus Facebook deal changes the game. The funders of a future product will expect equity in addition to beta product and T Shirt.

3. Debt. Why add this to Crowdfunding networks when perfectly good Peer Lending networks already exist? The reason is that the loan is done within context of the product being built/launched, there is less collateral or cash flow but the lender might still be motivated to lend because they know the entrepreneur and/or share the passion. In some cases equity will be appropriate (it’s a big market and there will be an exit) and in other cases debt will be appropriate (it’s a niche market and a big exit is unlikely).

4. Donation. Some wealthy investors may prefer to donate (and circumstances permitting, get a tax write off).

Crowdfunding networks will have to be big to do all four on a global scale, but the opportunity is massive.

Many VCs want to believe that the entrepreneurs who use Crowdfunding to get started will need them when they want to scale. It certainly worked that way in the case of Oculus. I am not sure that will be true in future. Crowdfunding naturally works in markets that are not capital intensive. The VCs don’t want to stuck investing in capital intensive businesses (like renewable energy, new healthcare drugs & devices, the kinds of products that take serious R&D $$$ before a launch is feasible). Other sources of funding such as Hedge Funds can jump in when they see momentum at a later stage.

 

Getting “the vision thing” right in Enterprise Software December 12, 2013

Posted by Bernard Lunn in Corporate Strategy, Enterprise Sales, SAAS, start-ups.
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Lou Gerstner wrote one of the best business books of all time,  an educational thriller about how he took an IBM that was on the ropes in 1992 (having failed to adapt to a PC centric world) and made it great again, which he called “Who says Elephants Can’t Dance?”

IBM was in total crisis in 1992. He was asked by a journalist what his vision was for IBM. His reply became famous and much misunderstood. He said something along the lines of “the last thing IBM needs right now is a vision”.  A couple of years later he did unveil a classic bland corporate vision statement and then said what he really thought which was:

“So the most important strategic priority for IBM becomes, when you peel it to the core, to execute what it knows – and has known for years.  Execution will lead IBM back to success.”

Gerstner did have a vision – to make IBM a customer-centric business – but he recognized that realizing this vision was all about execution. Later in the book he revealed his growing understanding that execution was all about changing the culture.

At IBM’s scale he was right. It was 99% execution and 1% vision. For tiny startups struggling to get noticed in a crowded market, that balance is different. Execution is critical – it always is – but startups need crystal clarity on vision, mission, positioning and so on. Mind-share precedes market-share.

In many enterprise software startups, this is harder than it should be, because executives are like blind folks around an elephant. Each one feels a different part, but only one part, such as the side or the tusk. They then compare notes and learn that they are in complete disagreement.

The different parts of the enterprise software elephant are:

A. Technological Advantage aka “secret sauce”. Externally this is irrelevant. Your customers only care what you can do for them, not how you do it. You actually want to hide this externally and protect it with patents. However, internally you must know where your source of competitive advantage comes from.

B. Customer pain. You must know “what keeps them awake at night” and how you can use your technical secret sauce to solve these problems. The difficulty that horizontal platforms have is that the language used to describe this pain varies dramatically by market. The way that a CXO level person talks about the pain is totally different in a Bank, in a Pharma company, in Government, in FMCG etc.

C. Market Space Labels. This happens when some bright analyst does some pattern matching across vertical markets. They spot that the customer pain being described in such different ways in a Bank, in a Pharma company, in Government, in FMCG etc all have a common theme. They give it a name, a label for the market “space”. All the participants in the market realign to position into this new space and to get into the magic quadrant or other short list paradigm.

The problem for startups is very simple:

By the time the customer pain across verticals has been aggregated into a “space”, it is too late for a startup to become the dominant player in that space. The incumbents can offer “just good enough” features to be signed off by buyers who have already put them on the approved vendor list.

Startups have two ways to meet this challenge:

1. Name the space while you are creating it. It’s incredibly hard to do. In this post I describe how Tibco did this.

2. Just deliver and don’t label yourself. That is what Splunk does. You deliver value and let the market figure out what label to put on you.

Negotiation Ninja says “don’t throw away the cards that have no value to you”. November 6, 2013

Posted by Bernard Lunn in Deal-making, Enterprise Sales, start-ups.
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As a sales rookie I was reviewing the key issues before a major contract negotiation with my boss. We made a list of a) showstopper issues and b) “not a big issue for us” clauses.

During the meeting one of the “not a big issue for us” items came up. My boss said;

“Hmm, that is difficult. Do you mind if my colleague and I step out of the meeting to discuss this?”.

I walked out thinking WTF; why make so much fuss about a clause that did not matter to us? When we were alone my boss said:

“So what do you think will happen in the cricket today?”

We spent 10 minutes talking about cricket. The idea was simply to make them sweat about a point we were willing to concede so that we could trade it for something we wanted.

Crossing The Chasm through the Bowling Alley to: rapidly entering niche markets. October 15, 2013

Posted by Bernard Lunn in Deal-making, Enterprise Sales, start-ups.
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For years Crossing the Chasm was the closest that Silicon Valley startups had to an operating manual. It fell out of favor when the focus was on digital consumer ventures, but people are dusting off their copies as we are now in an enterprise software renaissance.

The way to Cross the Chasm to the mainstream is through the Bowling Alley:

“Market momentum picks back up in the Bowling Alley phase, as early pragmatists in certain
customer segments overcome their reluctance toward discontinuity and adopt the new
technology to solve niche-specific problems. By their nature, pragmatists are reluctant to
adopt new technology and prefer to follow the herd. Early pragmatists are forced out of
their comfort zone to find solutions for broken, mission-critical business processes.

The Bowling Alley phase takes its name from the market strategy that is appropriate. The
key to success is to provide a complete solution for one segment while identifying closely
aligned segments that could benefit from a similar solution. When the momentum from
successfully capturing market share in the first segment (the lead bowling pin) is felt,
this momentum is leveraged into adjacent segments. By dominating several segments, your
company may start to emerge as a sector leader.”

That describes the strategic mission – that is the easy bit. Actually winning those deals and delivering those move-the-needle projects is a lot tougher, particularly today after “enterprise software’s decade in a coma” has left many of those skills rather rusty from lack of use.

Each niche is like a foreign market. Literally, niches like this have their own lingo, the jargon that feels like listening to a foreign language. You can translate the jargon, study the subject, but you will still feel like a foreigner mangling French in a Parisian cafe getting supercilious stares from the waiter. The people in these niches all know each other
well, these are dense networks which spit out antibodies to reject outsiders.

You can break through into these niches but it requires creative selling techniques that have been forgotten in the last decade. Consumer start-ups don’t need to sell, they market online using their product. Consumerized SaaS startups believe that this is also the way to win the enterprise. It may be the way to get your foot in the door of the enterprise, but to really win the big tickets you have to solve really big pain points.

These creative selling techniques usually start with some variant of asking “what keeps you up at night?” You are looking for the kind of pain that is so acute that the customer will overlook the fact that you are a startup with radically new technology.

It is good to first read the guide books to this foreign land and talk to people who have lived there. You need some familiarity with the lingo of this niche market, understand “what makes it tick” and some theory of where the pain might lie that you can fix. Even open ended questions need a focus. But remember, “no theory survives first contact with a customer”, keep an open mind and stay light on your skis. Opportunity often lurks in the parentheses, the seemingly unimportant throwaway comment that shows you the real hot buttons.

You need more than a 10x proposition based on a technological breakthrough. You need that to be able to deliver the solution, but that alone only works if your 10x proposition is purely a cost-cutting proposition. That tends to be a tough sell in most enterprises because it involves rip and replace and that is too big a risk to take on a start-up. You can sell a 10x rip and replace cost-cutting proposition if your technology is down the bottom layers of the tech stack and you sell to data centers. For example if you have a way to 10x cut the electricity consumption by servers, Amazon, Google and Facebook will all listen intently even if you are a bunch of techies in a garage and sell one of them and you are off to the races….

However if your proposition is further up the stack, for example at the middleware layer or the application layer, well as they say in Brooklyn….fuggedaboutit. That’s when you have to find a business problem to solve that fits these three criteria:

1. A “big, bad problem” something that really, really matters, that gets the attention of the CXO level guys, that keeps them awake at night. Don’t worry, the Global 200 are going through wrenching changes thanks to the triple tsunami of globalization, digitization and the debt crisis, so there is no shortage of big, bad problems.

2. A problem that is ideally suited to your unique technology, that none of the incumbents can easily solve. There is no point in discovering a big, bad problem that can be easily solved by Oracle, IBM, SAP, etc. All that will happen is you spend a lot of time getting the proposal up the chain of command until a salesman from an incumbent spots it and closes the deal.

3. An internal “sponsor”. We used to call them angels, but has a different meaning now. This is your inside person, who keeps the message going after you have left the room. I think of him/her as an innovator with clout. They have to be innovators because you are an upstart with new technology, so they have to think outside the box and be ready to challenge orthodoxy and incumbency. You will easily find many like this and have lots of conversations where they bemoan how stupid their company is, how politics gets in the way of innovation, blah, blah. These conversations go nowhere. You need an innovator with clout, somebody who is trusted and respected by those with the power to close a deal.

So you have to cast your net really wide to find the few that sit at the intersection of this three-way venn diagram. Cast a wide net and then qualify like hell. Lots and lots of conversations, lots of active listening, lots of “see ya later” when you don’t hear the screams of pain that indicate these guys really, really need you. This has to be more like a guy who has had a
heart attack needing a surgeon than somebody with a headache needing an aspirin.

Once you have found the problem, the hard work starts. This is what I think of as the middle of the chess game. You have opened well, now it gets complex with lots of options and moving parts. Now you have to assemble a solution. It is an assembly job, great for Lego fans. You need these pieces:

1. Your technology at the heart. You will need easy interfaces to all the other bits as you are the newcomer and therefore the one who is most motivated.

2. The other components that deliver a total solution. This could be as simple as the hardware and networking if you are running behind the firewall (yes, that is technically simple but the incumbency innovation antibodies lurk here) or include software components up and down the stack. Remember, you are solving a problem, not selling technology. If you don’t do this hard work, the incumbency innovation antibodies will attack you; an existing vendor will show a “just good enough alternative”.

3. A team that can pull it all together, the system integrator. Your view has to be pragmatic; use your own people, or one of their approved integration vendors or an internal team. This is a key area where your Sponsor needs to guide you.

If you get through this part you are positioned for the end game, you are in the closing zone. That is the subject for other posts.

Four Gates That Multi-$billion Ventures Pass Through. September 28, 2012

Posted by Bernard Lunn in capital markets, Enterprise Sales, IPO, SAAS, start-ups, Strategy Workshop.
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I also think about these Four Gates in the form of a funnel, with lots at the top and very few at the bottom (just like a sales 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 site; 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 not 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 ventures is a crystal clear understanding of the problem, because they have heard the pain described by so many customers and prospects.

I look for conceptual clarity in 4 dimensions:

  1. Large enough 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.
  4. You really, really want to do this more than anything else in the world and deep down you believe that you are the best person to pull this off. You are saying “damn the torpedoes, full steam ahead”. If you want people to take that risk with you, you had better believe it yourself deep down in your heart and gut. You also must be ready to commit to at least 10 years with 60 hour weeks, forget about a balanced life for a while.

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 four 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. Enterprise software ventures tend to be bootstrapped from customer revenues, not from VC, so the founders learn to 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. 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.

Gate #2: Prove the Concept.

This is the “fit to today’s market” phase. This is also what VC call “traction”. 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 proving fit to market in a niche. So the service has to work and deliver what those consumers want. In the lean startup model, this is when all that pivoting takes place. However great entrepreneurs don’t pivot at a conceptual/strategic level, they got through Gate #1 with conceptual clarity, but it may take multiple tactical pivots to get traction in a specific niche.

Gate #3: Scale within niche.

This is the “make it work as a business” phase. This is when you throw out the lean startup guide book and start working like a real business with serious amount of capital and real management bench strength. Blowing it at this stage for lack of resources – human or financial – is dumb.

During the last decade, most enterprise software vendors that made it past Gate # 2 got acquired. VCs mostly shunned enterprise software during this time and it takes huge amount of self-sacrifice by the whole team to make it past Gate # 3 without VC.  At this stage – you have the 3 reference customers, you have proved the concept – the acquirer will not consider your revenues to be meaningful, so you will be acquired for your R&D value with a bit of credit for the quality of your customer relationships. If you are lucky, you hit a market just at the point where two behemoth vendors who compete like crazy absolutely must, must, must have this technology….. If you raised VC, the acquisition value at this stage will usually 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.

Entrepreneurs who want to build 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.

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. This is when we see the free users (“if the service is free, you are the product”) start to get annoyed as the company starts to monetize them more aggressively (think of Facebook or any other social media venture), but a great entrepreneur and management team can navigate their way through this challenge.

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. 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 all 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 remains to be seen if this decade will produce more big winners, but that is the subject of another post.

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 up to 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.

Enterprise Software: Returning To A Market That Has Been In A Coma For A Decade September 5, 2012

Posted by Bernard Lunn in Enterprise Sales, Enterprise Web 2.0, SAAS, start-ups.
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About 10 years ago, I wrote a post called Enterprise Software R.I.P. The venue that I published in has long since disappeared into the digital dustbin, but my trusted laptop files retrieved it, so it is published below. I decided to revisit this post because I have come to the conclusion that enterprise software did not die, it just went into a coma and it is now coming out of that coma.

To a casual observer, there is not a lot of difference between coma and death. First let me say what I mean by coma/death in this context. Of course there is still lots of enterprise software and a few huge vendors doing very well and lots of small niche vendors operating in the cracks between those behemoths. But where is the Oracle or SAP of the last decade? Or even the BEA or Cognos or TIBCO of the last decade? Where is the start-up that broke into the mainstream and became a multi-$billion success story? I am referring to the death of innovation in enterprise software. This decade has not been conducive to enterprise software ventures. It is no wonder that most VCs ignored enterprise software during this decade.

Ten years ago I sensed that this was happening. It was disturbing to me because enterprise software was the world that I understood so well. I felt like the Polish Cavalry in the Second World War. The Polish Cavalry was renowned as the best in the world. They could shoot with great accuracy at full gallop and turn on a dime, nobody could match them. None of that helped them when the Nazi dive bombers and tanks rolled into Poland in 1939. I had mastered a game, but the game had changed.

So I set out to understand the consumer web. A decade later I am not a master of that game, but I understand it “enough to be dangerous”. That helps now that I am coming back to enterprise software because the consumerization of software is a big part of the renaissance of enterprise software. However it is only one part of that renaissance. Enterprises are more than the sum of their parts, they cannot simply empower every employee with consumer web type tools and hope they all pull together to grow the profits. That is why I remain sceptical of the hype around Enterprise 2.0 tools, all those “Facebook tools within the enterprise” ventures. These are “shiny objects” that make Gen Y employees happy and can have an incremental impact on productivity, but they are hardly game-changing in the way that say relational databases and ERP were game-changing in their day. Sure it helps to have better user interfaces that encourage collaboration. But there is a lot more at stake for enterprises and therefore for the employees. Enterprises face a perfect storm of three tsunamis hitting at the same time – Digitization, Globalization and the Debt Crisis. This is an existential crisis for large companies, their very reason for existence is being called into question. Business-as-usual won’t help them navigate this perfect storm. Therefore software-as-usual won’t help them navigate this perfect storm. That is why there is a huge opportunity again in enterprise software.

But I am “getting too far over my skis”. I want to return to the R.I.P post from ten years ago. There was a lot that I got right. I could see the dismal grind of consolidation. However some of my gloom was due to the terrible, but transitory, backwash from the end of the technology nuclear winter. These were the days when nobody was buying any software, innovation was dead, the only answer was to get into real estate speculation. Thankfully I resisted that temptation, it ended in a bust worse than the Dot Com bust, one that we are still living through. In hindsight the biggest thing I got wrong was:

“The “IP everywhere” rollout is exactly that, an implementation of proven technology by big vendors”.

That was wrong because the “IP everywhere rollout” fundamentally changes the rules of the game. The IP everywhere rollout makes transaction costs cheaper externally than internally. This is the practical realization of Coase’s Theorem. Coase, an economist writing in the 1930s, posited that firms grew big based on the fact that transaction costs were lower internally than externally. The Internet makes external transactions dramatically cheaper; this is the “frictionless commerce” that is now becoming reality. This challenges the very basic idea that scale is always an advantage. All those roll-ups, acquisitions and mergers in the industrial age were based on the theory of economies of scale; in Coase terms they were based on the theory that transaction costs were usually cheaper internally than externally. This goes to the very heart of what makes an enterprise big, why it needs to be big to win. This is as far from business-as-usual as you can get.

I also lost the plot a bit here as well:

“The return of the single vendor stack. IBM, Sun and HP are putting together complete solution stacks that look suspiciously like the pre-Wintel proprietary solution stacks provided by hardware vendors such as IBM, DEC, Data General, Olivetti, Burroughs, Univac, Wang and other dinosaurs that once ruled the earth. “

I had that both right and wrong. Yes, the vendor stacks forced consolidation. I got that bit right. But of course this is no different from the pre-Wintel proprietary solution stacks and they all disappeared into the dustbin of history; only IBM survived and thrived, DEC, Data General, Olivetti, Burroughs, Univac and Wang are all history. I saw that but I did not see how it would end. The answer is that when IP everywhere rolled out enough, the proprietary solution stacks started to become threatened. That is happening now. Sun has already fallen, it’s great technology is now one part of the Oracle stack. HP is a seriously troubled company. Again, only IBM has emerged stronger from this wave of change.

Perhaps the most fundamental mistake I made was in my definition:

“First a definition; enterprise software is the core, mission critical stuff that manages transactions, accounting and management information.”

If you define enterprise software that way then certainly it is “game over”, but that is only a definition of the first wave of enterprise software. The next wave, enabled by IP Everywhere will tackle much more critical issues than basic administrative functions. These critical issues will be the subject of anther post but they will address the existential question for enterprises which is how to grow when economies of scale is no longer the driver of growth.

I also mistook the fact that real time enterprise was only in the “slough of despond” that always comes after a period of hype when I wrote that:

“real time enterprise” is a fancy name for what the industry is gradually evolving towards

Real time enterprise needed to wait until the IP Everywhere rollout was more complete. For example, now that about 50% of the 7 billion people on the planet have mobile phones, you have to operate real time to thrive. The IP Everywhere rollout also enables real time enterprise solutions to be implemented practically.

—————————————-

Enterprise Software R.I.P

(Note: this was written late in 2002 and is copied here unchanged).

This is a receding Tsunami. Thousands of companies rode this one to fortune, but it is now crashing on the beach and the backwash is pulling a lot of companies underwater.

We are still in the early stages of the enterprise software consolidation and the most sensible option is to sell out for the best price you can get. Then you can find another wave that is growing. Or you can get out of the industry as thousands of talented, experienced executives have done in the last few years. For those who love the industry but hate the idea of working for one of the gorillas, this article highlights how to find a reasonably protected niche market

First a definition; enterprise software is the core, mission critical stuff that manages transactions, accounting and management information. The industry has been doing this for decades and there really are only so many ways you can slice the cake.

Of course it is a huge industry and is not going away. The issue is whether this is an environment conducive to start-ups. Look at the things that customers are now focused on such as data center consolidation and integration. These require big companies. The “IP everywhere” rollout is exactly that, an implementation of proven technology by big vendors.

Attempts to hustle up big new growth waves within enterprise software have failed. Wireless is a simple another delivery option and “real time enterprise” is a fancy name for what the industry is gradually evolving towards. These are add-ons to existing products from big companies.

What is driving this consolidation?

  • The proximate cause is the after effects of the bubble bursting. Massive over-investment and the dramatic drop off in demand puts the buyer in control.

  • The buyer has always hated the traditional enterprise software model; too many small vendors blaming each other for projects that don’t deliver business results. In a buyer’s market, they get what they have wanted for a long time.

  • Investors demand the earnings visibility that comes from a recurring revenue model. When customers and investors both demand the same thing you can be pretty confident that it will happen.

  • The return of the single vendor stack. IBM, Sun and HP are putting together complete solution stacks that look suspiciously like the pre-Wintel proprietary solution stacks provided by hardware vendors such as IBM, DEC, Data General, Olivetti, Burroughs, Univac, Wang and other dinosaurs that once ruled the earth.

  • ASPs with solutions engineered from the ground up for the Net, such as SalesForce.Com and Intranets.com are getting real traction and proving that it is possible to deliver real solutions over the Net for a monthly fee.

So will all the customers simply plug into a few giant Con Edison style utilities? Is our only option to work for/invest in these utilities? Thankfully the answer is an emphatic no. The utility analogy can be stretched too far. IT has a far bigger impact on a company’s profitability than electricity and there are a lot more variables. So how can smaller independent companies prosper in this new world?

  • Leverage the stack for your own high growth niche. Offer the total solution on-line for a monthly fee. This reduces the buyer’s risk and thus enables start-ups to get that critical early traction. The good news is that it is now much easier and cheaper to put together a total solution from a mix of outsourced data centers, open source frameworks and offshore developers. All you have to do is find an emerging growth market.

  • Operate right at the top of the stack where you are dealing directly with end users (aka a vertical market solutions focus). Look for business sectors that are growing fast but that are small enough today to fall below the radar screen of the gorillas.

  • Web Services based “features”. Experienced venture builders look at most new ventures and say, “that is not a product, it is simply a feature”. The best that can happen to these “companies” is that they get sold for R&D value. It is possible – but not yet proven – that Web Services will enable small companies to thrive by offering these features on a pay as you need basis over the Web.

  • Mine the backwash. There is a lot of money in maintaining old systems, catering to the conservative customers and forgotten niche markets. These forgotten markets last much longer than you would think from listening to industry analysts. This is low on the glamour stakes but if you are in business to make money it is worth remembering the old saying “there’s brass in that old muck.”

  • Private label commodity providers. This is another low glamour business, suitable for low cost operators. You sell your product through other solutions providers without your brand being visible. Of course you may eventually pull off the “Intel inside” trick and move up the stack, but even pure commodity players can make good money if the market is big enough and you focus on efficiency and being the lowest cost provider. You will need to bundle excellent support and show that your TCO is lower even than open source.

This a good time to take stock and get ready for the recovery with a new positioning. Markets will recover and IT will remain central to business. But don’t expect it to be like it was before. Prepare for dramatic change and find where you can add the most value.

Playing against 5 Aces December 6, 2007

Posted by Bernard Lunn in Globalization, India, start-ups.
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NOTE: THIS WAS WRITTEN IN 1997
I wrote this article 10 years ago, having spent a lot of time in India at that time. I have written the “10 years later perspective” and posted that to Read Write Web.

American software companies dominate the competitive landscape. Americans have no genetic advantage over Indians, a fact that is proven again and again by Indian immigrants to America. No, the advantage is environmental not genetic. America is a much, much easier environment within which to create great software companies. American companies start life with 5 major advantages – their 5 Aces:

1. A large domestic market
2. Access to intellectual capital
3. Reliable, low cost telecommunications
4. A culture that rewards innovation and risk taking
5. A well developed venture capital industry

If you were playing poker, that would be like having 5 Aces. Yes, I know you cannot have 5 Aces but, American companies have so many advantages that it almost seems like cheating. Stacked up against all those Aces, India has only one good card to play, an abundant supply of well-trained software engineers at reasonable rates. Sorry guys, America has the better hand.

So should Indian companies give up the dream of creating killer apps and just stick to Y2K and other low value work? Well let’s look at some of those Aces in more detail first:

A large domestic market.
America has a vast domestic market that serves as an ideal springboard for global ambitions. Unfortunately India’s domestic market does not serve the same purpose.

There are many brave companies creating software products for the Indian market. They are the unsung heroes of the business. Usually they have tiny revenues and therefore they never appear in the usual roll call of Indian software champions. Yet what they are doing is far harder than shipping a bunch of engineers off to USA, which is still the primary activity of TCS, Infosys et al

Let’s face it, India is a tough market. Indian buyers assume that foreign products must be better. In fact Indian software gets much more respect internationally than it receives at home. The local vendor typically only gets a look in at the low end of the market, where price is the main consideration. For example, a lot of Indian companies are going after the “low end ERP market” because the giants such as SAP are not interested in this segment, at least yet. Will any of these domestic companies make it into the big time before SAP and other global players decide that the low-end market is worth tapping? This is a tough game that has been called “picking up peanuts in front of a steamroller”.

This lack of respect works both ways. The big Indian software companies contrast the wealth of opportunities in USA and Europe with the slim pickings in the domestic market. They naturally put their best people on international projects, treating the domestic market as a training ground at best. This is a vicious circle. Indian industry, which is facing its own struggle to become world class, is not keen to be treated as second best.

Access to intellectual capital
Intellectual capital is the reason why a healthy domestic market is so important. Intellectual capital is much more important than revenues. You can have a world class software company that has no revenues from India. You cannot have a world class company without world class intellectual capital.

Intellectual Capital usually comes from customers. Think about how most new software products get built. The process usually starts with a visionary customer who wants to make a major impact on their business by using new technology. Looking around the market they see no off-the-shelf product that meets their visionary demands. So they tie up with some bright software guys. The visionary customer is more concerned with innovation than size and understands that innovation usually comes from small companies with no vested stake in the old way of doing things. So small, innovative software companies get their first break.

Look at virtually any software company and this is the pattern you will see. Bill Gates, received his first break through a contract from IBM to deliver DOS. Other giants such as SAP and BAAN follow a similar pattern.

When people in India talk about intellectual capital and the Indian software industry, they tend to focus on technology. They point out that most technological innovations come from the USA and that this puts India at a major disadvantage. In fact, this is only a minor issue. The latest version of Visual Basic or whatever is available in India at much the same time as it is launched in America. Through the Internet you can research all the latest technologies and download what you need.

No, the intellectual capital gap relates to industry. You need customers that are innovators and world leaders in the area of Supply Chain Management or Derivatives Trading or Electronic Commerce and these are hard to find in India.

There is one industry where India has innovators and world leaders (or nearly) and that is software. Maybe that visionary customer is in your own back yard. There is a huge population of software engineers in India that is always looking for innovative ways of doing their job more productively. Maybe the Indian “killer app” will be a new software productivity tool?

Reliable, low cost telecommunications
When Bill Gates was being wooed by the high and mighty in Delhi, he was often asked, “what should the Government do to ensure that India becomes the next software superpower?”

Rather than respond with a whole laundry list of initiatives, his answer was very succinct: “make the telephones work”.

Telephones are the single greatest tool used by the software industry. Telephones provide the means to reach your market, to transfer software to your customers and to access all that intellectual capital on the Internet.

Coming from Europe and America I took reliable, affordable telephones for granted. When I started calling on Indian companies I became all too familiar with a young lady telling me that “all lines on this route are busy. Please call back after some time”.

If you have always lived in India your reaction is probably a fatalistic “so what…that’s life…keep on trying”. Well I was selling rather than buying and so I did keep on trying. What if I was buying? What if my next calls were to companies in Israel and Russia where I got through the first time? Would I have persisted in trying to buy from India? Probably not.

A culture that rewards innovation and risk taking
There was a story in Fortune magasine recently where the big consulting firms, prestigious names like McKinsey, Anderson, Booz Allen, were complaining that they were having a hard time attracting the pick of the MBA crop. Why? Because the best and brightest wanted to work in tiny start-ups in Silicon Valley where they can make a difference.

I doubt that the consulting firms face the same problem in India. The best and brightest would flock to the status and safety of the big firms rather than face the uncertainty of a garage start-up. Without the best and brightest, Indian software will not hit the big time.

The difference is a culture in the USA that rewards innovation and risk taking. There are so many role models for the budding entrepreneur to emulate. Indeed high tech entrepreneurs in America receive almost as much attention as the Indian cricket team!

The role models are available in India and some of them, such as Shiv Nadar and Narayana Murthi, receive a lot of press attention. It is increasingly clear that software is one of the industries where India can become world class and this will help to attract the best and brightest.

America has a very healthy attitude to risk and failure. Start-ups are risky by nature. A lot will fail. Does a young engineer in America, leaving a failed start-up find doors closed and people and looking at him in a funny way? Not usually. Indeed most people would assume that the person has learnt some valuable lessons and will succeed next time. Magazines are full of people who tried numerous ventures before hitting on the successful formula.

A well developed venture capital industry
Venture Capitalists in Silicon Valley vie for the opportunity to tell their story to first year students at Stanford University. They hope that the bright kid with dreams will come to them first. Can you imagine this happening at an IIT?

Actually, yes I can imagine that! Venture Capitalists are thirsty for new ideas and don’t care where they come from. There is plenty of Venture Capital right here in India looking to invest in software ventures. OK, there are not as many as in the USA, but how many do you need? You only need one to fund your venture.

The talk about a lack of Venture Capital in India is misguided. Talk to some of the Venture Capital firms operating in India and you get a rather different story. “Indian software companies do not understand Venture Capital. We have plenty of money to invest. What we lack are good business plans promoted by credible and seasoned management teams.”

You need to understand the Venture Capitalists and talk to them in their language, but that is the subject of another article. If you have the right idea and the right management team, you will get funding.

So should you continue to play when your competitors have 5 Aces? Maybe it would be more sensible to stick to bodyshopping.

“Insanely great products”, as Steve Jobs calls them, are not created by sensible people. They are created by obsessed individuals, who forge ahead when everybody is telling them that they are crazy. There are entrepreneurs in India today who can turn those 5 Aces to their advantage and add the Indian advantage of abundant low cost talent.

There are great software companies that grew up outside of America. Look at SAP from Germany, BAAN from Holland, Business Objects from France and Checkpoint from Israel.

These companies treat America as their home market. They raise capital in America, have most of their customers in America and bring in American management talent to help them to better understand this key market. In other words they make those 5 Aces work for them and not against them. You had better take those 5 Aces and make them your own and do it quickly, because American companies are taking the one Indian Ace, your talent. Most of the major US software companies are setting up 100% owned subsidiaries in India in order to tap Indian engineering talent. That Ace no longer belongs exclusively to Indian companies.

If you think that the situation looks tough from India, look at Israel. Israel is tiny compared to India and does not share India’s English language advantage. Yet Israel received over $800 million in high tech Venture Capital from the USA last year, more than any other country and far more than India.

So, yes it is possible to create killer apps outside America. It is possible to create them right here in India. Do you have the ideas and the drive to make this happen? Do you know where you want to go but lack a road map? The Dataquest “In search of India’s Killer App” series of articles will give you a road map.

In our next edition, Bernard Lunn will describe the financing options for entrepreneurs, helping you to have fruitful discussions with Venture Capitalists and Angel Investors.