What Kind of Entrepreneur Are You?

Being a technology marketing guy, I'm constantly updating my business's customer profiles.  A customer profile is simply a thumbnail sketch of your target customer(s) - in my case startup entrepreneurs - used to guide your sales and marketing efforts.

I thought it might be fun to share some with you.  I meet a lot of startup entrepreneurs, yet find that they can be grouped into one of four profiles:

Ralph - As in Ralph Waldo Emerson's "if a man can...make a better mousetrap...the world will make a beaten path to his door."  Ralph's alternate motto is "build it and they will come."  Ralph has no use for marketing.  Sales people are, at best, a nuisance to be tolerated.  Ralph is almost always a first timer.  I don't waste a lot of time upfront with Ralph; he already knows everything having confused omniscience with confidence.  The funny thing is that if Ralph survives the school of hard knocks, he may end up being one of my most profitable clients.  Why?  Because cleaning up a mess is lot more work than preventing one in the first place.  How likely is Ralph to survive?  I won't say it's zero;  after all people do win the lottery.

Spock - Again, usually a first timer, mostly technically oriented, highly intelligent, and logical to a fault.  They've attended the classes, read the books, and know how a startup is supposed to work...in theory.  Unfortunately, Spock lacks the down-in-the-trenches experience to evaluate any advice that runs counter to theory, especially with respect to areas containing large doses of human irrationality, like sales, or management, or fund raising.

While everyone goes through a learning curve when doing something new, Spock's is often a lot slower.  Ironically, it's not because of lack of brainpower.  Rather it's because you first must unhook him from his cherished beliefs before he can learn anything.  How likely is Spock to succeed?  It's a race between how fast Spock learns vs. how fast Spock spends.

Rikki Tikki Tavi - Like the hero of the Rudyard Kipling story, Rikki's motto is "run and find out."  Rikki may or may not be a first timer.  Rikki doesn't know what he doesn't know but is wise enough to recognize this possibility and is eager to learn.  Rikki doesn't know something?  He'll run and find out or find out who does.  Rikki understands that the way things work aren't necessarily the same as the way things should work.  He makes mistakes, but above all he learns.  He knows the importance of good counsel.  I love to work with Rikki (and VCs love him too)!  Guess what his chances of success are?

"Ben" Around the Block - Almost always a serial entrepreneur or someone who's spent a lot of time in the trenches building a business.  Ben knows what he does well and more importantly, what he doesn't.  Ben knows how to leverage connections, cash, and resources.  He knows how things really work which means he understands timing.  Ben's been hit so many times that his bruises have bruises and through this he's gained perspective.  There's a reason VCs line up to get Ben into their portfolios.

So what distinguishes Ralph and Spock from Rikki and Ben?  The understanding that maybe, just maybe, they don't know everything.

Why do I say this?  Because I've been Ralph and Spock.  As a newbie, hot shot, R&D engineer, I was Ralph.  Thankfully, I'm a lot dumber today than when I was 25.  It took me a couple of years watching amazing technology that I was working on die in marketing reviews to evolve into Spock.  A corporate transfer into marketing and the patient tutelage of some tough, no nonsense sales managers⁽¹⁾ and two of my bosses in marketing⁽²⁾ killed Spock.  Today, I'd like to believe I'm Rikki striving towards being Ben (but maybe I'm just deluding myself).

So which one are you?

I'd love to hear from others to round out my field guide to entrepreneurs.  Tell me about other types you've run into in your travels.

(1) Thanks to Sal Spano, Lee Herren, John Mestemacher, Dan Frailey, and Brian Moylan.  The pains from the beatings have finally subsided to a dull throb.
(2)  Thanks to Loren "Catch Flies with Honey" Sutherland and Keith "Don't Confuse Me with the Facts" Scott.

Startups & Existing Markets, Part 2: Beyond the Beachhead

Last week's post discussed five rules for establishing a dominant position in a niche segment.  This week's discusses how to extend that beachhead into the broader market via the three R's.

Because existing market customers have a current solution, you now must deal with purchasing agents (including buyers, supply chain managers, or the equivalent) not just technical specifiers.  Purchasing agents are concerned about the costs and risks associated with changing from their current solution.  The key to addressing these concerns is to have a reputation as a market leader able to supply credible references to prospective customers who will make referrals to other prospects on your behalf.

Reputation:  Purchasing agents rarely get fired for buying from the market leader, a position you can legitimately claim, provided that you've established a niche dominant position.  Part of your reputation is based on your market positioning.

For entrants into an existing market, the most common positions are based on either:

1. Highest performance, high price - Best when your product can solve a growing outlier problem that existing products address poorly or cannot address at all.  To increase market share, the company must decrease prices.
   
2. Sufficient performance, lowest price - Best when your products have the ability to address a minimally sufficient solution at a significantly cheaper cost.  To increase market share, the company must increase product capability. (This is the approach presented in Clayton Christensen's Innovators Dilemma⁽¹⁾.)

Take care not to establish a position that precludes extension into the targeted market segment.  (E.g. a club whose exclusive position is based on a limited number of members would be tough to extend into the mainstream; better to make exclusivity based on member net worth.)

References:  Pursue an adjacent niche approach to extending into the mainstream market.  Do this by getting relevant customers to act as references to new ones.  Relevant customers are ones in your existing niche who have problems as similar as possible to those of your prospective customers.  It helps if the reference customers are market leaders as well.

Depending on what market you are penetrating, the ultimate reference is to become an industry standard.  This can be as formalized as in industry trade organization specification (e.g. IEEE, ISO, ASTM, Blu-ray) or by default due to market share dominance (e.g. Microsoft's O/S, Apple iTunes).

Referrals:  As you gain new customers in the mainstream market, get them to refer you to others (assuming they aren't competitors; those you'll have to figure out yourself).  As your new customers begin to reap the benefits of your solutions, they become the new most relevant customer references.

Eventually, the three R's set up a reinforcing cycle which in time should give your company a path to becoming the incumbent.  Just keep an eye on those startups.

References:
(1)  Christensen, Clayton, The Innovator's Dilemma, New York: Harper Collins (2003).

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Startups & Existing Markets, Part 1: Five Rules for Niche Penetration

Why Pursue an Existing Market
While much has been written about startups developing entirely new markets, comparatively less has been written about startups seeking to penetrate existing markets.  But there are several advantages to pursuing an existing market:

• The market is defined - There exists real data about products, market size, customers, competition, and sales channels.  More importantly, the market is already framed which minimizes the blank stare factor you get in trying to describe a completely new market.
• A real problem exists and real money is being spent - There is no question that basic demand exists and that someone will pay for a solution.  The risk of having a "solution looking for a problem" is reduced.  Of course, this is not a guarantee that people will buy your solution.
• Customer ROI can be calculated - In existing markets, the rules for determining customer payback are often well understood.  This is an invaluable guide in determining how well your solution addresses a need or compares against the competition.  Example:  the cost of ownership model used in the semiconductor industry.

But there are two important disadvantages:

• Competition exists - And they won't just yield without a fight.  Competitive strategy is the issue with existing markets vs. new markets.  (With the latter, framing a value proposition and promoting awareness to target customers are often the key problems, not competition.)
• Pain of adoption favors the status quo - To the degree which your offering introduces risk or requires customers to change habits, processes, or relationships, this can be a serious barrier to success.

Five Rules for Penetrating Existing Markets
Startups seeking to penetrate an existing market should pursue a niche dominance or beachhead strategy governed by these five rules:

1. Competitive entry must be based on superior performance or lower cost. You must demonstrate ROI high enough to overcome the pain of adoption.
2. Focus, focus, focus and burn the boats.  To establish dominance, you must understand the entire niche ecosystem in depth, not just your product's competitive advantages.  Choose one and only one niche segment.  Don't choose two (unless you can field a completely independent team).  Penetrating an existing niche is hard.  By burning your boats and committing your startup to just one niche, your team will have no choice but to knock down every obstacle that rears its ugly head.  Don't give the team an excuse to dodge when the inevitable "unsolvable" problems arise or they will remain unsolved.
3. Pick a niche based on speed of dominance over size.  Look for customers with high pain who will be the most motivated to adopt your solution ASAP.  Don't worry if the niche is small; once you're entrenched with a dominant position, you can extend into bigger segments later.
4. Risk management can be a bigger issue than performance enhancement.  Because existing market customers have some working solution, superior product performance or lower cost is a necessary but insufficient condition of purchase.  You must also address their concerns surrounding any downside risks of change.  These often have nothing to do with your product but are more associated with the supply, deployment, and integration of it.
5. Work through existing relationships.  One way to minimize the pain of adoption is to work through existing partners, alliances, and channels as much as possible.  While this introduces its own set of challenges, this eliminates a major source of risk.

How will you know when you dominate your niche?  Market share.  While this varies by industry, to be truly niche dominant, your company should have the largest share of all competitors in your chosen niche and typically greater than 30%.  Don't confuse reputation for dominance.  Dominance means share.

Next week's post will discuss the Three Rs for moving beyond the beachhead niche into the mainstream market.

Raising Startup Money: PRODUCTS that CUSTOMERS will PAY for

Periodically, I get asked some variation of the following:  “What’s the best way for me to raise money for my startup?”  “How should I approach investors/angels/VCs for funding?”  “Can you introduce me to an angel/VC?”

My answers:  “Demonstrate that you have a product that customers will pay for.” “Demonstrate that you have a product that customers will pay for.”  And “have you demonstrated that you have a product that customers will pay for?” respectively.

This is usually followed by a short discourse on product/market fit, what constitutes a product, what constitutes a target customer, what constitutes a meaningful dollar commit, and why acceptance of free samples by customers is not substitute.  (I love free samples at Costco, but that doesn’t mean I’ll buy.)  Of course,  if you can’t get someone to take your product when you’re giving it away, there’s a learning opportunity embedded in there….

After today, I can now just say, read Steve Blank's blog post here: http://steveblank.com/2009/11/05/raising-money-with-customer-development/ . 

For those who may not be familiar with Steve Blank, he is the developer of the Customer Development methodology⁽¹⁾, a rapid, iterative, learning oriented feedback process by which minimally sufficient feature sets of increasing refinement are delivered to target customers for validation as defined by a sale or other dollar commitment.  It is analogous and complementary to the Agile methodologies used in software development.  At the end of the process, you have a (1) defined product (2) identified target customers and (3) idea of what they will pay validated by a P.O. or other dollar commit that can be used to help you raise money.

While particularly applicable to software development, Customer Development can also be applied to services and hardware products, although it is not a universal cure all.  What dictates the methodology’s applicability is the total cost (dollars, time, resources) of iterative prototype trials.  The cheaper the cost of trial, the faster the iteration cycle time, and the lower the consequence of failure, the greater the reasons for using Customer Development.

For example, because software can be rapidly and cheaply deployed in small functional chunks, not only can iterative cycles be turned around quickly, multiple “split tests” can be run concurrently.  And the consequence of failure is usually small. This greatly accelerates the learning and subsequent convergence of fit between product and customer.

However, in medical devices, for public safety reasons, the deployment of new products is highly regulated.  Validation time by the customer can be lengthy, and the consequences of failure much more severe.  This limits the number of prototype iterations which reduces the benefits of using this methodology.

Nevertheless, if you’re involved in technology commercialization and aren’t familiar with Customer Development, it would be well worth your while to become so. 

Want funding?  Think products that customers will pay for.

References:

(1) Blank, Steven, The Four Steps to the Epiphany, Cafepress.com, 2005.

Why Facebook is Lucky to Have Me as a Customer!

A couple of weeks ago, I opened a Facebook account and they should be thrilled!  Why?  Because I’m an Early Majority guy.

A what?  The term comes from the Diffusion of Innovations⁽¹⁾  theory popularized by Everett Rogers whereby individuals are categorized with respect to their willingness to adopt new ideas, technologies, and products as Innovators, Early Adopters, Early Majority, Late Majority, and Laggards.  Wikipedia has a nice diagram which juxtaposes the adoption curve with the growth in market share.

The diffusion of innovations according to Rogers. With successive groups of consumers adopting the new technology (shown in blue), its market share (yellow) will eventually reach the saturation level. Diagram from Wikipedia.

Now a lot of attention has been paid to the importance of Early Adopters in the successful commercialization of new technologies.  While Innovators have been both celebrated as true visionaries and derided as the bleeding edge, Early Adopters are universally acclaimed as the opinion leaders who can rocket a new product up the lifecycle curve.  They are the trendsetters to be courted like royalty by startups hoping to succeed.  And you absolutely do need them.

But look at the market share curve. Notice where the growth inflection point starts, with the Early Majority.  This is fast growth part of the product lifecycle where companies establish industry dominant share positions (or not).  This is where cash can really make a difference.  In other words, Early Adopters Get You In but Early Majority Gets You Scale.  And this is why my getting a Facebook account is such good news for them. (Make hay now guys!)

So I’ve been a technology commercialization guy for 20+ years; why am I not an Early Adopter?

I’m not a technophobe (I’m an ex-engineer) nor is it even the case that I’m never an Early Adopter.  I bought one of Apple’s first MacIntosh computers (128KB!), setup one of the first websites in my industry in 1993, have been using LinkedIn for over five years, and bought an iPhone in August, 2007 just after it stopped being necessary to mount an assault to get into an Apple store (ditto for the Wii).  On the other hand, I waited until late-2006 to download iTunes, a mere six generations after Apple launched the iPod, still don’t own a DVR, and Ashton Kutcher aside, I’m still not on Twitter.  It’s not about cost; after all setting up an iTunes or Twitter account is free. 

So what's the reason?  Pain of Adoption.

Pain of Adoption encompasses a number of a factors including price, learning curve, fear of the unknown, and time/effort to implement.  It can be a serious impediment to the commercialization of new technology or a powerful defense of adopted technology.

How serious?  Even the most trivial impediments can be enough.  For example, my twelve year old son just bought a new laptop and, having no money, happily loaded it with Open Office, a free, open source equivalent to MS Office.  Because it’s all new to him, the learning curve for the two programs is the same whereas the price tag is not.  Me?  I’ve been using MS Office for so long, that I can’t be bothered to learn the miniscule interface differences, so I pay.  Of course, every time Microsoft “improves” Office (which to me means nonsensical annoying changes to the interface for no apparent benefit) I seriously contemplate shifting back to a Mac (but more on this later).

We Early Majority types are sensitive to the pain of adoption.  Unlike Early Adopters, we don't want to play with your stuff;  we just want to use it.  For us to adopt your technology, we want to know that it’s going to be around long enough to make it worth our while to learn and that it’s robust enough that we won’t be spending all of our time getting it to work.

So what’s the message here?  If your startup is going to be successful bringing new technology to market, you need to bridge from the Early Adopters who got you started to the Early Majority who will scale your company.  Geoffrey Moore discusses this more than ably in his book Crossing the Chasm⁽²⁾.  But here are my five tips to overcoming the pain of adoption.

1.       Provide compelling value – Above I cited cases of my being an Early Adopter.  In actuality I was not.  What I had was pent up pain!  For example, juggling a cell phone, Palm Pilot, and laptop on long business trips was such a pain, that when the iPhone came out I was ready!

2.       Take away risk with a free trial -  Its easier to try something if there’s no out-of-pocket risk.  A money back guarantee isn’t good enough because of the hassle of recovering my money if I don't like it.  Give me enough trial time to invest in the learning curve and get hooked!

3.       Work with the learning curve – Give me basic functionality right away without having to resort to a manual or help files.  At this stage, a plethora of features is a negative.  Get me hooked first, then give me an easy upgrade path to me to pay for the enhanced features. (And if I don’t, that should tell you something….)

4.       Give me feedback that I’m doing it right – Using a web service example, think progress bar (good) versus spinning alarm clock (bad - is it working? hung? broken?)

5.       And finally, don’t upgrade the user interface unless there is some hugely compelling benefit for me (not you) -  Once I’ve gone down the learning curve, you now have the pain of adoption working for you.  Don’t give me an excuse to check out your competitor (see MS Office story above).

References:

1.       Rogers, Everett, Diffusion of Innovations, New York: Free Press, 1962.

2.       Moore, Geoffrey, Crossing the Chasm, New York: Harper Collins, 1991.