In recent months I have written a lot about the act of being a good Product Manager and the process of developing a successful market and product strategy.  If you follow my advice you’ll increase the probability of creating a fundable and successful product or company, but there are no guarantees.  Developing a strategy is kind of like home brewing beer.  You can take all precautions, sterilize all equipment surfaces, follow procedure painstakingly, and yet still end up with a final product that you are forced to call “Ink Beer” or “Superfund Site Ale”.  When that happens, your only recourse is to try and sneak that beer unnoticed and unlabeled into the refrigerator late at the party.  Which is kind of the start-up equivalent of selling off your source code and disbanding your engineering team – not what you setout originally to do.  So, in developing your strategy, you still need to “sniff test” the result to make sure that the strategy is healthy and viable, and that no pernicious wild bacteria has invaded to spoil it.  How can you do that?  In this Musing, I define some trouble signs that you should be on the lookout for.

The Mysterious Customer Syndrome

The absolute number one rule of developing a market or product strategy is that there should be no mystery about the targeted customer.  Vagueness or broad definition of the targeted customer is a fatal flaw both to getting funding and (more importantly) being successful with whatever funds you get. I find that such vagueness is usually a symptom of superficial interaction with targeted customers or assumptions about the target customer that are taken from “past experiences” or “gut feel”. This is generally a symptom of technical people, who either don’t know how to get access to customers or don’t feel they are smart enough to understand the merits of their wonderful new idea – so why waste the time?  Often, people substitute market research or demographics for face-to-face customer interaction, which is kind of like trying to get pregnant by reading a book on sex.  Yet, I regularly see investment presentations and business plans where it is clear that the principals have never met someone they ultimately plan to sell to. 

To truly understand your business, you have to get to know a representative sample of target customers personally.  You have to meet with them enough times (one meeting does not suffice) so that when you make product and marketing decisions, you are doing that with a clear mental model of specific named people that you are building for and selling to; with a complete understanding of what their job functions are, who they report to, how they are measured, where they get budget from, who influences their decisions, how they got their present jobs, what their major headaches are, how they spend their time each day, who their present vendor allegiances are to, what their span of control is, what their present environment looks like, how their organization is structured, how they make decisions, what they would like to do next in their career, where they would like to go on vacation next year, and what their favorite beer is. 

If you know all of this, and if you have presented to them a detailed product or service idea that they have responded well to, then you know you will sell at least a few of the widgets that you are developing.  Now all you have to do is figure out how many of these customers there are to sell to (which is where market research and demographics are useful) and how much it will cost you to develop the product to figure out whether it’s a good business idea. That is usually a pretty simple exercise once you have the target customer well characterized and you have validation of your concept from a sufficient number of them.

Tennyson’s Theorem

I don’t know about you, but if I was in the Light Brigade and saw cannons to the left of me, cannons to the right of me, and cannons ahead of me, I would have had a pretty intense sinking feeling in my stomach about my prospects.  Business is not about valor and bravery and the flag.  There is no reason to venture into the valley of death as a start-up if you know that is what lies ahead of you.  But many people do so either because they fail to comprehensively scout out the opposition or they fail to objectively assess what the competitive information they do have means to them.  The first of those mistakes is just stupid – you deserve your fate.  But the second is a very human failing related to being an optimist, which all good entrepreneurs inherently are.  You don’t want to lose that trait, but for the sake of your business, you do want to be paranoid when it comes to the competition. Assume they are smart, resourceful, and aware of the same opportunities that you are. If you do, you’ll interpret competitive information in their favor, which will force you to strengthen your value proposition even further.  Or hang back with the cooks while the brigade saddles up for a stroll into the valley (the definition of discretion – look it up).

Here are a few indications that you either haven’t done your competitive homework or you have but are ignoring the conclusions you should be making from it:

• You claim you have no competition.  My experience is that this is only true when you have no market.

• You list a few competitors, but the VCs you are pitching to call up Acuitive and off the top of our head, we reel off a half dozen more that you didn’t list.

• Your competitive positioning presentation consists of a multi-page detailed feature list in point 6 font, which shows that while one competitor or another has every feature you are proposing to build, no one has them all.

• You postulate that your advantage versus the competition is an architectural advantage.

• You postulate that your advantage is that there are no other Engineering teams in the world that could build what you are proposing to build.

• You are a “tweener”.  In other words, you fill a perceived market coverage hole in an already established product or service space. There are competitors who are bigger, badder, faster, more feature rich, and more expensive.  There are also competitors who are cheaper, smaller, etc. If these competitors are established, a “tweener” strategy is generally doomed, because either a need for your combination of characteristics doesn’t exist, or it does and the competitors move up or down towards you and squeeze you out. 

• Your list of direct competitors is greater than six.

• Your target customer is high-end enterprise IT managers, and an entrenched competitor is Cisco.

• Everyone on your list of competitors is rapidly going out of business.

Instead, here is what I look for:

1. The ability to objectively and honestly position most other companies and products who may on the surface be competitive, as different beasts, delivering differing values, and therefore either irrelevant or complimentary to what you are doing.
2. An easily articulated feature/function advantage vs. a short list of remaining direct competitors in an area that is a high priority issue with the targeted customers identified, with at least parity in all other areas important to the customer.
3. A six-month time-to-market advantage over the closest competition, assuming best case execution on their part and worst case on your part.

The Mythical Huge Market

I’m always extremely skeptical when someone tells me that their market opportunity is huge – many billions of dollars.   People who honestly feel that about their product are the same ones that generally start their presentations with concepts like “the Internet is huge and growing”, or “Service Providers need QoS-based differentiated services to survive and thrive”, or  “IDC forecasts that 5 billion Chinese will be using wireless phones by 2005” (calling for take-out from Italy?).   After a series of logical randomness, these presentations always end up defining a particular product or product roadmap that one is led to believe can tap into the entire mega-market referred to in the introduction.  This is never viewed as realistic by anybody and depending on how vociferously the proposition is presented, can end up undermining the speaker’s believability.  As a result, all other data presented is looked at skeptically.

In reality, there are only two scenarios possible for a particular product.  Either it meets the need of a very specific customer community (a market), or it meets the needs of no one.  The best ideas for products, and for start-up companies for whom the product is the company, come from recognizing a fairly small but tight customer community, and a solution that will be recognized as valuable by all of the members of that community relative to other options they have.  The old Hewlett Packard process of continually subdividing markets into segments until you identify those that you can dominate makes a lot of sense to me.  As a result, I generally only am interested in new product ideas that address market segments in the range of $100M to $1-2B or so, and that can achieve 20% or more penetration of that segment.  Anything less than market size is probably too much of a niche.  Anything more than that is probably a sign of poor market segmentation or a mature market with established winners.

This isn’t to say that a start-up can’t dream of being a company that services markets much larger than this.  But the 1^st product and its derivatives aren’t going to get you there.  Big, successful companies generally got started with one good and well-executed product idea. But to get big and successful, they followed that up with a series of good decisions about follow-on products that allowed them to leverage their early success and expand their market opportunity.  It is almost impossible to forecast out several years and anticipate how this could play out.  As a start-up you shouldn’t worry about that too much and should focus on achieving initial success with the initial customer community.  And if you think that opportunity is multiple billions of dollars, you’ve failed the “sniff test”.

VCs “Get It” Immediately (Or Not At All)

One clear sign that you may be in trouble if you are an early stage company seeking funding, is if you walk into a VC meeting for the first time and with-in 15 minutes, they “get it”.  VCs are generally quite smart, but they are not generally intuitive.  For them to “get it” means that the problem statement and solution sounds familiar to them – probably similar to other companies they have talked to or similar to other companies their VC friends have already funded and brag about.   If you experience rapid VC traction, it’s a sure sign that you need to re-double your efforts in investigating your competitive position. At least a few companies are at least a quarter or more ahead of you.

Of course, an even worse scenario is if the VCs never “get it” at all.  You may think it means they are stupid or have a blind spot.  But that is generally not the case. VCs are smart, they often do quite a bit of customer and market research (or have someone do it for them), and they talk to a lot of people in the industry.  If a series of them don’t “get it” after several meetings and a few months of interaction, it’s a pretty good sign that you are fooling yourself about your opportunity, uniqueness, or team.  Rather than searching farer and wider for a source of funding, you should be looking inwardly at yourself and asking some tough questions.

The ideal situation is when a VC’s interest is tickled in the 1^st meeting, but they still don’t quite get it – i.e. they are a little skeptical simply because the concept is new to them.   But than after a couple of more meetings with you and a month or so of investigation on the side, they come back to you aggressively and enthusiastically.  That means that they have figured out your uniqueness.  You may have known it all along – but give the VCs a break, they see a lot of crap wrapped in gold foil and they need some time to filter off the good ideas from the noise of the bad ones.

The End-to-End Dead End

One of the main things I think about when developing a value proposition for a customer that then leads to a product or service definition, is “what is the value when the 1^st box (or CD, or site serviced) is deployed?”  If the answer is “none” or “little”, then I know I have a problem and I need to go back to the drawing board.  In networking, the ideas that “take” are those ones that can be deployed as point solutions, delivering real value, and then the value gets more and more as people deploy more.  Anything that requires broad deployment (in the worst case end-to-end deployment) before the value is realized, will not get off the loading dock in large quantities. 

Ecosystem Horror

Successful products and successful companies generally become so because they put themselves into a situation where they were largely betting on themselves.  In other words, they recognized an opportunity to build a product or service for a particular customer community, developed that product or service, and then sold it directly to that customer community.  There were plenty of opportunities to screw up, either in defining the opportunity wrongly or in messing up the execution – but both of these were with-in their own control.    

But many other companies put themselves in a situation where their success depended on the strategy, execution, staying power, and timing of other companies. 

Murphy’s Stout Rule: Ninety-nine times out of a hundred, when you are depending on others to behave in a certain manner so that your opportunity emerges, you would have been better off spending a year in a bar rather than launching a company.

A great example of this is all of the Multimedia Server, Digital Rights Enforcement, and QoS-Oriented Broadband equipment vendors who built their products in expectation that the “Internet Entertainment Ecosystem” of broadband consumers, digital content providers, and service providers would emerge to create a huge market for their products.  We’re still waiting for that to happen and most of these companies are dead on the beach, or at least being looked at solemnly in the triage process.

The problem was that none of these vendors carried enough weight to make their market happen.  They were waiting for the elephants to dance to a certain rhythm at a certain time and it never happened.  So they and their investors got more and more frustrated but had little they could pro-actively do to help their companies succeed. 

Summing Up

It takes a lot of self-discipline to sniff-test your own strategy. I greatly admire the people who do so and then react appropriately.  If you can’t do it yourself (the recognition of which displays quite a bit of self-awareness), get somebody else to do it for you so that you can anticipate and fix issues before you ask some one to give you a lot of money so that you can spend a lot of money.  Those people you ask will be applying their own sniff tests and you’d like to be pretty sure that you pass them.

(volume 4, number 10)

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