All Fishermen are Liars Except for Me and You and Honestly ... I’m Not                   so Sure about You

Steelhead (and Salmon) are what scientists call androgynous fish.  While they are born in fresh water, they adapt to also live in salt water as part of their migratory life cycle. Out of the 5000 or so fertilized eggs in their redd, only 300 will survive the many dangers from predators, pollution, drought, water diversion and worm dunkers.  Against these odds, they innately follow their senses on the journey to and from the ocean only to return home to mate (once) and die. Any comparisons drawn between steelhead trout and entrepreneurs are for the most part purely coincidental. 

In the last couple of guest musings “Fish where the Fish Are” and “Fishing Good...Catching Bad,” we explored the pre-engagement and engagement stages of the customer validation process. We will now examine the post customer meeting phase. 

·                      All Fishermen are Born Liars ....

My fishing buddy Trevor likes to say, “Nothing makes a fish bigger than the one that got away.”  He routinely divides in half the number of fish I tell him I caught and then discounts by 25% the size of the fish.  I find myself telling my wife, “The fish was actually much bigger than it looks in the photo,” (although, it’s funny I always look the same size).

Possibly as a result of this, I am a big advocate of documenting customer meetings. There are a number of reasons for this.  The first is that the process of transcribing meeting notes allows me to see trends that I might not immediately capture in the heat of the meeting. After multiple times of hearing quotes like “that’s not the problem, this is...” my attention starts to peak.  I like to build matrices with our “Sacred Truths” on one axis and every customer we talked to on the other axis.  A quick scan of the rows will usually either yield a trend or an outlying data point depending on your perspective.  It also can prevent instant memory loss, reality distortion from magnifying the positive and filtering out the negative. After a particularly bloody customer encounter, one of the founders of a client exclaimed to my disbelief,  “Wow... they really loved the color of the box!”

Documenting customer meetings also provides a legacy to see how far you have evolved during the process of customer validation.  Down the road this may be important to the new VP of Marketing or Sales.  When the product is ready, they may want to follow up with the CISO at Goldman Sachs who was intrigued.

Finally, VCs know “All Fishermen are Liars...”   In the due diligence phase, it is not unusual for our client companies to supply VCs with Acuitive’s independent market validation reports. We are not J.D. Powers, but Acuitive’s customer meeting summary documents tend to be pretty objective and will ensure that it didn’t take 79 customer visits to produce those 3 perfect sound bytes.  Some recent work with an exciting stealth company founded by a serial technical entrepreneur produced a very positive experience with Mohr Davidow Ventures’ Jon Feiber and Donna Novitsky. The MDV team was a true partner in the validation process and had an insatiable appetite to consume the customer meeting analysis to probe more deeply into the opportunity while opening up their network as well.

·                       Don’t Shoot the Guide....

Admittedly, after a fruitless (and expensive) day of guided fishing, I have been tempted to take out my ‘45.  However after time goes by, I start to realize what Jimmy Buffet, the famous coral reefer philosopher, once said, ”Hell, it could be my own fault.”

Most founders of start-ups are engineers and most engineers crave data. The trick is to diffuse the emotion out of the process and focus on what to do with what we’ve learned in the process.  Our clients are intimately involved in the validation process.  They write down their Sacred Truths belief system and their wish list of customer targets.  They actively participate in the content creation process and the actual customer meetings. They are supplied with detailed post meeting write ups and analysis of what we have learned together immediately after each meeting. Somewhere during the process, a transferal of ownership happens which takes the feedback out of the realm of our opinion and into what the Acuitive client’s customers truly believe.

People react differently to customer feedback.  Many go through similar stages to what Dr. Elisabeth Kübler-Ross described in her landmark book “On Death and Dying” (Denial, Anger, Bargaining, Depression, Acceptance).  This is not to equate getting negative customer feedback with terminal illness, but many founders go through a similar process when it comes to interpreting customer feedback.  Many first time CEOs go through the stages very slowly as they get so entrenched in their own world view (based on their technological prowess and not on customer requirements). Sadly, it is often only after the company is shut down or the board brings in a new CEO that they finally accept it and can move on. 

The faster an entrepreneur can process the customer feedback, the faster they can get to the most important question....the “Now What?”  The right answer to this question will certainly impact engineering design decisions and product schedules while the wrong answer or ignoring the feedback could negatively impact the viability of the company.  One of the best at assimilating and processing customer feedback is Ross Schibler, founder and Chief Technology Officer of Topspin Communications which was recently bought by Cisco.  Topspin is the leading provider of programmable server switches whose channel partners include a few small companies you may have heard of (Dell, HP, IBM, NEC, Hitachi and Sun).  Ross also founded Rapid City Networks and then sold it to Bay Networks. As a seasoned entrepreneur, Ross has the ability to unemotionally process customer feedback and make actionable decisions about product features and functionality based on the data which propelled Topspin through the five stages all in the same meeting. 

One of the reasons why I love working at Acuitive is Mark Hoover. Mark has the uncanny ability (and 20 years of networking experience) to process recent customer data in real time and then sanity check it for consistency with his own career data points.   Mark quickly gets to the “Now What?”  With his legendary bed side manner, he can lift up the spirits of a founder by saying “The bad news is that your 40 targeted customers don’t care much for your Swiss Army knife, but the good news is I think that you may just have the best Can Opener in the industry.”

·                       Size Does Matter....

Hopefully, you have not had the good fortune of running across a California Fish and Game Warden while fishing. If you have, then you’ll know these dudes don’t mess around.  If the fishing regulations call for only one adult steelhead over 24 inches in your possession, they won’t hesitate to take your license, your gear and your truck if your prized catch is an inch short or your license is on the kitchen table.

Joel Jewitt, fellow Stanford GSB classmate and one of the founders of mobile platform provider Good Technology, once told me that there is no such thing as a vertical market for a start up.  Joel’s insight was that what looks like a single vertical market like financial services is really comprised of many small thin market slices (retail brokerage, equity trading, back-office, etc.) with diverse product requirements that can be difficult for a start-up to track and satisfy. The trick is to find as many slices that have enough in common to build a viable business and leverage your development.

I like what InQuira has done with their natural language enterprise search platform.  They have targeted complimentary markets such as retail financial, retail telecom and retail automotive due to the fact that these complimentary slices all have what InQuira calls “well understood industry intents.”  With this leverage, InQuira knows how to focus their sales, marketing and development budget on a large enough market opportunity.   Only after achieving significant revenue traction in known market slices, InQuira asked Acuitive to design a market entry strategy for other segments that exhibited similar characteristics to their core competency markets. There is no way to figure this out unless you talk to customers and understand their needs in complimentary verticals.

It is a fairly common practice for Acuitive to help companies quantify their Total Available Market (TAM) size, Served Available Market (SAM) and Share of Market (SOM) as part of the validation process. Despite enthusiastic responses from customers, be cautioned about having too narrow a focus. After the initial positive feedback, clients can be faced with the dilemma: to achieve a respectable revenue ramp they will need every customer with an installed base of 5000 VoIP phones deployed in a single location (all seven of them) or every existing geographically distributed SAN to buy the gateway appliance to make the numbers work.  You don’t want to be the undisputed leader in a zero billion dollar industry! 

Resist the temptation to jury-rig the TAM/SAM/SOM model to make the numbers look straight up and to the right.  While you might get funded, you will need to believe it yourself.  Eventually, these expectations set in the funding process will have a big impact on the next four to six years of your working life.

·                Evaluate the dependencies

You spot a huge steelhead slurping flies in a gin clear run across the stream and your heart starts pumping and your mind races...if you could just do a modified double-back haul cast into the wind to avoid the oak tree behind you and then bank your fly off the mid-stream boulder to have a chance at that fish...well that is a pretty big dependency.  I hate dependencies where I can’t control my own destiny.

Often this is the case with start-ups.  The fate of your company is in the hands of someone else, such as a service provider or an OEM, and your success or failure may be highly dependent upon them.  Often these companies know the leverage they have over start-ups and are not afraid to exercise it to get exclusivity, preferred pricing terms or even go to the Machiavellian extent of driving a vendor out of business to get access to IP.  In the validation process honestly try and get a sense if your success is dependent on someone else.  Soundpipe, a developer of private label low cost IP-PBXs, found that despite a 10X price benefit compared to comparable solutions from branded vendors, access to the distribution channel mattered as much (possibly more) than the product itself.   Soundpipe was acquired by a public company (Comdial) and finally got access to the dealer channel. 

Having spent over ten years in the proprietary hardware platform business, it is exciting to see the opportunities for start-ups being created as a result of the proliferation of low cost Linux compute nodes and the removal of many dependencies from proprietary platform vendors.

·                Keep your Eye on the Big Fish

The harsh reality of the start-up world is often there is a really big fish swimming in the same hole as you. Whether it is Cisco in network infrastructure, security and telephony, Microsoft in anything related to the desktop, Network Appliance or EMC in storage, or Apple in consumer MP3 devices, being able to realistically anticipate the likely response to your market entry will increase the likelihood of your survival (or being swallowed up).

I was recently in a customer meeting where the CIO of a very well known financial institution was constantly one slide ahead of me during my presentation.  After much head nodding (a good sign), I went for it and said, “You could have given the presentation instead of me.  At the risk of going out on the limb it sounds like if company X had this product today you would buy it... right?” He replied to a dumbfounded audience of founders, “I love the product concept and you are two years ahead, but there is no way I would buy this critical component from a start-up.  Cisco does not have this functionality today but it is on the Q4 2006 product roadmap.”  This factoid would have been good to know before start-ups burn through inordinate amounts of venture money trying to directly take on the Big Fish solely based on being cheaper or having some feature that the Big Fish didn’t have at the current moment (nor did they for that matter despite impressive power point).

In recent years, corporate IT has gotten even more conservative.  Frankly, they have been burned by too many start-ups.  Without some extraordinary technological breakthrough based on proprietary IP or a “hair on fire” problem with an immediate solution only available from a start-up, taking on the Big Fish in their home pond is ill-advised. 

Instead, I like Centrify’s approach.  Early on they began working closely with the Big Fish, which in this case is Microsoft.  They have built a platform that integrates most flavors of UNIX and Linux into Microsoft’s Active Directory so there is one directory structure for cross platform access, identity and policy management. It is a novel approach to the single sign on issue, yet leverages the fastest growing directory from the industry’s most stable provider who is not threatened nor likely interested in supporting non-Microsoft platforms in Active Directory.   When roughly 40% of Centrify’s market validation customer meetings end up with unsolicited requests to be in their beta program, you know they have something.  Now the Big Fish is asking to do joint customer calls because there is no threat, it fills a niche in their story, and furthers their mutual objectives. 

Life is short. This beats banging up against a wall trying to figure out how to guerrilla market against the Big Fish who will attempt to freeze the market with their five year product roadmap while they play catch up.

So what happens when what you are working on is so disruptive that talking to customers is a futile exercise because your company will fundamentally change today’s natural technology trajectory? We will examine validation for disruptive technologies in the final Musing in our series entitled, “Ain’t Ever Caught One of Them Before.”

Tom Garland joined Acuitive in January 2001. His market, customer and channel validation practice has helped match dozens of Acuitive companies to his contacts with Fortune 1000 IT professionals in search of....  the elusive customer.   To contact Acuitive directly regarding its Market Validation Practice, email validation@acuitive.com.