Monday, August 15, 2005

Pat your head and rub your tummy

Young start-ups need two things to survive: customer orders and funding.

The challenge, however, is that customers and venture investors often decide to "buy" based on very different messages.

To succeed with customers, start-ups need to articulate clear, focused value propositions. Often the nature of early stage product development is such that the product is of limited functionality and can best be sold by "narrowing the focus to broaden the appeal;" clear use cases, incremental value wrt products already in production, easy to install, and quick to show value.

Focus is often the key to early sales traction.

Investors on the other hand can often have a pejorative view of focus - VCs question nichey looking business plans ("is this a feature or a company?") and the proverbial "what is the TAM" and "can this thing scale" are often orthogonal to the product marketing challenges of selling version 1.0 products to skeptical customers.

In my experience as a VC and ex-startup CEO, young companies need to remember to develop and tell two stories. The first targets customers and explains specific, tangible, and focused value made possible via the currently available product. The second story targets the VCs and addresses the real concern with respect to scale, TAM, and a road map that supports the emergence of the company from a niche-product to a real company.

This challenge of orthogonal messages and the need to develop them simultaneously is similar to the age-old, "pat your head and rub your tummy" trick.

Some companies tell great customer stories and never get funding. Others are great at raising money, yet never seem to be able to sell the customer. It is the rare, and significant, early-stage company that can tell a story of relevancy that resonates with the buyer, while also painting a longer-term vision to VCs wrt how to build a large company that will make VCs a healthy return.

Any comments or experiences here would be great to share!

7 comments:

  1. Great post. I've actually run into this exact problem. I’ve built a great company with an awesome value proposition, hundreds of customers signing up every month and somehow when I give the same pitch to investors, they don't "get it." But what I've learned over the years is that you have to tell them a different story. They care about different things. It’s kind of a pain really, but as I grow and mature as a CEO, I realize its necessary and something I will continue to work on. I commend the people that can do both and it’s definitely something I'm striving for. Even if we can build a great business without the big-time funding, having the “ability” to do both is extremely valuable.

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  3. IMHO I think young startups need one more thing: a kick-ass product.

    In other words, an innovative and committed R&D team.

    How many companies do you know of that were acquired because of great marketing and generous funding, but lousy or no product?

    I cant think of any.

    On the other hand, tech history is littered with several instances of teams that, with a kick-ass product and zero or little funding or orders, created a lot of value. My favourite: Nullsoft, the three guys that created a software MP3 player called WinAmp (sold to AOL for 60m USD). Another favourite: the two guys who created FrontPage (acquired by Microsoft).

    These both form an interesting model to formalize and replicate:

    With a $20m commitment, you could fund 100 developers to go out and build their "dream" product idea (and every dev has one), at $100k per dev. If 1 out of 50 devs comes up with a revolutionary product which gets acquired for USD 20m, your ROI is 100%. And if half the devs are based offshore, make that
    1 in 70.

    I think this applies even more today, when RSS aggregation is touted as "high technology." IIRC the Bloglines guy took 2 months to put together the site. While he was working his day job.

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  4. Missing from above comment: Calculations assume that every funded dev also hires a two person team at $50k each.

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  5. Anonymous11:02 AM

    Hey, you have a great blog here! I'm definitely going to bookmark you!

    I have a Ultimate Marketing site/blog. It pretty much covers marketing related stuff.

    Come and check it out if you get time :-)

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  6. Anonymous4:37 AM

    Hey, you have a great blog here! I'm definitely going to bookmark you!

    I have a Ultimate Marketing site/blog. It pretty much covers marketing related stuff.

    Come and check it out if you get time :-)

    ReplyDelete
  7. I am surprised you did not mention unique idea or first to market as the two things young start-up need to survive. I have been debating for many years within friends that Google and Amazon was neither unique nor pioneers.

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