Do you remember Kevin Costner’s movie Field of Dreams and the farmer who hears voices saying if you build it people will come. So he builds a baseball field in the middle of an Iowa corn field and, sure enough, the people come. It just doesn’t work that way unfortunately. No matter how good your mouse trap, the world will hardly ever beat a path to your door.
How it really works is well described in Bob Metcalfe’s (the inventor of Ethernet and founder of 3Com) article “Invention is a flower, Innovation is a weed”. If you haven’t read it, Google it and have a read. It’s a succinct, first-hand summary of some of the issues in establishing a hi-tech start up.
So we’ve seen how we need to have a founding team to identify and then validate the market we will select to build our business on. We also need a strategy, but before we look at a strategy we need to fully understand Geoff Moore’s theory of “crossing the chasm”.
If you are not familiar with it, buying his book Crossing the Chasm is the single best investment you will ever make for $50 (with the possible, and I say only possible, exception of a powerball-winning lotto ticket).
Many years ago I attended a software industry dinner in California where an unknown Geoff Moore was the guest speaker. The audience was astonished and captivated by what he had to say.
He described in detail the issues I had recently come up against in building my first hi-tech business. I had thought those problems were unique, but here was someone who could explain exactly what I had found and more importantly he showed exactly how to overcome the very same issues I was stumbling around in the dark trying to deal with.
The theory is broadly (and this is a paragraph summary of a 300-page book) that the early market customers buy on product features, but these represent only around 5% of a typical hi-tech market. The other 95% buy mainly on business issues, like “will your company be around next year, I don’t want to buy an orphan”.
Because the early market customers (who will make a buying decision on product features) are only 5% or less of a market, the economics of serving, along with the emotional cost of being defeated in almost every sale, means that market alone is generally unviable. Imagine, at 5%, only closing one in every 20 sales.
Key red flags that you have yet to cross the chasm, are lots of positive interest and prospects that never seem to close and fall away at the last stage.
So now we get to thinking about our strategy. A good strategy is not a frontal assault on a bigger opponent. In the 6th century BC Sun Tsu wrote a book on military strategy called The Art of War, much of which remains valid today. In it he recommends not attacking an adversary with a frontal assault, unless you have a three to one size advantage. In my experience it’s very good advice in business today.
Rarely will a start up with a better product defeat an established competitor with a poor product. We are concerned also with building a valuable business, not winning an award for bravery posthumously. So we need to develop our strategy with an eye on the past to make sure we don’t repeat the mistakes of others, there are plenty enough new ones for us to discover without making old ones!
To those who may doubt this scenario, consider your next purchase of a car. Would you choose a BMW, a Mercedes or a new model that has more technical features and costs less but is made in Tibet by the Kamakooza company. Not surprisingly most people (probably 95%) would choose the safer bet of the BMW or Mercedes, and so it is with customers who buy hi-tech products. An Apple can occasionally beat a Sony, but it takes a lot of time and money.
It’s beyond the scope of this article to condense 20 years of experience into a paragraph. But suffice to say once you have the right market and a great team you need a great strategy, then pretty soon (but not before) you can think about a product!
A good strategy will be based on a series of specific, realistic and measurable goals our team can achieve to serve a valuable market that will make us a profitable and valuable company.
Ok, you’ve been very patient. Next article we’ll start building a product!
O’Hara is chairman of Clarity Commerce, a publicly listed software company based in England, and an independent director of Tait Electronics. Contact him at www.johnohara.co.nz