Feature, Product, Company
Is it a feature, a product, or a company?
The 'it' can vary, but for the sake of simplicity, in
this discussion I'll assume the innovation is technological.
But the issues are similar for others, e.g., a new service
idea.
Is it a feature, or at least a product? Here are two
of my favorite ways to probe this:
Is the function separable? Can it be implemented
without the necessary existence or cooperation of supporting
functions or businesses? For an example: 15 years ago
the idea of a 'public network search engine' was invalid.
The open standards and content base of the Web did not
exist. To the extent that consumer online content existed,
it was locked up in proprietary online services, each
running on a closed network. The idea of a separable search
engine product or service was nonsense - the market was
not ready. Now we have Google.
If the answer to the separability question is 'no', then
there's a subsidiary question: Does the necessary supporting
infrastructure exist already, as part of an operating
business? If not, add the necessary support to your business
plan, and reanalyze for value and ROI. If yes, you are
a feature to someone else's product or service.
Will the customer pay for it separately? And not
just that, but pay enough to achieve an ROI including
reinvestment over time. An historical example is the linkage
of achievable software prices to the cost of the underlying
hardware. Another common case is the difficulty in revenue
extraction when the supporting functionality is seen as
'free' by the customer - either actually or as part of
a bundle. Add-ons to MS Outlook could be an example.
You can approach this problem with common sense or reasoning
by analogy with existing markets, but at the end of the
day, you'll need some customer endorsement. The question
is not whether the customer perceives value, but whether
and how much they will pay for it. If the answer to this
question is 'no', you may be out of luck.
Being analyzed as a feature is definitely harmful, though
not always fatal, to VC support. If the underlying market
is fast moving and competitive, the time premium assigned
to innovation may be enough for you to carve out a position
as a supplier to incumbents in the underlying product/service
space, or force one of them to buy you out to maintain
their position. But this is inherently a 'timing play'
which can lead to disaster if market momentum slows, as
the last few years showed.
If you are an entrepreneur in such a position, and still
want to continue, you should look very hard at whether
you want to go the VC route. The number of firms that
will consider you is going to be less, and you will find
yourself pushed towards the timing play.
If both the above questions - and others appropriate
to the case - were answered 'yes', then congratulations.
You might have a product. You still must show you can
make money at it, of course: that you can build it on
time and in budget, get it to the customers economically,
and defend your market from imitators well enough to recoup
the investment and a return. But, I'm going to assume
you can pass all of those tests as well, so we can move
on to the next fork in the road:
Are you a product, or a company? If your product win
is big enough, if it defines a big new category, the question
might be academic. But if you make that claim to VCs,
be prepared for them to look askance. 99% of the time
the statement 'defines new category' means one of two
things: The actual customer value has not been correctly
analyzed, or the company has overlooked (or wants us to
overlook) a class of potential competitors. This is quite
common with technical entrepreneurs, who will often analyze
in terms of whether a competitor solves the problem in
the same way, overlooking options that are substitutable
in the eyes of the customer.
So assuming your first product isn't enough for a profitable
exit, what distinguishes a 'one hit wonder' product from
a company?
Here's the point where 'market space' comes in. It's
a nebulous phrase summing up a lot of potential ways of
expending from an initial market position, as well as
the opposition you will meet in doing so. There's no way
to enumerate all of them but here are some of the options
that can create 'space', as well as some of the challenges
and competitive rebuttals that may occur:
- We'll add functionality and raise our price point
over time. [Good luck putting up prices, and if you
succeed, you'll exceed the buying authority of your
first customers.]
- We'll expand our market by creating a lower-featured
'lite' version. [Some of your regular customers will
think it's good enough and your gross will drop. You'll
create channel conflict.]
- We'll get others to use our product to support their
businesses, and that will grow our value. [That's called
a 'platform play.' Microsoft or Intel will integrate
your functionality and squash you like a bug once they
figure out what you're doing.]
- We'll use the momentum and profits from our first
product to buy up more technologies to integrate, and
products to brand and sell through our channel. [That's
called a 'roll-up.' Have fun integrating the management
and sales teams, and keeping customers who bought into
different value propositions happy.]
- We'll integrate backward, and assimilate the functions
and revenue of supporting businesses. [Who does the
customer want to do business with, an upstart or an
established company?]
- We'll go international - 2/3 of the market is offshore!
[It takes time and money, you don't have the cultural
skills, and local champions will get there first.]
- The underlying market is about to explode, Moore's
Law guarantees it! [Some analyst cooked up numbers to
sell a report, and made gross assumptions on market
elasticity.]
Now these are obviously pairs of wide-eyed optimism
and jaded cynicism. Truth will usually be somewhere in
between for each possibility. What you want is at least
one convincing growth argument of this sort, after considering
the structural barriers and competitive responses, preferably
also buttressed with a couple of other plausible alternatives
if they are necessary.
Again, if you got a 'no' answer, and still want to persevere,
ask again: Do you want to go the VC direction? There are
many valid products that never create a VC style equity
exit, but may create profit and cash flow for the entrepreneur
and value for the customer. What's your goal?
By Tim Oren
