26 March 2012

The Accelerator Conundrum and Good Business Sense


Acceleration is the “term du jour” for start-up companies, and entities called “Accelerators” have sprung up across the country to serve the thousands of companies that want to be the next Google, Facebook, or Twitter.  Acceleration services come in several flavors:
  • First, there is real estate – as in a space to hang out and collaborate.  Physical accelerators typically house 5 to 25 companies – providing private offices and shared workspaces.  The rent is low, but the landlord is likely to be taking some equity for his trouble as well.  Since entrepreneurs find it hard to rent office space at market prices, this can be valuable, but you should ask yourself this question:  Would the CEO’s kitchen table work just as well for the two meetings a week when the whole is team is required?  Skype and FreeConferenceCall.com work pretty well, too, when group thinking is required.
  • Next, there is mentoring.  Start-up companies are notoriously short on expertise across the board, because, generally speaking, it’s the guys who are inventing the product that start the company, and the other functions come later.  Plus, hiring a full management team and all the key employees that would make life easy is very expensive, and, besides expertise, the top thing start-ups lack is money.  For better or worse, early on, company founders drive sales.  Finance is a bank account.  Marketing is a mystery, and human resource management is a subject for another day.  If the mentor team at the Accelerator can provide cogent advice in these areas that saves time and money and juices your company’s performance, this is a huge bonus.
  • Third, it’s even better if your mentors know something about your market.  Enterprise software, clean energy, social commerce, and healthcare IT require radically different knowledge and skill sets.  If you’re looking for a physical accelerator, pick one where the operators and mentoring team know something about your market, products, customers, and business model.
  • Lastly, there’s the price/value equation.  Typically, Accelerators invest $50,000 to $100,000 for 3 to 7 percent of your company, and some ask for some of this funding back in rent.  Plus, your stay on-site may be short.  You might be “graduating” four to six months after you enter.  Is it worth the price?  For the Accelerator, the risk is small.  Historically, 20 percent of the companies that come through their doors will survive two years or more, and 10 percent will produce an excellent exit.  Your mentors might love young companies, but, for them, it’s a numbers game.  For you, it’s your work life and personal passion all rolled into one.  You should ask yourself:
  • Can I get $50-100K in seed funding from some other place more cheaply and without as many strings attached.
  • Do I really need office space nowDoes the accelerator offer the right type of mentoring?
  • Can I hit key milestones during that four to six months that would attract additional funding?

Here are the other thing syou should ask yourself:
How good is my idea?
Does my idea have legs for the long-term?
These days, there seem to be two types of start-ups:
  • Companies that build defensible products and business models.  If you are successful, you end up with a 12 to 18 month lead in the market.  As a result, you can make mistakes and survive them.  I have a client in Austin called StoredIQ that provides a Big Data Management software platform for unstructured data that is better at finding, collecting, indexing, and analyzing huge amounts of data than any other piece of commercial software in the world.  Better than HP-Autonomy, better than EMC.  The IT world is just now catching up to what they do, which means that the market is coming to them.  It’s a good place to be.  It took millions and millions of dollars to build the StoredIQ platform, and, someone wants to enter their market from a standing start, it will take millions and millions to catch them.
  • Companies that create a killer model that can be rolled out fast and grow rapidly but is easily copied.  Facebook and LinkedIN have built dominant positions by building social networking platforms, building a critical mass of users, and then figuring out how to charge for access to the masses.  Both started early, built software platforms that appear simple on the surface but are complex underneath – making them hard to replicate on a grand scale, although Google is doing its best.  Therefore, a lot of entrepreneurs have created either niche social networking products – think social networks for doctors, lawyers, or accountants – or tools that connect with and enhance Facebook or LinkedIN – hoping that one or the other will buy them for a good price.  Note, however, that only 2 out of 100 “killer” social analytics tools will end up in the Facebook or LinkedIN product portfolio, and figuring out how to make money off of them as an independent is a big challenge.  
Groupon and LivingSocial have both built up big leads in the Daily Deal space, but barriers to entry are very low, big companies like Amazon and hundreds of small companies have entered the fray. For Groupon and LivingSocial, sustaining a high growth model will be a huge challenge.
If your business model is easily copied, there are two major implications:
  1. There’s an added premium on execution.  You have to be as perfect as you can be in an imperfect world, because 25 or 50 companies are trying the same thing.
  2. You might not need as much money to get started, but you’ll need more down the road to fund rapid market penetration against a torrent of competitors.

As strategy consultants who do a lot of "acceleration" of young companies at the kitchen table, we're big fans of long-lasting, defensible business models, even if the idea might be a little less sexy.

Here’s the bottom line.  Whether you go into an Accelerator space or leverage the kitchen table, there are three things that you should do right out of the gate:
  • Create a great plan.  It can be simple, but you should some idea of where you want to be in 2 to 3 years.  You can do it by writing down simple milestones and documenting your product plan, or you can go deeper and write a full business plan.  Either way, you have to have a plan, and your fellow managers and employees need to understand and endorse it.
  • Sharpen your story - continuously.  Never use 100 words when 10 will do.  People talk about the elevator pitch all the time.  You really need one, because, when it comes to attracting investors, employees, and customers, you want to give your pitch and then hear those magic words, “Really.  That’s interesting.  Tell me more.”
  • Finally, know your numbers.  You need to set a multi-year forecast out of the gate that tells you what it will cost to build your product, how much revenues your initial customers could bring you, and how much funding you’ll need to reach your goals.  The forecast translates your plan and story into numbers and tells you how big the mountain is that you are fixing to climb.  And, if you can, match your forecast against the projected size of your market.  If you're trying to build a $50 million company in a $75 million market, your funding chances are probably pretty slim.  If you are remaking a $5 billion market that is old and stale or creating a huge, new multi-billion dollar green field market, your chances for funding at a fair valuation are much better.

13 January 2012

When It's Time for Entrepreneurs to Give Up the Ghost

Thankfully, entrepreneurs are optimistic creatures.  Most launch their companies on a wing and a prayer and then work with their radically under resourced teams to create their first product and gain initial customers. Sometimes, things go smoothly.  Funding comes in, customers sign up, and product reviews come back positive.  A majority of the time, however, young companies struggle and ultimately don't survive to fight another day. In fact, most start-ups hang on longer than they should, because, as I said before, entrepreneurs are optimists.  They glom on to any shred of evidence that might indicate that they could be successful and ignore or minimize the rest.

Here are the signs that an entrepreneur might want to pursue another career path:
  • Your competition is way ahead of you.  Way ahead can have several definitions.
  • Your competitors are much better funded and are using that funding effectively to create a lead in product capabilities, marketing, and customer penetration. 
  • Customers prefer competing products.  Many entrepreneurs may reason that the next version of their product will fix that, but your competition will have a next version, too, that will probably be much better. 
  • You can't sell a date to a sailor on leave.  Some products sell themselves, but yours is incredibly hard to sell and the reasons for this tough sales cycle are a mystery.  Meanwhile, your competitors are making lots of sailors happy.
  • Your market is more limited than you thought.  Sometimes, a market looks good, and it just doesn't pan out.  This happens for two, main reasons:
  • Customers just aren't interested.  For example, right now, consumers aren't buying nearly as many 3D TVs as consumer electronics companies expect, and, when they are buying them, it's because really good 3D TVs tend to have really outstanding 2D picture quality.
  • Your market is subsumed inside of a larger market, and your product becomes a feature of a larger solution as opposed to a discrete product category. This happens a lot in software, where customers prefer integrated enterprise suites over point solutions that need to be supported in the IT department.  One or two targeted solutions is okay, but 30 or 40 isn't. 
  • You don't have the talent and determination to compete.  Markets aren't won and lost through analyst reports.  People win markets by creating great products and selling and supporting them effectively.  Usually, victory is relative as in:
We did a better job of making fewer mistakes and spending our money more wisely than our competitors.
From 1980 to 2000, Microsoft did the best job of any company of using its talent and resources to compete effectively.  In 1980, Microsoft was tiny and unproven but able to face a larger competitor, Digital Research, head on and win its PC-DOS contract with IBM.  Going forward, Microsoft faced an unending list of powerful foes from IBM to Compaq, Novell, Sun, Apple, and Netscape.  It's not Microsoft didn't make mistakes; it is that, when the chips were down, its competitors made more. Plus, Microsoft hired the best people and let them figure it out. And Microsoft didn't give up when its first attempts didn't go well. Version 3 of a Microsoft product seemed to be the one that changed the game.
So, for all you entrepreneurs out there, please try to think clearly. Customer feedback, competitive actions, the quality of your team, and access to capital are the most important factors in the success of your business.  If you get low scores in any of these areas, chances are that your company has issues.  If you're behind in most or all of these areas, it's probably time to figure out how to bow out gracefully and find the next thing to do.

04 January 2012

The Big Consumer Tech Questions for 2012

When it gets to be early January, pundits like to prognosticate.  it doesn't matter whether the subject is technology, politics, or the love lives of celebrities, the news sites, blogs, and TV airwaves are filled with predictions.  This blog is no exception.

Since I am not a celebrity and abandoned my political ambitions in 10th grade, here are my tech predictions for 2012:

  • Apple's slow product refresh cycle finally causes headwinds for the world's best run tech company.
There's no doubt about it.  In the last ten years, Apple has more "hit record" products than the Beatles had hit songs in their prime.  Or at least it seems that way.  However, in key areas, Apple is now way behind or at parity.  Beginning next week at CES, the market will be flooded with Ultrabooks, the Intel-based PC architecture that aims to take on the iconic MacBook Air.  The thing is, the first ultrabooks from Lenovo and Thoshiba are very promising.  They match the Macbook Air spec for spec and are very competitive on price.  Windows 7 performs well, and boot up times are much shorter than on traditional laptops.  This morning, Ina Freed of AllThingsD noted that Ultrabook prices are expected to drop by a third in the next 12 months.  Plus, Windows 8, which doubles as a tablet OS, will debut at the end of the year.  Expect Ultrabook/tablet combo devices by this time next year.  Personally, I think there's pent up demand for a Windows tablet that runs all those Windows desktop apps.
Innovation in the Mac hardware area seems to have stopped for an extended nap?  I read rumors of a 15-inch MacBook Air, updates for the Pro and iMac lines, and maybe even an update to the behemoth MacPro desktop, but the roll-out is very slow.  
The 4G revolution is in full swing.  All of the major handset manufacturers have credible 4G devices running on multiple carriers, and, with the broad roll-out of Google's Android 4.0 "Ice Cream Sandwich" OS, Android phones may finally come close to matching the "simple and elegant" look and feel of Apple iOS.  Plus, Google, not Apple, is leading the charge into mobile payments.  I love my iPhone, but I am part of the 10 percent of the US population that is Mac-centric.  The Mac ecosystem is the best solution for me.  Google's cloud apps, social network, integrated mapping and payments, and 400,000 app store get more credible and compelling every day.
Apple faces additional challenges expanding iCloud, broadening its media offerings, inventing its mythical TV that has been coming for years, and getting the next-gen iPhone 5 and iPad 3 out the door.
The bottom line is, Apple needs to step up its game - delivering more products faster with typical Apple quality.  My prediction is that Apple will live up to the challenge.
  • Microsoft makes a comeback and becomes a player in digital media in the living room and over connected devices like tablets and smartphones.
Microsoft's biggest problem isn't weak products or poor customer satisfaction; it's snooty members of the tech press that call them a corporate dinosaur or discount innovations in areas like media streaming or mobile phone OSes.  If you look at Microsoft's product history over the last 3 or 4 years, you'll see a bunch of winners:
  • Excellent new versions of Office for Windows and the Mac. 
  • Windows 7, which largely erased all of the annoying features of Vista and made things faster, too.
  • Superior media streaming built into the XBox 360, which is the largest streaming platform in the world.
  • Excellent online games.
  • Significant upgrades to its enterprise apps and development tools.
  • The purchase and relaunch of Skype, which is expanding dramatically.
  • A mobile phone OS in Windows Phone 7.5 that many reviewers grudgingly admit is just as easy to use as Apple's iOS.  Maybe the Microsoft-Nokia alliance will see some traction this year.  
Eventually, reporters and analysts will notice.  Microsoft is still insanely profitable with massive amounts of cash in the bank.  It is still a market leader in the most of the segments where it elects to compete aggressively.  Plus, it's a major investor in Facebook, which will go public this year and create even more available cash.  I wonder what they will buy with it.
The tech pundits talk about the Big Four Platform companies - Facebook, Google, Apple, and Amazon - like they will decide the future of the consumer cloud.  Well, 90 percent of consumers use PCs and software from Microsoft and don't seem inclined to change.  The Xbox is the number one selling game console in the US.  None of the Big Four has these advantages. 
My prediction is that, when the battle for the living room reaches maturity 3 or 4 years from now, Microsoft will be a serious challenger.  Eventually, even tech reviewers can recognize quality.
  • Cord Cutting is coming, but slower than the pundits predicted and with higher margins for cable and telecom companies.
For several years now, the digerati have predicted that consumers will begin to cut cable/satellite TV connections in an effort to save money and gain access to programming on an ad hoc basis.  I have a client that sells subscriptions to digital services, and the number two top questions in their call center are:
  1. "Can I get Netflix with that?"
  2. "Can I get rid of some of those stinkin' channels that I don't want and pay less?" 
The answer to both questions is yes.  Someone will do a better job of streaming on-demand TV, although the jury is out on Netflix as the eventual winner.  And your cable/telco provider will be happy sell you TV a la carte by delivering to you through your connected TV over an even faster and more profitable Internet connection.  With the escalating cost of content - particularly ESPN and a few other network bundles - pay TV has become a low profit business, and it's not like the cost of content will decline any time soon.   
Broadband is another story.  It's hugely profitable, and consumers can't live without it in the way they can - say - ditch their home phone line or the Food Network with impunity.  For digital service providers, speed upgrades are a minor cost when compared to putting the lines in the ground to begin with. TV shows look just fine over the Internet, and then there are all of those tablet apps and websites, like Watch ESPN and the Verizon and Comcast programming apps.  It turns out that consumers will watch TV just about anywhere, including on much smaller tablet and smartphone screens.  In fact, yesterday, Comcast and Disney inked a ten year agreement to facilitate content delivery of the most popular pay TV properties on every platform imaginable.  Plus, broadband is the gateway to new services like home security and monitoring, which is hard to turn off once it's installed and is much less expensive to deliver than pay TV.
So, yes, you'll be able to cut the TV cord, but it's likely to be replaced over the next few years with a much more profitable cord or two and more expensive and faster broadband service.