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.

The Big Three - Of Technology

Over the last 50 years, there have been hundreds of substantial technology companies that, together, have transformed the world.  AT&T brought us the telephone for ubiquitous communications. SAP enabled us to run a big business much more efficiently and predictably. Cisco and Sun brought us the Internet.  HP created great technology for scientists, printers for office workers, and even calculators for finance geeks.  Digital Equipment Corporation democratized the data center by inventing the minicomputer. Google allows us to find almost anything. Yes, list of groundbreaking tech companies is long, and, in their day, each one of these companies were revered for their technical prowess.

In the history of technology companies, however, there are three that stand above all others:

• IBM, which defined computing.
• Microsoft, which democratized computing.
• Apple, which designs beautiful computers, devices, and software and lets evangelism and good will do the rest.

IBM.  Until the PC revolution of the 80s, which put tens of millions of IBM-compatible PCs into offices around the world, IBM was computing.  Like Apple, it was built upon a founder's vision for what computing can do. Thomas Watson, Sr., began Thomas Watson, Jr., begat the era of mainframe computing.  Big companies invested in Big Iron, and IBM delivered not only enormous computers that required raised flooring and cool temperatures but people to ensure that they worked.  In the 60s and 70s, IBM mainframes came with people who helped run them - for free, and the phrase, "Nobody ever got fired for buying IBM" was born.  IBM is still a great company, but it is no longer "the one" - just one of a select few.  IBM's descent was somewhat gradual:

• From 1969 to 1981, the US government and some smaller companies that lost the computer race to IBM spent their time suing IBM for anti-trust.  Eventually, IBM beat the feds, but also lost their way.  Lawyers ascended in influence.  Customers received a little less attention, and competitors took advantage.
• The IBM PC was born.  Originally, this provided  growth engine for IBM, but it also created clones from Compaq, HP, Dell, AST, and many others.  And it created the company that ruled the desktop across all "IBM compatible" makes and models, Microsoft.
• Microsoft was the ultimate arms merchant.  It ensured that IBM would never win the desktop war.

By the early 90s, IBM had lost its way.  Client-server allowed competitors to attack from all sides.  It took an outsider, Lou Gerstner, to right the ship. IBM is more of a services and software than hardware company today, and it no longer sells PCs.  It has its groove back.  The ocean, however, is full of many more dangerous fish than it was 30 years ago.

Microsoft.  Bill Gates & Company democratized computing - first by putting MS-DOS and then Windows on 90+ percent of PCs in the world.  Then Microsoft supplanted Novell and IBM in local area networks, desktop productivity software, development tools, and in large parts of the data center.  Most importantly, despite having big market share in several key markets, Microsoft created tens of thousands of millionaires by enabling the development and distribution of capable software for the Windows desktop and server platforms.  Microsoft was a channel-based company.  It focused better than any company before it on making the channel successful.

Microsoft was always fiercely competitive - beating back challenges from IBM, Compaq, Sun, Novell, Netscape, and others at critical times.  It's not that Microsoft executed perfectly - pundits pointed that out constantly - but it always outperformed its competitors at critical times.  I like to think of it this way:

Sometimes, you only have to suck the least.

Today, Microsoft is under siege - as IBM was before many years ago.  Like IBM, anti-trust litigation took its toll on Microsoft's aggressive and entrepreneurial corporate culture.  New Internet-based technologies have provided businesses and consumers with worthy alternatives to Microsoft products in virtually every area where Microsoft has been dominant.  The Company seems to be experiencing a product rennaissance in several important categories, and it is determined to be a winner in new Internet-based markets, like search, online advertising, and collaboration.  Plus, it still generates obscene profits despite losing billions of dollars a year on its new Internet ventures.  I wouldn't count them out, but rebuilding mojo takes a lot of time and markets are moving faster than ever.

Apple.  Apple isn't a Big Iron or enterprise software company.  It's a customer experience company.  IBM and Microsoft have always wanted to be essential - especially to businesses.  Apple has always wanted to be "insanely great."  Apple's first act from its birth in a garage in 1976 to 1996 when Steve Jobs retook the reigns showed a possible path for computing, but didn't close the deal.  The software was beautiful, but the hardware broke.  Or the file formats weren't compatible with PC.  Or management at the top didn't get the job done.  It was always something.

The last fifteen years are another story.  The greatness of Apple has been in its second act, not the first.  There are six, key elements to their success:

1. Know your core.  Apple fixed manufacturing by outsourcing to companies with more scale and expertise, but kept design close to home so that it wouldn't lose its edge.
2. Address weaknesses - particularly in management.  Having spent 12 years away from Apple working on NeXT and Pixar, Steve Jobs understood his own weaknesses, not just his strengths, and he hired world-class managers who could do things that he could not accomplish himself.
3. Pick the right markets.  Apple targeted markets that already existed but where transformation was possible - like MP3 players, laptop computing, music downloading, tablet computing, and smartphones.
4. Transformative products.  Apple has created devices, software, and services that are impossibly elegant and beautiful - consistently in market after market.  In each new product category, Apple products seem to make their predecessors old and tired instantly.  See Blackberry, Windows, the Creative Labs Nomad, Palm, and many others.
5. Let evangelism do the work.  Apple builds products for broad markets.  It lets its evangelists who build things for their products - like OS X and iOS developers - and consumers do the work.  Why do 92 percent of Fortune 500 companies support the iPhone and now the iPad?  Because their employees wanted them to.  Apple didn't do the heavy lifting.  Apple knows that, if you build products that people admire and the price/performance ratio is right, word of mouth will do the rest.
6. Maximize revenues and profits.  Lots companies are profitable but don't grow.  Some grow like crazy but can't make money.  Apple does both for several reasons:

• Their products command a premium price.
• Their component sourcing practices are world class.
• Their product designs use the same components across platforms.
• Options are limited, and customers are driven to the options that Apple wants them to buy.

Apple is the greatest second act ever.  It is what every company would love to be:

• The number one trendsetter in its industry.
• The largest and most profitable company.
• The company many talented people want to work for.
• The keeper of the flame in product design.
• A continual transformer of markets.

The death of Steve Jobs certainly creates uncertainty, and Apple's competitors are well capitalized and fighting hard.  Google, Microsoft, HP, Samsung, Nokia, and many others have a lot to lose if they finish far back in the race.  However, unlike IBM, which entered the PC market almost by accident, or Microsoft, which has felt the pain of a thousand cuts from competitors and governments in the US and Europe,

Unlike IBM or Microsoft, Apple seems to be ahead of the game in a time of great market upheaval. Apple is the thought leader.  Its thoughts go to market as beautiful products that command premium prices.  Competitors imitate but can't seem to do better, and, before his death, Steve Jobs and his team put in place a product roadmap that is said to stretch out for years. So, while Steve Jobs is gone, you'll see his genius and the genius of his team for many years to come.