OK, it took a while since part 1. It is kind of busy here in Project-X and weekends are the only time left for some writing. Before it gets too far from my VC days, I wanted to write the promised (but perhaps not anticipated) part 2 of my post, and get it out of the way. The last post covered some basics: What’s a good VC, getting meetings and the strange habit of VCs not to pass on deals. Today we will focus on what’s important- what will a VC look into when  meeting you. Before we get into details, let’s talk about drawers. VCs employ people that need to decided between many bad companies and few good ones 5 days a week. This is why they all have a mental filing system and if your idea can not slide comfortably into any drawer, your chances of getting funded are much slimmer. Like I heard from one venture guy:

“Don’t come first with an idea, but don’t be the tenth as well. If you are first, you will fail the pattern recognition test. If you are tenth, you will slide into the drawer of: “there are too many of this already”.

So, what would VCs look at:

• Market size: Your idea must go after a big market that can be quantified. Many entrepreneurs will make the mistake of telling the VC that they are going to create a new category. This is the fastest way to never get your phone call returned. Try to figure out which money will you attract, and use it to define the market you are after. For example, if you are developing a Wii alternative for a gym, you can claim taking share from the video game category and of the fitness category- both large markets. Why is it important? Because even the most successful company in a small market would not make a great exit.
• What’s the team: So you have the right market- now who is going to take the market over? VCs care a lot about the team. Proven CEOs  will get a huge premium and VPs that came from successful companies in the same space will increase your chances of getting funded. If you develop a travel site, you may want to bring along coupe of ex-employees from Kayak, even if they were not the most senior there. Why is this so important? The deadpool is full with companies that had great ideas in the right market and a team that messed it up.
• Follow other people tracks: If companies in your space or that have similar business model had great exits- you just got yourself a big plus. It is so much easier to explain your exit strategy with some examples like: company X was bought by Y for 450M with only 17M in revenue…
• Make it big: give a VC two options: a company with 50% chance to be sold for 50M of a company with 5% chance to be sold for 400M. The math and normal judgment will make everyone choose the first one as an investment target. Nevertheless, VCs tend to swing for the fences, so if your idea is safe but small, you may want to search for alternative funding.

There is much more I can write but I leave some to part 3… feel free to share your stories or comments…

I tend to have great level of appreciation to Apple’s ability to design amazing and easy to use products. In most cases, there is a lot of thinking behind each feature, but here is one which is far beyond my understanding: Apple intentionally destroys third party apps credibility by encouraging bad ratings.

If you ever wonder why so many applications have bad ratings the answer is quite simple: sometime along the way Apple added a step to the application delete process: rate this application before deleting. Now, you don’t have to be Steve Jobs to know that users that delete apps are either not happy with what they got, or just don’t think the app is useful anymore. In either case, the poor app is doomed to get a rating of 1-3/5 from virtually everyone that deletes the app, since it is so easy to do. It takes as long to hit the “no thanks” button as it takes to click on one of the stars and click “rate”.

Now, assume I am a happy customer that really likes FlyCast. What will it take me to write a positive review about the app?

1. Think of writing a positive review
2. Go to App Store app on the iphone
3. Search for FlyCase (assuming I can spell it right…)
4. Scroll all the way down on the app screen (can be 4-5 screens down)
5. click on the review button
6. Click on write a review
7. Enter my itunes password and wait for the screen to load
8. Click on the 5th star to show my excitement and hit save

It is easy to assume that a user needs to be highly motivated to go through this couple of minutes process to write a review. In reality, Apple has created the easiest way for unhappy customers to voice their opinion and the hardest way for all the rest. By that it creates a huge bias toward negative reviews.

I think the idea of creating an easy way to voice an opinion is actually good. It is similar to the way Netflix is embedding the ability to review in their confirmation emails when a movie is returned. The big difference is that Netflix does that for all movies, all renters and therefore gets balanced ratings. If Apples wants to solve this issue all it needs to do is to add a new button next to the X that appears on the app before it is moved or deleted with a star icon that will lead the user to an easy, 1-5 star selection screen or whichever other idea that will level the playing field.

While Apple is not impacted directly by this unbalanced system (you can not delete the Apple pre-installed apps), it diminishes the overall value of its eco system and iphone biggest asset, its third party apps.

Workday, a financial and human resources SaaS provider, has secured $75 million in Series E funding. In my humble opinion, this is a very good sign that investments in business software are going to get a boost in the next few years.

Look back 15 years ago and compare the progress in “consumer computing” to the progress in “business computing” – the differences are amazing.  Consumers moved from 14K modems to cable, from one inbox per office to unlimited mail accounts and storage, from backing up files on floppy disks to box.net, from from Rolodex to manage their personal lives to Facebook, from expensive and complex Photoshop to Picasa, from mail orders to Amazon and from paper atlas to Google maps. Our lives as consumers are almost 100% digitized now.

What happened in the business side? Mainly Salesforce.com and other SaaS companies, that in most cases, did not change the utility of the product, but rather brought the same old functionality to the web. Only 2-3 years ago (with force.com), what you got from Salesforce was pretty much what Siebel offered on the desktop. Moreover, the services we use at home, are better than what we tend to get in the office. Who wouldn’t choose Gmail over Exchange or Facebook over your corporate address book? Bottom line- if 15 years ago we want to the office to get better IT for our private stuff, now we go home to get the faster connection and the better tools on our “personal desktop”.

So, there is lots of catch up to do in the business IT world. It is a slower moving world but the fact the gap is so wide and every employee is also an after hours consumer, reassures that money is going to be invested in the business space and more innovative tools will be at our disposal. In 2007 it was not “cool” to invest in business software but now with consumers spending less, VCs and private investors are likely to funnel money back to where most of the IT investments were funneled just 15 years ago- into the business IT world.

The news are all grim about VCs recently. They can’t raise money, they don’t invest…While it is not the best time for VCs and startups (and for the rest of us), money is still invested.  I spent the last 6 months as an EIR (Executive In Residence) with a venture capital firm, classically located on Sand Hill road. Destiny (and network) got me to spend my winter with Storm Ventures, one of the finest VCs I got to know. During this time I saw dozens of startups, attended many internal discussions and learned a lot. And, as my old grandmother used to say: “learning is solidified by writing”. So here are some of my learnings that many people know, but more don’t…

• What’s a good VC?: seen all entrepreneurs will say that a good VC is a one that gives you money. Fancy entrepreneurs will not want to work with any VC which is not tier one. Most will fail to remember that one individual  will end up seating on their board for the next 3-7 years and will make their life great/miserable… My suggestion : add one more angle to the way you look at VCs- the partner side. Instead of thinking of the VC as a whole, find a partner you think will mesh well with you and try to make your entry through him/her. You are more likely to end up working with the partner that saw you first so try to aim for the one you want to see on your board. It will also increase your chances to get a second meeting…
• Getting a meeting is easy, so try to get as many as you can: most VCs want to meet you. How else would they find good companies? I am sure you don’t assume they will be out there hunting for you… So, most VC partners and employees will happily spend an hour with any credible entrepreneur.  What can you do with this knowledge? don’t try only one VC that happens to know you- try many so you can improve your chances to get a positive reaction.
• No one gets it in the first try: Just like in Baseball, you need to swing more than once to win a game. VCs are triage experts: they are designed to make a decision within one hour and just like in real triage, they may end up missing the one patient that could have been saved. The lesson is: try often. One try, two or even ten may not be enough. Nonetheless, try to get honest feedback from the people you met, before you get to the next meeting, so you can improve your pitch.
• VCs hardly pass on deals: most people think that a meeting with a VC will end up with a yes, we want to learn more or with no, we are not interested. Actually most of them end with nothing. No phone call, no reply. Radio silence. It is not that the people you met are rude- they are just not interested enough but don’t want to close the door. Don’t wait for ever, follow up and ask for the status, but when you do so, try to present  some new data, like a major customer win. Without new data you are unlikely to get a better answer.

Up next- what VCs care about when they meet you. It is all about market size, successful companies in the space and the team…

More than a year ago I spent time thinking about Facebook and the problem it solves. Back then, Facebook was growing in a staggering speed, adding 1 million users every week. This week, Facebook turned 5 and with 15% of the world internet users on Facebook, it is clear they are winning the game of user adoption. I made two claims about Facebook back then and I am happy to say I was very wrong about one and only somehow right about the other. Not much of a record…

I was wrong about the problem Facebook is solving. I thought it was a fun product that did not solve any real life problem. With 15 months of perspective I feel that I have a better idea: Facebook is so successful because we are all absolutely horrible in managing our social relations. We suck in staying in touch with people- a real life problem right there. We all collect connections during our lives: High school, college, neighbors, gym buddies, work friends from 5-6 different employers and other miscellaneous friends. This adds up to hundreds of people we want to have a “link” to. Before Facebook, we had to work hard and be proactive in order to stay connected. The “old era” alternatives of calling, mailing, sending cards etc required some kind of a system to remind us to connect and an average of 5-30 minutes for each interaction.

Facebook allows us to be reactive, which is a natural talent of all of us. We go there once a day or two, skim through the news and reactively comment on statuses, send birthday wishes and stay in touch. I can now spend few seconds reading, commenting and connecting with many more people. Robin Dunbar came up with his famous Dunbar number, claiming that homosapiens can stay in touch with up to 150 other individuals- Facebook allows you to do a better job staying in touch with those 150 and have a potential access to many more. Facebook became our personal CRM system.

The other claim I made was that Facebook is not offering any segmentation and not trying to adapt to different age groups and interests. Ning is exactly the opposite when it comes to segmentation. According to Ning’s CEO, it attracts 2500-3000 new networks every day. Ning is hosting 700,000 different networks so it clearly proved the need for segmentation in the social graph. Nevertheless, with 10% of Facebook traffic, it is clear that Facebook management decided it had a bigger fish to fry.

What works for Facebook would not necessarily work for others. I am not sure that Facebook founders knew which problem they were solving when they came up with the service but they hit a vein and continued at it, ignoring all the good (but useless) advice they got. There is no point ignoring the rules of product greatness as a habit, but there is room for ignoring them if you really know what you have is something big.

Today’s economy leads to many layoffs across all sectors. According to TechCrunch’s layoffs Tracker, over 132,000 employees lost their jobs from August 2008 in the tech sector alone. Reductions in force (RIFs) are commonplace now but there are few best practices out there when it comes to doing it right strategically. While HR already mastered the process from their side, executives often fail to creatively think of the best way to reduce the number of employees, without destroying the company.

There is a smarter way, but let’s first understand how it is done today. The way most RIFs are done is simple: the CFO and CEO agree on a number (say 10%) and ask their direct reports to reduce the bottom 10% of the company. From their perspective it doesn’t look so bad: after all, if you are asked to cut 10% of your division, wouldn’t you eliminate the low performing employees first? In reality, the outcome is a bit different: the 10% marching order is cascaded down the management hierarchy. Managers are asked to look at their teams and reduce them in 10%. From this point it becomes personal: remote employees will get the ax faster since they don’t know their manager as well, senior managers will tend to survive (since someone need to execute on the layoff plan) so the company will end up with the same amount of chiefs but less Indians and employees that were recently hired will be the first to exit, although they may possess a greater potential than the old timers.

The results of a “10% across the board RIF” are dire: first, you don’t end up reducing 10% in costs since the less expensive employees are the ones to leave. The company loses more than 10% in effectiveness since it has too many managers juggling too many activities with fewer working bees. In addition, you leave every team in the company crippled and de-motivated, regardless of its importance and prospects. So why RIFs are done this way? It is easy to decide and it feels good to ask everyone to work 10% harder and pretend productivity is not lost.

Here is a different way to RIF: make some bold decisions and shut down few activities all together. This is how it goes: If you want to save 10% of your workforce related costs you look at your company portfolio and decide on shutting down activities that will translate into this 10% reduction. When your CFO will come back with the numbers you will discover you need to layoff less than 10% of your force since there are many other costs that will go away when you shut down an activity instead of laying off the lowest paid employees. Now move to stage two: allow each surviving business unit to hire as many people as they want out of the shut down units for a period of 30 days, as long as they are brought as replacements of existing employees. The surviving leaders will run amok to find those stars from the other units, and use them to replace their lowest performing employees so most of the talent is preserved.

The result is very different now: the surviving business units are now STRONGER than they used to be before the RIF and can actually deliver more than you ever expected them. Instead of averaging the pain, everyone that stayed is now happy and motivated: they have enough good talent to get the job done; they see the wisdom and fairness behind the move so they can mentally support it.

It is painful to close down activities but this is the only way for a company to reinvent itself. You can also consider selling activities instead of shutting them down. As an example, service partner may be interested in operating an end of life product for the service fees.  There are more details to cover (like systems to support it or ways to move products to maintenance mode) but this plan passed the logic test of few senior executives in large enterprises that are facing RIFs. Does it pass your logic test?

The only advice CEOs are getting nowadays is to cut costs and be more frugal. This is a good advice but I don’t think there is any CEO with a pulse that hasn’t heard it before. The other issue with cutting costs is that at best, it will allow you to survive 2009 and show vital signs when the economy is back on track. It would not create a competitive advantage nor will it help you deal with the next crisis or external change in the market place. The real test for a CEO is not cutting costs in time of crisis but rather finding a repetitive way to reinvent her company as market conditions change.

Take Salesforce.com. Not too many companies were able to grow from zero to billion dollars a year in less than a decade. Even mighty SAP took 20 years or so to touch the billion dollar marker. Do you remember how it all started? Salesforce.com started as, yes, sales force Automation company with a very narrow focus and commitment. Later it has expended to become a full CRM package (and picked “CRM” as its NYSE ticker). Nevertheless, in the last 3 years salesforce is becoming a platform company and pushing initiatives like force.com and App Exchange. Without judging the wisdom behind the changes, Mark Benioff built a company with “change” in its DNA. Not only does it want to change every few years, the company knows how to change and it is doing it enough to get really good at it.

Here is the theory behind it: in his great book Dealing with Darwin, Geoff Moore explained that every company can divide its activities to “Core” activities, the ones that create sustainable competitive advantage, and “Context”- the ones that are needed, but don’t differentiate the business from others. For example, an airline circa 2009 may have core activities like 5 additional inches and an on demand video system in coach and context activities like landing in one peace. While the latter is much more important, we assume all airlines are safe and we ignore it as a factor when selecting an airline.

The most important thing about core and context is remembering that what was core in the past is likely to become context over time. If online check in was core and innovative only few years ago, it is now a context item for every airline. Great food, once a differentiator -is now such a context item, that airlines can get away with not serving it at all…

Companies fail when they are not used to build a new core all the time, and shift resources accordingly. When Toyota figured out that green is the new core, GM was still protecting the old core of size and convenience. When Google figured out that the new core is speed of getting the data you need, yahoo protected the old core of “a portal to the internet”, full with unneeded data for you to choose from. When Apple figured out that the new core is design, Dell still pushed “make to order”.

What’s great about Google, Apple, Saleforce, Toyota and many others is not the fact they have a better strategy or the right product. The competitive advantage they have is change- the ability to listen to the market and quickly shift resources to support the new core.

5 steps to start your own core/context analysis:

• Read the book…
• List your company’s activities and split them into core and context
• List the context activities that are no longer mission critical (like food in flights)
• List your resources (budget/people) and assign them to the list of activities
• Use the map to reassign resources. Think not only on quantity but on quality as well. For example, you may want to assign the most innovative people to your non profitable core activities and the “deployers” that get the job done to the money making context activities.

]]> http://gadishamia.wordpress.com/2009/01/07/reinvented-your-company/feed/ 0 gadishamia http://gadishamia.wordpress.com/2009/01/07/reinvented-your-company/ http://feedproxy.google.com/~r/ala360/~3/ihZgqxIf-Qg/ http://gadishamia.wordpress.com/2008/12/06/how-come-we-dont-drive-a-better-horse/#comments Sat, 06 Dec 2008 22:19:27 +0000 Gadi Shamia http://gadishamia.wordpress.com/?p=172 ]]>

If I’d asked people what they wanted, they would have asked for a better horse….. Henry Ford

If you are a product manager or product leader- the easiest way to get the job done is speaking with your customers and collect their requests.  After all, they are the ones that pay for your salary so just make them happy. Right? Not always.

Henry Ford, the man who invented mass production of cars, summarized his product management philosophy in one sentence, acknowledging that asking customers for product ideas will usually yield ideas for improving the status quo. 

Nevertheless, saying that you should not listen to your customers (or that you should listen at all times) will be an over simplification of a complex question. In fact, the type of dialog you ought to have with your customers and prospects depends on the stage of your product:

• Idea on a napkin: when your product is nothing more than an idea on a napkin, the type of dialog you should have with customers (potential customers in this case) is around validating the pain point you are trying to solve. People tend to discuss their idea of the solution, instead of making sure that the problem they solve is actually a problem for the target market and that it is painful enough for customers to reach to their pockets and pay.  For example, Microsoft tried to go after QuickBooks with its small business accounting product and failed flat on the  face . It was all about ease of use to use but customers never thought that ease of use was a big enough issue with QuickBooks.
• Mockup: when you have something to show go back to your customers and ask if you solved their problem or not. Focus them on what is already in the product and ask them to identify critical gaps only. Don’t open it up to a free form wish-list since you will get more than you can ever deliver…
• Got a product: This is the trickiest part: most product people will talk to their first customers and ask for feedback. This is the right thing to do but is not enough. Your first customers are in many cases a random collection of people you stumbled upon and happened to like your product. They do not represent mass market yet. Listen to them but also speak with lost opportunities, and non prospect/customers that you can invite for interviews or focus groups. This will create a much more balanced picture, talking with the most important customers: the ones that have not signed up yet… It is also important NOT to create a master list of all the requests and rank them by importance or number of customers that asked for a feature: try to create a story out of all you have heard, and mesh it with your vision and ideas coming from other worlds.  For example, it took 10 years after Google was lunched for some of the ERP vendors to add free text search option to their products. Customers that got used to the tree like search offered by all ERP products in the past, never thought it was wrong until offered with an alternative.
• End of life: it is unfortunate, but many product people work on products that add very few new customers but enjoy a huge install base. If this is your case, don’t be innovative- all you want to do is make your current customers happy and you will do that by simply doing what I said not to do in the paragraph above: take the list, rank it and choose the most popular requests.

So, you always have to talk to customers- you just have to learn to listen differently depending on where you are in the product life-cycle.

Microsoft offers zero percent financing on Dynamics ERP and CRM. Given the economy and the credit crunch, it must make a lot of sense, right? Not really. In ERP, licensing the product is far from being the most significant cost. Training, implementation, change management, additional hardware, additional software (like database), third party software components that goes with the new package (add ons are common addition to ERP implementations) make the money you spend with Microsoft the smallest part of your investment.

According to AMR research, only 20% -25% of ERP cost are actually invested in software licenses (this includes third party licenses like order management add on to the core product)

So, if you took Microsoft on their offer and purchased MS-Dynamics ERP for $200,000, you will pay only $5,000 per month for the software, but you are likely to spend $800,000 more during the course of the implementation- meaning that the cost you will pay before going live with your new product is likely to be 850K or so, which is equal to an 85% down-payment. You can try to finance the service fees as well, but you will have to pay high interest rates, and you are also unlikely to get everything covered (e.g. third party software)

It all gets back to my “reducing the risk” post.  On premise ERP happens to be high risk/strategic IT decision.  People are happy to make these decisions when things are going well, and a new ERP product is critical to support growth plans. Now when prospects are declining, companies will think twice about buying a new ERP product, with or without Microsoft’s generous offer. Customers are much more likely to make small, low risk investments on the edges of the enterprise. SaaS utilities, that are paid monthly by design, and usually requires much less professional services, are likely to be the winners of this shift in priorities.

SAP, Oracle and Microsoft solutions will not go away anytime soon. While the SaaS discussion is gaining ground in the last months, we still don’t see massive (or even minor) conversion of enterprises from mission critical systems like SAP to SaaS based applications. Netsuite for example, is reported to go after SAP customers in a competitive conversion offer. I doubt that they will get too many real R/3 customers that are fully deployed converting- the only success they may enjoy is from customers that never deployed SAP or subsidiaries of SAP shops that used something else (say MS-Dynamics) and now want a better solution.

Why is that true? On the surface, SaaS creates huge advantages in cost, flexibility and deployment over the on premise model. In reality, customers made huge investments implementing and tailoring ERP products to their needs, and the risk of switching does not justify the potential future savings. When considering replacements people tend to think less on future value, and much more on past investments.

Just like in the last downturn, the winners will not be the replacers. Salesforce.com was not in the business of replacing Siebel in 2001-2004. Salesforce won SMB accounts and rogue salespeople (or teams) in larger organizations that didn’t like the CRM solution provided by the enterprise. It was not a replacement game but rather an addition to the current IT infrastructure provided by the organization, small enough to digest without making waves. Only later did Salesforce came back in and tried to convert them to corporate deals- and when did they have most of the success? The 2005-2007 timeframe, when IT investments beefed up significantly and people felt like being strategic again.

What does it all mean? I predict that successful SaaS players will not be the ones offering enterprise applications as a service (with long implementation cycle, high setup fees etc) attempting to replace current systems, but rather players that innovate on the edge of the enterprise, improving existing systems rather than replacing them.  Yes- best of breed is back and until the infant SaaS industry will start consolidating around a major player, it may well be a dominant force.

Replacement of an existing system is usually perceived as high risk for enterprises and they will try to avoid it in bad times. Solutions that improve the edge of the IT process (e-signature, lead management, marketing, communication…) and do not replace existing investments will be perceived as low risk and can get much better traction in a down market.