Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Tag: startup

High Tech Market Research for New Products

One of the biggest problems in High Tech businesses is the “technology-driven” approach that tends to predominate, especially among startups. Much of this occurs due to the fact the many founders of software and technology companies tend to come from an engineering, programming or other technical background. While a strength in creating a flow of technical innovation, this can be a real problem when companies are planning new products which they hope to find a real market for.

Everyone has a tendency to focus on what they know best; that’s just human nature. Folks spend more time on the issues that they enjoy, are more comfortable with, and are more confident about their ability to make good decisions on. Things that don’t fit into this category tend to be put off, or given short shrift.

The result is often products are well thought out from a technical viewpoint–but much less well so from a “meeting market needs” perspective. While both are important, the market perspective is absolutely critical initially. So what’s the right approach to product planning-oriented market research?

When Should The Research Should Be Conducted?
The answer to this is early, often and forever. The earlier you start prior to design or coding, the more time you will have to obtain the most accurate picture of the market that’s possible. Sometimes there are practical limitations to how early you can start–Trade secrets and patent filings, for example, or the lack of a prototype which may be considered crucial to receiving realistic market feedback. Within these limitations, get out and begin interacting with the marketplace as soon as practical. And don’t ever stop. Markets, especially the software and technology variety, are like living organisms. They are constantly growing and changing. What may be true in the early phases of a market could change dramatically over even a short period of time. Companies tend to develop an internal “common sense” that is used in making decisions, which is based upon past inputs. When doing Product Planning this can very dangerous in a dynamic market.

Who Should Do The Research?
The best way to do this research is what I often refer to as the “two-headed monster” approach: one marketing person, and one technical person. Not a lone wolf if you can help it, and please–no committees. Most often, this would be a Product (Marketing) Manager along with the Engineering Project Manager who will lead the actual development of the project. In the smallest startups, it might be the technical founder and the “business” founder, for example the CEO and CTO, or CEO and VP Marketing. The Business/Marketing manager should be in the lead for this task, but it’s important to note that both camps have a role to play in this endeavor. There are two different perspectives on market feedback, and well as two different priorities in questions to ask. Having both parties involved (assuming there isn’t a dysfunctional relationship) usually leads to the most complete and risk-reducing result. In addition, it often eliminates arguments over priorities later in the process after coding starts (and schedules inevitably begin to slip) If only one can be available, it should be the Marketing side–working closely with the Product Development/Engineering lead to make sure their input is included in the process.

How Should The Research Be Conducted?
This is a really broad question which of course depends heavily on the situation. How much do you have available to you in terms of money and other resources? If you’re in a big company, you may be able to commission some objective research. If you are a startup with modest resources, it usually is an ad hoc exercise of visiting and interviewing potential customers.

What’s most important to keep and open mind, and eliminate your own biases and pre-conceived notions. This exercise needs to be a search for the truth, not an attempt to validate your own theories. Also, make sure that you are talking to the right people. If you are planning a market-creating breakthrough product, you really need to be talking to Early Adopter types, not the guy or gal that only buys after everyone else they know. If you are introducing a product that is very similar to other products in an already large market–but maybe at a lower cost–by all means, talk to those mainstream buyers and even the late adopters. Use the current market phase to guide who to get input from.

It’s great if you have the money to do some formal secondary research, but be careful about confusing formality with accuracy. For example, I know of large companies that spend huge amounts of money on Focus groups, while their Product Managers only reluctantly talk to actual potential customers directly. I find this very dangerous (you might say stupid!). Particularly with breakthrough technology, you tend to find a “garbage in, garbage out” phenomena with professionally managed focus groups. But there is that formal, professional looking report that appears very convincing in the aftermath. They can be great if constructed properly, but I have seen a lot of money spent for a very bad result. If the focus group wasn’t run properly, or the technology is very revolutionary, the results can be total garbage covered in a beautiful wrapper. I always advise that there is a good amount of old-fashion ad hoc research–talking directly to customers–to be used as a sanity check, if not the main research technique. There are exceptions, of course. If you are doing incremental product research, where the product is well-understood and the changes are evolutionary, objective research methods such as surveys may be a great way to get a quick and definitive read on the market’s reaction.

How Do You Know When You’re “Done”?
This really depends on what you are doing, but my general answer is that “you will know when you are done when you get there”. It’s important to not put an absolute time limit on the research, if it is at all practical. In some cases in the real world, this isn’t possible, of course. Sometimes you just have to go with the information that you have gathered up to a set point in time, along with your market common sense, intuition, and gut feel. With incremental product releases, waiting may not be possible or necessary. But if you can avoid it, especially if starting a new company, division, or business area, resist the temptation to “go with what you have”, if it just doesn’t’ feel right. In my experience, when you’ve “done enough” research to begin serious product planning–it’s obvious. You will feel very comfortable with regards to the clarity of the current market snapshoot, and feel you’ve really nailed the wants and needs of the market as it relates to the new product opportunity. Try not to get “antsy” and move forward because you’ve reached the original market research end date on your theoretical timetable. Resist that temptation and keep working until you are CONFIDENT that you are there, unless other factors just won’t allow it.

Summary And Conclusions
Make sure that you do sufficient market research before you begin building products; product development on a developer’s gut feel is most often a prescription for failure. There are a few high profile companies which have entered our folklore that were lucky enough to start that way, but usually this approach will quickly empty your pockets, rather than make you rich.
Include both Marketers and Technologists in the Research if at all possible. In summary:

*Marketing should take the lead on market research for new products
*Always make sure you talk to at least some customers directly and informally
*By wary of formal market research results, if not supported by an informal research “sanity check”
*Make market research a continuous company function
*Don’t stop an individual product-oriented market research project until y
ou are comfortable that you’ve got the correct answer.

There you have my thoughts on market research for product planning purposes. I’d love to hear yours as well.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

1 Comment by admin on March 10, 2008
filed in B2C, Pricing, Product Marketing/Management, Social media, Software/Product Development, market research
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The Haphazard Development of People in Early Stage High Tech Organizations

Many entrepreneurs start out giving little thought to how they will grow their embryonic technology business in the long run. They are totally focused on designing and releasing the first product, or making that first sale. This focus is usually a very positive thing in a new company, since grandiose plans of startups have a way of getting derailed by the harsh realities of trying to survive.

Other more organized and contemplative entrepreneurial types have a master plan all laid out, including the steps on how they are going to grow their company all the way to the happy exit they have planned. This approach can be of great benefit as well; even though things won’t go exactly as planned, it’s great to have a road map that you can adjust as conditions change.

One thing that many younger organizations don’t do so well, is in planning the development of their staff. Don’t misunderstand; there are a lot of development opportunities for employees of newer and smaller companies. But this development often just “happens”; there is little thought that goes into it. A job needs to be done–and a particular body is more available than any other. The fit may not be ideal–and the amount of training given minimal. But the person is thrown in to sink or swim, because like the old saying “necessity is the mother of invention”. It needs to happen, and it often works out well a surprisingly large amount of the time, given the haphazard way in which this “personnel development” often occurs.

But is this optimal, even within the constraints of a hard-charging software or hardware company? Most of the time, with a bit of foresight and a strategic pause, you can increase the odds of successfully stretching your current staff, into areas where expertise or experience are lacking. Below are five simple steps that may greatly increase your success rate in growing

Consider Psychographic Profiles Of Candidates In Your Hiring Choices
Like most things that are done in company development, if you hire the right people, things are likely to turn out better–no matter WHAT curves the marketplace throws your way. So try to think ahead when hiring that next entry-level employee, to fill the open clerical or support role. What other activities may need to be done in the near future? In what areas could this new employee be grown? Are you hiring the most flexible candidate, the type that will be most comfortable when you try to “stretch” them into an unfamiliar role? Will they freak out at being asked to perform a new and challenging activity, or will they embrace it as an attractive career growth opportunity? Try to think ahead, and the answer to your next personnel crises might be right down the hall.

Plan Ahead As Much As Possible
As mentioned above, it’s really useful to try to think ahead to what functions will need staffing in the next 3, 6 or 9 months. This type of strategic thinking is difficult for many early stage managers, who are focused on getting through the end of the month. Unfortunately, this mentality often leads to hiring the person that will save a few nickels in initial salary, or has the most experience for the immediate position–therefore “hitting the ground running” with the least amount of training. But if you factor the medium and long term needs of your business into your hiring decisions, you may hire different candidate–who may add much more to the growth of the business over time.

Train At Least A Little–Don’t Just Throw Them To The Wolves
Startups have a tendency to “throw people in the pool and see if they’ll float”. Many times managers will ask an employee to get started, and just do the best they can in the short term. It’s often a crisis situation, and the manager intends to come back and train them when things settle down a bit. Unfortunately, in early stage companies, the situation NEVER settles down. As a result, you end up with an employee that fails, feels abandoned and neglected, or develops bad habits that become hard to undo. While it’s hard to find the time or resources to provide training, for most people, it’s an important factor in ultimately achieving success. So make it a priority to give the person in a new role some basic training, no matter what it takes.

Supplement And Train Using Consultants As Mentors
One great way to provide training and support to employees in new roles is to get some outside help. Many smaller companies don’t believe that they can afford consultants, because their price tags for providing expertise and short term work are much higher than permanent employees. But that is usually “penny wise, but pound foolish”. Most jobs that need doing, also need to be done right. If there isn’t the expertise or senior management bandwidth available to train and support the employee in the new role, the job may not be done the way the manager intended–costing the company far more than the amount that outside help would. In these instances, an outside consultant is actually a very cost-effective way to prevent costly early mistakes, as well as putting the employee solidly on a track to long-term success in their new role.

Allow Room For Errors
Margin for error is usually less in early stage companies, with a resulting amount of high pressure to “get things right the first time”. But it’s unrealistic to think that someone new to a job, with minimal experience and support, will do everything perfectly the first time. Startup managers need to factor this into to their expectations, and plan for results to be a bit uneven at first. It’s especially important that the demeanor of the manager makes the employee feel comfortable to take educated risks in the company’s best interests, without feeling like any missteps could cost them their career.

SUMMARY
It’s true that early stage tech companies can’t afford to engage in the same type of organizational planning and personnel development that occurs in most giant corporations. However, that is somewhat offset by the vast opportunities for development that are found in these fast-changing, non-bureaucratic environments. Early stage tech companies are well served if they force themselves to engage in just a fraction of the planning done in larger corporations. Post a comment and let us know what you think about organizational development in startup companies.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

2 Comments by admin on June 24, 2007
filed in Corporate Strategy, General Management, Startup/Early Stage
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Marketing and Selling Technology Products through the Value-Added Reseller (VAR) Channel

Selling through multiple channels is one of my preferred strategies in technology marketing. If done properly, it allows a company to fully exploit its expensive, hard-earned intellectual property to the maximum extent. One of the most popular channels (and one of my favorites) used to sell B2B software and hardware is the Value-added Reseller, or VAR channel.

VARS ARE THE DISTRIBUTION HOLY GRAIL FOR MANY STARTUP COMPANIES

In fact, with a great many startup software and technology companies, building a VAR channel network to sell their companies products is the first thing they want to do, upon releasing their first product. This is especially true when the founding management team primarily comes from a technical background. The thinking goes; they are technologists who have created a great product. They don’t have a lot of experience selling or marketing–and most of the startup money has gone to, and will continue to go to developing products. Why not just recruit a bunch of resellers to market and sell their product for them? Sounds like a great idea on the surface, doesn’t it?

Unfortunately, there are few strategies that are more flawed, and which have continuously led to failure than this one.

Let’s contrast the realities of the VAR channel, against this simplistic notion that has been tried again and again, without success:

WHAT VARS DON’T DO

1) First of all, VARs DON’T market. At least not YOUR products, anyway (they may market their services). So the very first flaw in this strategy is that it is based on a gross misconception of what a VAR typically does.

2) VARs don’t create new markets. VARs are great at selling into established markets and further expanding already growing ones. Missionary sales: brand new markets, categories and products? Not so much.

3) They don’t sell a wide variety, or a large assortment of products. In fact, VARs are focused on actively selling VERY FEW products–if they are even focused on selling products at all.

4) VARs aren’t motivated by high product margins.

5) The individual VAR does not exist to help YOUR company make money.

Now if you’re not a sales or marketing professional with experience working with the VAR channel, you’re probably very confused by the list just above. So what is it that VARs actually do? And why is it worth dealing with them at all!

What happens time and time again is that a technologist startup CEO will pursue the VAR channel as their exclusive distribution channel, without knowing any of the points in the list above. Their effort will fail miserably, and they will then scramble to begin selling their product directly, or through some other means. They will swear off the VAR channel forever, and I do mean swear:

“Those !!@#$%^^* resellers are good for nothing. They take a big cut of your margins, while adding no value in return. I’ll never deal with them again.”

I can’t tell you how many times I’ve heard some version of the quote above.

But the VAR channel is a major force in the technology business, and if you know what you’re doing, it can be used to great leverage by your company. So let’s now take a more realistic look at what VARs CAN DO:

WHAT VARS ACTUALLY DO

1) First and foremost, VARs are in business to sell their own HIGH MARGIN SERVICES. That is why they exist, and how they put bread on the table. This revelation may be discouraging to some product vendors, but you must understand and respect this above all, if you hope to leverage this channel. The only exception to this is the “core” product, which will be discussed later in this article.

2) VARs are very interested in things that apply to their own vertical focus. Although it wasn’t so true many years ago, most successful VARs these days have a very tight vertical focus.

3) Many VARs act as “thought leaders” for their corporate customers. So they are very interested in “what’s new” in the market, so they can stay on top of trends and remain market experts for their clients. This means that they will sometimes spend a lot of time talking to you about your new product, but never find the time to actually “sell” it (even if they have the best of intentions). In the busy world of the small VAR, client demands and selling the core product and services usually soak up all excess time.

4) VARs are often used as “aggregators” of purchases by corporate clients. This way, the corporation can use a single vendor point of contact for their technology purchases, greatly simplifying their purchasing process. They can also leverage the VAR as an evaluator/validator of new products and technologies. This makes them a very important part of the purchasing chain for many corporations.

5) If they put any real effort into selling products at all, it is usually into one or two “core” products that they have built their service offerings around. If you aren’t a product that pulls services, forget about getting high mindshare with the VAR.

6) When it comes to selling “non-core” products, VARs are almost completely driven by the demand they see in their installed customer base. They won’t often add in new products that they don’t see a demand for, unless they are really techie, early adopter types. And these techies will often add a product, but never find time to actually offer it (let alone sell it) to their customers.

7) The VAR channel is EXCELLENT at fulfilling demand for great new products into their existing, installed customer base.

8) VARs can be an excellent proxy for a vendor in installing, configuring and offering first level support. This can enable a vendor extend its reach and to leverage the VAR channels existing infrastructure rather than building out a large field organization (which depending on the product category, may not even be feasible).

So given the points outlined above, what are the “best practices” to follow when you are seeking to build and leverage a VAR channel?

VAR CHANNEL BEST PRACTICES

*Always sell your new product directly in the beginning. Even if you don’t plan to build a direct sales force and sell directly in the long run, it is critical to establish that the product works, and can be sold successfully. If you can’t sell your own product, no VAR will be able to either (and few smart ones will be willing to try). De-bug and systemize the sales process, make sure that your end user price points are right, and build a small reference account list–at a minimum. Only at this point should you begin to approach VARs to distribute your product.

*Marketing the product is the vendor’s responsibility. Do not naively think that the VAR will market the product for you, or that since you have VARs to sell, you don’t need to market at all. Remember, VARs are great at fulfilling demand among their existing customers–and very poor at creating it among new customers. The vendor must position its products in the market and create demand for them–otherwise your channel efforts will certainly fail

*Treat VARs like the valued business partners they should be. If you do sell direct, don’t “steal a deal” and take it direct just to make a few more points on one sale. Nothing is more short-sighted. Not only will this VAR not do business with you again, in any given vertical it’s a small community–and word gets around fast. You risk becoming a pariah in the VAR channel, and losing all the hard work that you put into building your network. My philosophy is: when in doubt, cut the VAR in on the deal. If you don’t feel he’s adding any value to your business, eliminate him from your network after the deal. But don’t use your low opinion of a particular VAR to convince yourself to cut him out of the deal. You risk cutting off your own nose in spite.

*Be realistic in what the VAR channel can do for you.
If you have a non-core offering, be happy that they “make it available” to their customer base, rather than expecting them to sell it actively. Remember, VARs are key influencers of their clients; just being available to endorse your product as something they offer, to a customer that hears about the product elsewhere, can be very valuable.

*Provide a reasonable margin, but don’t “throw margin away” thinking that it will motivate a VAR to actively push your product–if they otherwise would not. It won’t work, and you’ll just be giving away money for no reason–that you could use creating demand instead.

*For most products, make sure that you don’t over-distribute by signing up more VARs than your market will support. Even though greater margins might not make a VAR push your products, the erosion of margins to near zero will cause a VAR to eliminate your product from their portfolio. It’s better to leave a few deals on the table, than to risk demotivating your entire reseller network, because they are 6 competitors are bidding on every deal in an particular area. The exception to this is if you represent a “core” product that pulls significant service revenue, you can get away with a lot more stuff, because the product margins are trivial to the VAR compared to the lucrative service revenue. But in this case, be careful when using your market strength to abuse partners. People have long memories, and “what goes around, comes around.”

SUMMARY

That’s my primer on how to approach, and even more importantly, how NOT to approach doing business with Value-Added Resellers. Post a comment or send me an email to delve into this important topic further.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

7 Comments by admin on January 28, 2007
filed in Business Models, Corporate Strategy, Distribution Channels, Product Marketing/Management, Startup/Early Stage, VARs, enterprise software, sales
tagged , , , , , , , , , ,

Strategic Advantage

How does a company compete in the long run? I’m not talking about day to day stuff—but what sets your company apart, and gives it a place in the marketplace that allows it to survive, and hopefully, thrive?

There are a lot of different terms used to describe the ability to compete: strategic advantage, differential advantage, competitive advantage, unique value proposition, etc. But all these terms mean essentially the same thing—what have you got that the market wants–that other don’t?

Drinking the Kool-Aid

At PJM Consulting I have the opportunity to talk to a great many software and hardware company CEOs, many which are of the early stage variety. I’m taken aback that some of them don’t even understand the concept of strategic advantage. To start a company, and not have thought about what is going to allow you to break into an existing market seems pretty strange to me. Ignorance is bliss, I guess.

A far greater number of CEOs understand the concept of strategic advantage, but have a tendency to fall in love with their company’s sales pitch—also referred to as “drinking the Kool-Aid”. This is natural, but really unfortunate. Lack of realism as to what your company brings to the table is not helpful in creating a company that will break through market noise and become successful. I would argue that realism, even skepticism, about a company’s advantage is an attribute that is important to every startup CEO. Don’t get me wrong; I don‘t mean to imply that a CEO should walk through the halls of his company, spouting “whoa is me, how will we ever make it”! But at least in internal thinking, he or she should be constantly questioning and testing whether his company’s advantage is real, and not fading. A bit of healthy paranoia can be very useful when it comes to strategic issues.

What is a Real Strategic Advantage?

So what does it take to have a real, sustainable competitive advantage? Let’s look at some of the things that are—and some that are not—what I’ll call “mirages”.

REAL ADVANTAGES

First Mover
The first mover advantage has led to some of the great success stories in high tech. Apple in PCs, Cisco in Routers, IBM in Mainframes, Adobe in Document Standards, Intuit in Personal Financial Software, SalesForce.com in Hosted CRM—just to name a few. What is important to mention here, is that while the first mover advantage is real—it isn’t necessarily sustainable for very long. First movers that don’t develop another, more sustainable advantage, often end up as road kill in the long term.

Critical Mass
Being big can be great—as long as the mass is muscle—not fat (see the large company discussion below). Being big can allow you the resources to build a great brand, spread your fixed costs over a large number of unit sales to provide a cost advantage, and enable you to attract and pay very smart people. Yes, size can be an enormous advantage, particularly in manufacturing market segments where scale is so important. As long as the company keeps its eye on the ball and uses its mass to its advantage, this can be one of the strongest, most sustainable strategic advantages.

Patents
I have mixed feeling about this one. Patents can of course become a major strategic advantage, over the very long period that the patent is enforceable. If you have a strong patent portfolio backing a product that has achieved market success—this is one of the most powerful, sustainable advantages available. But I believe that the pursuit of patents can often be “fool’s gold” for many young technology companies. First of all, they really aren’t that important, unless you have success in the market. If you aren’t successful in the market, sometimes you can become “patent troll”, suing others for infringing your patents—but that is truly a business plan of last resort. In software markets, in particular, I’m of the belief that almost anything can be “coded around”. Also, with the wide variety of stuff available for patent these days, coupled with great confusion about what is truly enforceable, it’s gotten harder to obtain a patent that you are certain you can count on. I’ve seen a lot of early stage companies dump too many scarce dollars into the patent process, which could have been very useful in that critical time window available to make a new product successful. I’m suggesting a balance here. Using the patent system can have huge payoffs, but this should be balanced with the need for capital in achieving market success.

Low Cost Producer
This is another major strategic advantage if you can achieve it. It can allow you to essentially control how much profit is made by an entire market segment. It is a lot more realistic to gain a significant cost advantage in hardware than in software. But with rapid globalization and the constant emergence of lower cost labor markets throughout the world, even current low cost producers cannot allow complacency to set in. Years ago, if you achieved the low cost producer position, you were probably set for a while. But not anymore.

Brand
This is the ultimate strategic advantage, and arguably, the only one that is sustainable in the very long term. If you establish your company as the leading brand in your market segment, it will allow you to charge higher prices, get away with somewhat higher costs, smooth over your slower decision-making, and much more. A great brand covers up many sins in the short run, and gives you additional time to recover from your mistakes, which competitors with lesser brands won’t get. In the long run, brand is practically everything.

MIRAGES

First Mover
Wait—“First Mover” already appeared in the “Real Advantage” column above! That’s right, it did. I think of being a First Mover as an advantage, but one that can quickly turn into a mirage, and often does. Think of VisiCalc in Spreadsheets, Ashton-Tate in databases, 3Com in networking hardware, Novell in network operating systems, Digital Research in microcomputer operating Systems, even Apple in PCs (they’re up now, but haven’t always been)—the list could go on and on. Many of you may not know the names of some of these companies, but they were all industry pioneers, and at one time dominant in their market segments. The message here is that being a first mover is a means to an end. It can assist you greatly in establishing a position in the market—but if that position isn’t quickly backed by some more sustainable advantage—ultimately the company may serve as a case study for some fast follower to “go to school”, and ultimately “eat their lunch”.

Technological Superiority
This is one I hear all the time from technically-oriented CEOs, talking about why their startup will win—vs. the 50 other startups and 5 established market leaders in their segment. First of all, they are usually kidding themselves—it s often not really true. They just have their head in the sand, or don’t know what’s in their competitor’s labs. And even if they do have unusually smart engineers, or a great technology platform, that in itself isn’t enough to guarantee initial success, let alone sustain it. The technology must be somehow be protected either via patents or trade secrets, and it must still be translated into an easy-to-use product that can demonstrate productivity benefits of some sort, to the target customer. Except for early adopters, no one buys products due to the wiz-bang technology inside.

Market Leadership
This is similar to the “First Mover” discussion above. Market leadership, by itself, is not a true competitive advantage. Your company may be in the lead at the moment, but
why, and for how long? Maybe there is a technological innovation in a competitor’s lab that will soon make your solution obsolete, from a performance or cost perspective. In High Tech markets, leadership can be very fleeting—unless there is some substantial, sustainable competitive advantage behind it.

Large Company
This one kills many good companies. Senior management gets complacent thinking they are one of the giants of the industry—who could possibly challenge them? This complacency is often accompanied by bloated cost structures, slow decision making, lack of “smart” risk-taking, and political/bureaucratic business processes. All of these things allow the nimble innovator in a high tech market to outflank the slow-moving large company. Having critical mass can be great—but not if you implode under your own fat.

So that’s my opinion on competitive advantage. I’m sure that you may be able to come up with many more “Real Advantages and “Mirages”. Or you may disagree with the points I’ve made. Either way—let’s talk! Post a comment on, or send me an email message.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

1 Comment by admin on March 24, 2006
filed in Business Models, Corporate Strategy, General Management, Startup/Early Stage
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High Tech PR

Among the potential ingredients for the marketing mix of a high tech software or hardware company, Press Relations is high on my list.

There’s a good reason for it. It is often the most cost effective tactic you can use to generate leads, build the image of the company, and create credibility that helps you close more sales. Best of all, it’s possible to do it on a shoestring budget, if you’re a capital-challenged startup company. Not For Every Situation But of course, an active PR campaign isn’t appropriate for every company, at every point in time. It’s very important to make sure that the company has its “house in order” prior to starting a PR campaign. This cautionary note fits into the category of you “only get one chance to make a first impression.” So let’s start by outlining when it’s NOT a good time to start a PR campaign: 1) The Product isn’t finished 2) The Product is buggy 3) No good public spokesman in the company, or one hasn’t been decided on yet 4) No website 5) No marketing literature 6) No users yet (not even beta users) The basic message here is that PR shouldn’t be started until the company and product are ready. Once you go out for PR, there’s no looking back. You can’t undo it. Maybe you’ve heard the old saying “There’s no such thing as bad PR”. Don’t believe it—it’s a lie! The only kind of PR that will help boost your business is good PR. Bad PR, and even so-so coverage, is to be avoided. It’s the News–Not the Product In addition, it’s not really possible to do a “small PR campaign”. You can’t test PR like many other marketing programs. It isn’t advisable to go out to a couple of publications with a press release to “test the water”, and see if you get some positive coverage. The problem is that once you do that, your important announcement is no longer “news” to other publications that may have provided coverage. You see, the “product” that publications are interesting in getting from you is THE NEWS ITSELF. Once it’s published in another publication, it’s no longer newsworthy to others. Press Releases are as fragile an asset to your company, as a seat on a particular flight is to an airline. They aren’t static assets, but time-sensitive opportunities to promote your company. So when you decide to go out with news, you need to go out big. Go out as big as you can afford to, anyway. News needs to be timed to hit all relevant publications at the same time. This is a bit challenging, since you may have relevant publications that are weeklies, monthlies and even websites where the news might posted near real-time. The technique you use to ensure it hits all at the same time is to send your release to the long lead-time pubs first, but “embargo” the release until the general release date. If you are dealing with legitimate journals, they will respect the embargo and won’t publish the news until your official release date. When PR Makes Sense So when should you use PR as part of your marketing mix? 1) When announcing the formation of a new company 2) New Product Announcement, assuming the product is “fully cooked” 3) Major new customer acquisitions (assuming it doesn’t need to be secret for some reason) 4) Senior Employees joining the company (new CEO, VP Marketing, etc) 5) New Partnership or Alliance These are the major reasons that you would put out a press release for marketing reasons, although I’m sure you can think of more. Public companies will often have a greater flow of releases, because they are dealing with a dual purpose of marketing and investor relations. This can often be problematic, but that’s a subject for another day. One Size Doesn’t Fit All Other questions relate to the mechanics of producing and placing news with the media. Should you hire a PR firm? Should your marketing department handle it internally? Should you hire a dedicate resource to handle the PR function? Just put it out over the Internet? There are lots of ways to handle PR and still do it successfully. One size doesn’t fit all—it really depends upon the situation. The first aspect to look at is your level of resources. PR is one of my preferred marketing activities, so I recommend that you don’t skimp in this area. But there are still situations where the money just isn’t available, for whatever reason. An outside PR firm can always be helpful, particularly if you’ve never been involved in a PR campaign before. But if you’re in a thinly funded startup company, don’t be deterred. To be successful in PR, it’s far more important to have REAL NEWS than it is to have a lot of money. (Of course, money doesn’t hurt!) So if you just can’t afford an outside or experienced PR assistance—do it yourself. One caveat is that just putting it out on the Internet without following up isn’t really Press Relations at all. That’s useful for SEO purposes, but isn’t likely to lead to any significant press coverage by itself. The second thing to consider, from a campaign implementation perspective, is “how big is your news”. If it’s solid, worthy of publication, but not earth shattering—maybe you can handle it internally. At most, maybe you need someone to help with the writing of the release itself, but the potential ink isn’t big enough to spend a lot of dollars attempting to place it. If on the other hand the news is big stuff (with a corresponding large potential payoff), it’s really a good idea to hire an outside firm or an experienced inside resource, to maximize the potential. Next, how big is your market? If you are in a large, horizontal market, with a large number of bigger publications—that points to the need for a more professional effort. Contacts with the editors are critical in this instance, and an experienced PR professional can be worth their cost many times over. If on the other hand your market is a small vertical niche, a PR professional may not be money well spent, particularly if you have a limited marketing budget. In this case you should be able to build and maintain good relationships with the limited number of editors and writers who are working for the small number of trade journals covering your industry. Another question, will the PR opportunity be ongoing? If you’re going to put out 2 press releases a year, how you go about staffing the function is very different, than if there are going to be 2 blockbuster releases each month. So the stage of growth of your company should also help guide your tactical PR implementation. Lastly, what’s your business culture and style? Do you like to get the best outside experts and use them when you need them, or do you prefer to hire people with expertise as permanent members of your staff? Conversely, do you enjoy learning the specifics of the task personally so you can apply the knowledge yourself? If you choose to learn yourself, make sure you get someone with PR experience to guide you, and serve as a sounding board. PR is for Almost Everyone Conducting extremely successful PR campaigns involves many fine points and vagaries, which can’t be addressed in a short article such as this. But I believe anyone should be able a do a good solid job, if they take the time, and put forth the effort. It’s not a mystery, and for most technology companies PR should play a very prominent role in there promotional strategy. I’d love to hear about your own PR experiences–post a comment below to continue the discussion. Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

4 Comments by admin on September 13, 2005
filed in B2C, Marcom, Online Marketing, Promotion, Social media, Startup/Early Stage
tagged , , , , , , , , , , , , , , , ,

Strategic Fundraising

Almost every company goes through it, except for the fortunate few. Some people have gone through it multiple times. While never easy, raising money for the second or third time (assuming success the first time!) is a picnic, compared to the first time.

The questions that run through an entrepreneur’s mind are nearly endless. Do I even need the money? Is my company fund-able, regardless? How much do I need? How much should I try to raise? What’s the best time to start raising money? What type of investor should I approach, and what are their expectations? How should I go about approaching them?

I could fill up the rest of a page with salient questions an entrepreneur might have. This might be the most daunting process in the minefield of difficult steps to forming and building a winning high tech company.

So you’re a new entrepreneur, with a great idea, a prototype, and a vague notion that you might need to raise some capital. Where do you go from here?

NO COOKBOOK FORMULA

Well, like most things that really matter, there’s no easy answer. It depends on what type of company you’re trying to build, your own control and risk/reward mentality, as well as the dynamics of your market.

For discussion purposes, I’ll focus on an embryonic software company. Most of the discussion will be just as relevant to a later stage business, or an early stage manufacturing business. In a manufacturing business, you’ll need to raise more money to fund manufacturing in the ramp-up phase. But the initial fund-raising is very similar.

FUNDRAISING BASICS

First of all, let’s quickly cover the various categories of capital sources. There are many variations and shades of gray with respect to funding sources, but the following are representative of the basic categories available to new software companies:

1) Self-funding
2) Friends & Family
3) Angel Investors
4) Venture Capital
5) Strategic Partners

Hopefully, these categories are pretty self-explanatory. Next, let’s look at what TYPE of company the entrepreneur is trying to build:

A) Lifestyle Company
B) Solid Single
C) Home Run

A Lifestyle company is one in which you are often intermixing your personal life with your company life. There may be family members involved in the business, your write-offs and accounting are more aggressively aimed at reducing taxes than showing profits, and you aren’t interested in or planning to sell the company anytime soon. Solid Singles and Home Runs are similar to each other; the major difference is market size/opportunity.

Lastly, let’s talk about what outside investors look for in a fund-able venture:

I) Management
II) Market size/opportunity
III) Defensible differential advantage

The three items listed above are all crucial, but they aren’t equal in importance. Professional investors look for strong management teams, but if there are holes in the current team, it isn’t necessarily fatal for many investors. They’re happy to help you fill out the team. Many, in fact, prefer it this way. But having a large market opportunity and strong differential advantage are non-negotiable in the eyes of investors. They are looking for big returns. It’s a long-held view among institutional investors that their own management time is the limiting factor in their own business. As a result, they don’t feel they can afford to invest in “solid little businesses”. If you don’t stack up as having big potential in both of these key areas, almost every professional investor will take a pass.

YOU HAVE TO LIVE WITH THEM, TOO

Another important consideration that many entrepreneurs fail to consider is how well potential investors fit with the company’s management. Management teams are often so focused on “getting the money” that they fail to consider that you “have to live with them”, as well. It’s a bit like getting married. You may be thrilled to attract the most prestigious investor (like the best looking potential spouse), but end up with business philosophy and personal conflicts that severely retard the company’s development. This isn’t a used car transaction, where the sale is made and the parties walk away. You and your investors are now intertwined, but may or may not have the same interests.

So ask yourself: Is this a good match?

Are you seeking a “hands off” investor, or someone that will get involved with the details—providing business guidance and contacts—for better or for worse? Many VCs, for example, have successful business backgrounds and networks that can make them invaluable as advisors. There’s another group, however, that don’t have the background or skills to run a company. Yet their arrogance leads them to believe they are eminently qualified to drive even the most strategic of decisions. Are they going to be so involved that it will take up much of your scarce management time that is needed to build the business? On the other hand, are the investors so busy that you won’t be able to get their attention when you need them? Which type do you want on YOUR board?

It’s true that the money that you raise is a commodity—but the people relationships that come along with it can make or break your company. Early stage fundraising, taken as a whole, is NOT a commodity function.

THE LIFE STYLE COMPANY

Now let’s look at the simplest case study. An entrepreneur has conceived a software business using his knowledge of a particular, very specific, vertical market. It’s a market he knows well, and there’s almost no direct competition. Unfortunately, the market, while attractive to him, is not large by software category standards. Yet the market is plenty big enough to support a very profitable company, particularly since there is almost no competition. He’s proven to himself that he has a solution that the market will embrace, allowing the building of a business. Yet he thinks he needs a little additional capital, to ramp it to the point of the business being self-supporting using it’s own cash flow. What should he do?

This is the classic example of a lifestyle company in the making. Sophisticated outside investors will have no interest, unless it’s for personal/hobby reasons. And since there is little competition, and as a result, little time pressure—fund it yourself. Take out a second mortgage, use lines of credit, or get an SBA loan. If you really have to, raise some money from supportive friends or family members.

This example makes up the great majority of software companies worldwide. There are many, many solidly profitable software businesses that will never be on the radar screen of the investor community. These companies often exist quite nicely, enjoying solid and relatively stable profitability with revenues in the $1-10M range. That’s fine—the problem lies when the entrepreneur doesn’t know what he has, or won’t accept it. He thinks his baby needs to grow up to be a fast-growing player. But it’s generally the case that the market is too small. There is little need to be distracted by trying to raise funds from outside investors—and it’s fruitless to try. It will only be a waste of time for the company and investors. And if by some chance it IS funded, there will end up being a lot of turmoil and hard feeling when the company doesn’t meet the lofty expectations that were needed to sell the funding deal. I’ve seen many great little companies screwed up in the attempt to become something they’re not.

THE SOLID SINGLE

Now we’ll examine the next step up—the solid single. This opportunity often presents itself as a larger vertical market than the life style company typically pursues. Another possibility is a horizontal, yet still niche, product. These are often the situations where the most difficult strategic decisions reside. In fact, the great majority of software companies who seek outside funding probably fall into this category. The market size is just on the edge of what the professional investors will consider. And while there is a differential advantage, it’s not at the level that you’ll be able to “knock their socks off” in your slide-show pitch. There’s worrisome competition, but it’s not completely over-crowded with 75 venture-funded companies. What’s a management team to do?

This is a tough call. Every situation is a little different, but my general advice is to work your way up the 5-part funding tree discussed earlier. Fund it yourself as long as it’s not crippling your progress. Then do a round starting with Friends and Family, as well as Angel Investors that are easily approachable via your immediate network. Once you go through this funding, hopefully you’ve built a rapidly improving business with good growth prospects.

It is at this point you may be able to attract money from a VC or private equity firm that has a later stage, more conservative risk/reward profile than the typical early stage VC. Professional investors might see in your company one that may not be a 10X return, but one that may be a 2-5X return in a shorter time frame, with less risk. And this later funding may work to your benefit, because the opportunity in front of the company may be such that you need to manage dilution of your stake carefully, to ensure that at the end of the day, it’s been worth your while. A strategic partner may be even a better fit here. Often a company in this situation may be able to attract funding because their product is important to the prospects of a larger partner company, filling out a total solution or providing a key technology the larger company can’t quickly or easily replicate. In this situation, the company may even get a richer valuation that the “Home Run” scenario which we’ll look at next.

THE HOME RUN

Lastly, there’s the classic Venture-funded company, the one with “Home Run” potential. These are the companies that VCs are out seeking to fund. These are the hot young companies that you often read about in the newspaper or trade journals. A high profile engineer, or someone else well known has started the company, with some cache in their field. The technology of the company appears to have breakthrough potential. The market is new, expected to grow to be very large, and is very newsworthy. But the competition is expected to be very intense, both from established players and a spate of new startups. This is obviously a very different situation than the two discussed above.

In this situation, you’ve got to go get the money. Time is of the essence. Getting established in the market early is crucial, and economies of scale usually become important as well. So a company in this situation typically needs to raise as much money as possible, as early as possible. All the steps are compressed here; and the time between funding rounds may be only a few months in extreme circumstances. It’s best, if possible, to skip the more casual funding sources and go very quickly to where you can raise large amounts of money very early—the VCs, and possibly strategic partners. Care needs to be taken on how you approach VCs, however. Unless you know them personally, never approach them directly. It’s one of the peculiarities of the VC community, and considered perverse by most people outside the VC community. The VC community has their reasons, although their rationale is certainly arguable. But no matter–it’s one of the rules of the game. Always approach them through a service provider (Accounting firm, Law firm, etc.), or another entrepreneur who has been successfully funded by the VC firm in the past.

Until you can get a commitment from institutional investors, however, take money from wherever you can get it, within reason. Self-fund, friends and family money and Angels may all come into play if there is a delay in getting the institutional money to buy in. Don’t worry very much about dilution in this case. The choice is often one of potentially ending up with a small, valuable percentage of a company with a large market cap, versus a large percentage of a failure. As you can see, the advice in this scenario is almost the complete opposite of what I’ve recommended in the two previous examples.

A STRATEGIC DECISION

But it’s all fund-raising, right? Why such different advice?

The advice varies because fund-raising is one of the most strategic activities facing an early stage high tech company. Many entrepreneurs view raising capital as a generic operational activity, like choosing a bank or leasing office space. It’s viewed as just a necessary evil, because every business needs money to survive and prosper. This discussion was intended to demonstrate that raising money should be viewed as one of your most important strategic functions–a decision that is taken with an eye for its effect on your competitive position. It’s really as important as choosing the best technology platform to adopt, or what marketing mix to use to outflank your key competitor.

I know that there are many of readers out there who have run the fundraising gauntlet—give us the benefit of your wisdom! Post a comment below.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

3 Comments by admin on July 9, 2005
filed in Business Development, Business Models, Corporate Strategy, Financing, General Management, Startup/Early Stage
tagged , , , , , , , , , , , , , , , , , , , ,
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