He told me that after seven months, when he was able to earn the trust of the board of directors, executed his plan and shut the business down. I asked him why, and he said that right from the start it was obvious that the business would never be profitable - a sizing of the available market and the revenue per customer showed clearly that there just wasn't a viable business. And with so much capital injected, it just didn't make any sense to attempt a restart to a new market. So he now has a management team and $2M that he is looking to seed invest (the investors didn't want the money returned).
This tale reminded me of the "Underpants Gnomes" from a South Park episode. For those that haven't seen this, it's a hilarious views of many start-up businesses - you can watch the segment here.
They had a phase 1 plan, phase 3 was profit, but were missing phase 2 - how many businesses are like this? Of course this applies to any business, but we're going to focus on how it applies to technology products. As you talk to the VC's of Sandhill Road, the most common initial question to entrepreneurs pitching is "How will this make money" i.e. what is Phase 2.
As we were talking about this, I started thinking about a simple checklist to evaluate product opportunities. So here's the list so far:
- Meets a customers need or solves a customers problem (don't even continue if you score a zero here). Products dreamed up in offices are often cool and visionary, but don't solve any need can be a company's death wish.
- Available market opportunity is big enough. This is an important one - getting in early on a future large market is critical - analyst market predictions help and confirm with potential customers (at Citrix a rule was thumb was that we should see at least a $200M market within a few years). Coming in late into a mature and crowded market is bad unless you can be truly revolutionary. As an example, the WAN Optimization market is now mature and crowded (so avoid it), but we are just on the cusp of the mobile internet device (MID) evolution (nice place to prospect).
- High Differentiation and (therefore) low competition. If you are competing on the basis of being smaller & faster then accept that this isn't sustainable over the long term (remember Novell?). Don't enter a market that is choked with competitors or dominated by a few large players.
- High Sales leverage (e.g. channel, online) - don't build a business that requires scores of highly trained and paid direct sales guys - this will constrain your growth. Sales guys are absolutely critical to any business, but you need to go out and get leverage to scale quickly.
- Low cost of sales and short sales cycle - some products require length sales cycles, with multiple customer department involvement, and even consideration up to the board level. As an example, think of the long length of time for an enterprise to approve a new financial or ERP system. On the converse side, people buy apps from the Apple App store on a whim, and often after a friend's recommendation.
- Easy to evaluate - make it super easy for a buyer to try out your product. I'm a big fan of the "freemium model" where you give away something basic free, and then up-sell. Look at what it did for the recently public LogMeIn.
- Low Support needs - build the need to call support out of the product, make the product self-supporting, well documented, give end-users forums etc. Do whatever you can to stop them needing to call you (and costing you money).
- Demonstrate clear customer ROI - in a downward economy customers are not going to buy anything unless there is a clear return on investment. Help them see that with an ROI calculator. Many companies are moving to a SaaS model as it makes the customer ROI much quicker without an infrastructure to deploy and maintain. If your customer doesn't help a customer save money or generate new money then it's probably a bad idea.
- Easy to market, explain, and understand - How easy is it for your customers to grok what the product does. If you can't explain in 2 sentances, then it's not the right thing.
- Generate recurring revenue - this last one is a biggie - you must be able to sell more to existing customers, or generate recurring revenue, such as with a service. We all know that it's much easier to sell to existing customers than find new ones - so give your customers way to continue to spend with you.
Of course no product is going to meet all these criteria, and some are more important than others. I am putting together an excel sheet that applies weightings as well as scores, and will post it to the blog when complete. Using this sheet I intend to help one of the companies I am advising what product ideas to focus on further - we'll end up with a top 3 ideas and then build more detailed business plans on each. The other advantage of this approach is that it generally resonates with engineers, as it is an analytical approach.
So let's go out and create our own perfect 10.