Tesla and Adobe: Why Continuous Deployment May Mean Continuous Customer Disappointment

For the last 75 years products (both durable goods and software) were built via Waterfall development. This process forced companies to release and launch products by model years, and market new and “improved” versions.

In the last few years Agile and “Continuous Deployment” has replaced Waterfall and transformed how companies big and small build products. Agile is a tremendous advance in reducing time, money and wasted product development effort – and in having products better match customer needs.

But businesses are finding that Continuous Deployment not only changes engineering but has ripple effects on the rest of its business model. And these changes may have unintended consequences leading to customer dissatisfaction and confusion.

Smart companies will figure out how to educate their customers and communicate these changes.

—-

The Old Days – Waterfall Product Development
(skip this part of you’re conversant in Waterfall and Lean.)

Waterfall

In the past both hardware and software were engineered using Waterfall development, a process that moves through new product development one-step-at-a-time.

  • Marketing delivers a “requirements” document to engineering.
  • Then engineering develops a functional specification and designs the product.
  • Next comes the work of actually building the product – implementation.
  • Then validation ensures the product was built to spec.
  • After the product ships, it’s maintained by fixing flaws/bugs.

Customers would get their hands on a product only after it had gone through a lengthy cycle that could take years – enterprise software 1-2 years, new microprocessors 2-4 years, automobiles 3-5 years, aircraft a decade.

Waterfall – The Customer View
When customers purchased a product they understood that they were buying this year’s model.  When next year’s model arrived, they did not expect that  the Ford station wagon or Maytag washer they purchased last year would be updated to match all the features in the new model. (Software at times had an upgrade path, often it required a new purchase.)

Waterfall allowed marketers to sell incremental upgrades to products as new models. First starting in the fashion business, then adopted by General Motors in the 1920’s annual model year changeovers turned into national events. (The same strategy would be embraced 75 years later by Microsoft for Windows and then Apple for the iPhone.)

As the press speculated about new features, companies added to the mystique by guarding the new designs with military secrecy. Consumers counted the days until the new models were “unveiled”.

With its punctuated and delineated release cycles, waterfall development led consumers to understand the limited rights they had to future product upgrades and enhancements (typically none.) In other words, consumer expectations were bounded.

Waterfall Releases

At the same time, manufacturers used new model changeovers to generate excitement over new features/versions convincing consumers to obsolete perfectly functional products and buy new ones.

Agile Development: Continuous Delivery and Deployment
In contrast to Waterfall development, Agile Development delivers incremental and iterative changes on an ongoing basis.

Agile Dev

Agile development has upended the familiar consumer expectations and company revenue models designed around the release cycles of Waterfall engineering. In a startup this enables deployment of Minimum Viable products at a rapid pace. For companies already in production, Continuous Deployment can eliminate months or years in between major releases or models. Companies can deliver product improvements via the cloud so that all customers get a better product over time.

While continuous delivery is truly a better development process for engineering, it has profound impacts on a company’s business model and customer expectations.

Continuous Delivery/Deployment – The Marketers View
Cloud based products has offered companies an opportunity to rethink how new business models would work. Adobe and Tesla offer two examples.

Tesla
While most of the literature talks about continuous Delivery/Deployment as a software innovation for web/mobile/cloud apps, Tesla is using it for durable goods – $100,000 cars – in both hardware and software.

Tesla Model S on the road

First, Tesla’s Model S sedan downloads firmware updates on a regular basis. These software changes go much further than simply changing user interface elements on the dashboard. Instead, they may modify major elements of the car from its suspension to its acceleration and handling characteristics.

Secondly, in a break from traditional automobile practices, rather than waiting a year to roll out annual improvements to its Model S, Tesla has been continuously improving its product each quarter on the assembly line.  There are no model years to differentiate a Tesla Model S built in 2012 from one built this year. (The last time this happened in auto manufacturing was the Ford Model T.)

Adobe
Adobe, which for decades sold newer versions of its products – Photoshop, Illustrator, etc. – has now moved all those products to the cloud and labeled them the Adobe Creative Cloud. Instead of paying for new products, customers now buy an annual subscription.

Photoshop package

The move to the cloud allowed Adobe to implement continuous delivery and deployment. But more importantly the change from a product sale into a subscription turned their revenue model into a predictable annuity. From an accounting/Wall Street perspective it was a seemingly smart move.

Continuous Delivery/Deployment – The Customer View
But this shift had some surprises for consumers, not all of them good.

As many companies are discovering, incremental improvement doesn’t have the same cachet to a consumer as new and better. While it may seem irrational, inefficient and illogical, the reality is that people like shiny new toys. They want newer things. Often. And they want to be the ones who own them, control them and decide when they want to change them.

Adobe
While creating a predictable revenue stream from high-end users, Adobe has created two problems. First, not all Adobe customers believe that Adobe’s new subscription business model is an improvement for them. If customers stop paying their monthly subscription they don’t just lose access to the Adobe Creative Suite software (Photoshop, Illustrator, etc.) used to create their work, they may lose access to the work they created.

Second, they unintentionally overshot the needs of students, small business and casual users, driving them to “good-enough” replacements like Pixelmator, Acorn, GIMP for PhotoShop and Sketch, iDraw, and ArtBoard for Illustrator.

The consequence of discarding low margin customers and optimizing revenue and margin in the short-term, Adobe risks enabling future competitors. In fact, this revenue model feels awfully close to the strategy of the U.S. integrated steel business when they abandoned their low margin business to the mini-mills.

Tesla
What could go wrong with making a car incrementally better over time? First, Tesla’s unilateral elimination of features already paid for without consumers consent is a troubling precedent for cloud connected durable goods.

Second, Telsa’s elimination of model years and its aggressive marketing of the benefits of continuous development of hardware and software have set its current customers expectations unreasonably high. Some feel entitled to every new hardware feature rolled into manufacturing, even if the feature (i.e. faster charging, new parking sensors,) was not available when they bought their cars – and even if their car isn’t backwards compatible.

Model years gave consumers an explicit bound of what to expect. This lack of boundaries results in some customer disappointment.

Lessons Learned

  • Continuous Delivery/Deployment is a major engineering advance
  • It enables new business models
  • Customers don’t care about your business model, just it’s effect on them
  • While irrational, inefficient and illogical, people like shiny new toys
  • Subscription revenue models versus new purchases require consumer education
  • If your subscription revenue model “fires” a portion of your customers, it may enable new competitors
  • Companies need to clearly communicate customer entitlements to future features

Listen to the blog post here
Download the podcast here

When Product Features Disappear – Amazon, Apple and Tesla and the Troubled Future for 21st Century Consumers

One of the great innovations of the 21st century are products that are cloud-connected and update and improve automatically. For software, gone are the days of having to buy a new version of physical media (disks or CD’s.) For hardware it’s the magical ability to have a product get better over time as new features are automatically added.

The downside is when companies unilaterally remove features from their products without asking their customers permission and/or remove consumers’ ability to use the previous versions. Products can just as easily be downgraded as upgraded.Loser

It was a wake up call when Amazon did it with books, disappointing when Google did it with Google Maps, annoying when Apple did it to their office applications – but Tesla just did it on a $100,000 car.

It’s time to think about a 21st Century Bill of Consumer Product Rights.

——

Amazon – Down the Memory Hole
In July 2009 facing a copyright lawsuit Amazon remotely deleted two books users had already downloaded and paid for on their Kindles. Amazon did so without notifying the users let alone asking their permission. It was a chilling reminder that when books and content are bits instead of atoms, someone can change the content – or simply disappear a book – all without users’ permission. (The irony was the two books Amazon deleted were Animal Farm and 1984.)

Google – Well It Looks Better
In July 2013 Google completely redesigned Google Maps – and users discovered that on their desktop/laptop, the new product was slower than the one it replaced and features that were previously available disappeared. The new Google Maps was worse then one it replaced – except for one key thing – its User Interface was prettier and was unified across platforms. If design was the goal, then Google succeeded. If usability and functionality was a goal, then the new version was a step backwards.

Apple – Our Code Base is More Important than Your Features
In November 2013 Apple updated its operating system and cajoled its customers to update their copies of Apple’s iWork office applications – Pages (Apple’s equivalent to Microsoft Word),  Keynote (its PowerPoint equivalent), and Numbers (an attempt to match Excel). To get users to migrate from Microsoft Office and Google Docs, Apple offered these iWorks products for free.iwork

Sounds great– who wouldn’t want the newest version of iWorks with the new OS especially at zero cost?  But that’s because you would assume the new versions would have more features. Or perhaps given its new fancy user interface, the same features? The last thing you would assume is that it had fewer features. Apple released new versions of these applications with key features missing, features that some users had previously paid for, used, and needed. (Had they bothered to talk to customers, Apple would have heard these missing features were critical.)

But the release notes for the new version of the product had no notice that these features were removed.

Their customers weren’t amused.

Apple’s explanation? “These applications were rewritten from the ground up, to be fully 64-bit and to support a unified file format between OS X and iOS 7 versions.”

Translated into English this meant that Apple engineering recoding the products ran out of time to put all the old features back into the new versions. Apple said, “… some features from iWork ’09 were not available for the initial release. We plan to reintroduce some of these features in the next few releases and will continue to add brand new features on an ongoing basis.

Did they think anyone wouldn’t notice?

Decisions like this make you wonder if anyone on the Apple executive staff actually understood that a “unified file format” is not a customer feature.

While these examples are troubling, up until now they’ve been limited to content or software products.

Tesla – Our Problems are Now Your Problems
In November 2013 Tesla, a manufacturer of ~$70,000 to $120,000 electric cars, used a software “update” to disable a hardware option customers had bought and paid for – without telling them or asking their permission.

Tesla Model SOne of Tesla features is a $2,250 “smart air suspension” option that automatically lowers the car at highway speeds for better mileage and stability. Over a period of 5 weeks, three Tesla Model S cars had caught fire after severe accidents – two of them apparently from running over road debris that may have punctured the battery pack that made up the floor pan of the car. After the car fires Tesla pushed a software release out to its users. While the release notice highlighted new features in the release, nowhere did it describe that Tesla had unilaterally disabled a key part of the smart air suspension feature customers had purchased.

Only after most of Telsa customers installed the downgrade did Tesla’s CEO admit in a blog post,  “…we have rolled out an over-the-air update to the air suspension that will result in greater ground clearance at highway speed.”

Translation – we disabled one of the features you thought you bought. (The CEO went on to say that another software update in January will give drivers back control of the feature.) The explanation of the nearly overnight removal of this feature was vague “…reducing the chances of underbody impact damage, not improving safety.” If it wasn’t about safety, why wasn’t it offered as a user-selected option? One could only guess the no notice and immediacy of the release had to do with the National Highway Safety Administration investigation of the Tesla Model S car fires.

This raises the question: when Tesla is faced with future legal or regulatory issues, what other hardware features might Tesla remove or limit in cars in another software release? Adding speed limits?  Acceleration limits? Turning off the Web browser when driving?  The list of potential downgrades to the car is endless with the precedent now set of no obligation to notify their owners or ask their permission.

In the 20th century if someone had snuck into your garage and attempted to remove a feature from your car, you’d call the police. In the 21st century it’s starting to look like the normal course of business.

What to Do
While these Amazon, Google, Apple and Tesla examples may appear disconnected, taken together they are the harbinger of the future for 21st century consumers. Cloud-based updates and products have changed the landscape for consumers. The product you bought today may not be the product you own later.

Given there’s no corporate obligation that consumers permanently own their content or features, coupled with the lack of any regulatory oversight of cloud-based products, Apple’s and Tesla’s behavior tells us what other companies will do when faced with engineering constraints, litigation or regulation. In each of these cases they took the most expedient point of view; they acted as if their customers had no guaranteed rights to features they had purchased. So problem solving in the corporate board room has started with “lets change the feature set” rather than “the features we sold are inviolate so lets solve the problem elsewhere.”

There’s a new set of assumptions about who owns your product. All these companies have crafted the legal terms of use for their product to include their ability to modify or remove features. Manufacturers not only have the means to change or delete previously purchased products at will, there’s no legal barrier to stop them from doing so.

The result is that consumers in the 21st century have less protection then they did in the 20th.

What we can hope for is that smart companies will agree to a 21st Century Bill of Consumer Product Rights. What will likely have to happen first is a class-action lawsuit establishing consumers’ permanent rights to retain features they have already purchased.

Some smart startups might find a competitive advantage by offering customer-centric products with an option of “no changes” and “perpetual feature rights” guarantee.

A 21st Century Bill of Consumer Product Rights

  • For books/texts/video/music:
    • No changes to content paid for (whether on a user’s device or accessed in the cloud)
  • For software/hardware:
    • Notify users if an update downgrades or removes a feature
    • Give users the option of not installing an update
    • Provide users an ability to rollback (go back to a previous release) of the software

Lessons Learned

  • The product you bought today may not be the product you have later
  • Manufacturers can downgrade your product as well as upgrade it
  • You have no legal protection

Update: a shorter version of the post was removed from the Tesla website forum

Listen to the post here

Download the podcast here

Strangling Innovation: Tesla versus “Rent Seekers”

The greatest number of jobs is created when startups create a new market – one where the product or service never existed before or is radically more convenient. Yet this is where startups will run into anti-innovation opponents they may not expect. These opponents have their own name –  “rent seekers” – the landlords of the status-quo.

Smart startups prepare to face off against rent seekers and map out creative strategies for doing so…. First, however, they need to understand what a rent seeker is and how they operate…

———-

Recently, the New York and North Carolina legislatures considered a new law written by Auto Dealer lobbyists that would make it illegal for Tesla to sell cars directly to consumers. This got me thinking about the legal obstacles that face innovators with new business models.

Examples of startups challenging the status quo include: Lyft, SquareUber, Airbnb, SpaceX, Zillow, BitcoinLegalZoom, food trucks, charter schools, and massively open online courses. Past examples of startups that succeeded in redefining current industries include Craigslist, Netflix, Amazon, Ebay and Paypal.

While Tesla, Lyft, Uber, Airbnb, et al are in very different industries, they have two things in common: 1) they’re disruptive business models creating new markets and upsetting the status quo and 2) the legal obstacles confronting them weren’t from direct competitors, but from groups commonly referred to as “rent seekers.”

Rent Seekers
Rent seekers are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates nothing of value.

These barriers to new innovative entrants are called economic rent. Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, auto, steel or sugar tariffs, patent trolls, bribery of government officials, corruption and regulatory capture. They’re all part of the same pattern – they add no value to the economy and prevent innovation from reaching the consumer.

No regulation?
Not all government regulation is rent or rent seeking. Not all economic rents are bad. Patents for example, provide protection for a limited time only, to allow businesses to recoup R&D expenses as well as make a profit that would often not be possible if completely free competition were allowed immediately upon a products’ release. But patent trolls emerged as rent seekers by using patents as legalized extortion of companies.

How do Rent Seekers win?
Instead of offering better products or better service at lower prices, rent seekers hire lawyers and lobbyists to influence politicians and regulators to pass laws, write regulations and collect taxes that block competition. The process of getting the government to give out these favors is rent-seeking.

Rent seeking lobbyists go directly to legislative bodies (Congress, State Legislatures, City Councils) to persuade government officials to enact laws and regulations in exchange for campaign contributions, appeasing influential voting blocks or future jobs in the regulated industry. They also use the courts to tie up and exhaust a startups limited financial resources.

Lobbyists also work through regulatory bodies like FCC, SEC, FTC, Public Utility, Taxi, or Insurance Commissions, School Boards, etc.   Although most regulatory bodies are initially set up to protect the public’s health and safety, or to provide an equal playing field, over time the very people they’re supposed to regulate capture the regulatory agencies. Rent Seekers take advantage of regulatory capture to protect their interests against the new innovators.

PayPal – Dodging Bullets
PayPal consistently walked a fine line with regulators. Early on the company shutdown their commercial banking operation to avoid being labeled as a commercial bank and burdened by banks’ federal regulations. PayPal worried that complying with state-by-state laws for money transmission would also be too burdensome for a startup so they first tried to be classified as a chartered trust company to provide a benign regulatory cover, but failed. As the company grew larger, incumbent banks forced PayPal to register in each state. The banks lobbied regulators in Louisiana, New York, California, and Idaho and soon they were issuing injunctions forcing PayPal to delay their IPO. Ironically, once PayPal complied with state regulations by registering as a “money transmitter” on a state-by-state basis, it created a barrier to entry for future new entrants.

U.S. Auto Makers – Death by Rent Seeking
The U.S. auto industry is a textbook case of rent seeking behavior. In 1981 unable to compete with the quality and price of Japanese cars, the domestic car companies convinced the U.S. government to restrict the import of  “foreign” cars. The result? Americans paid an extra $5 billion for cars. Japan overcame these barriers by using their import quotas to ship high-end, high-margin luxury cars, establishing manufacturing plants in the U.S. for high-volume lower cost cars and by continuing to innovate. In contrast, U.S. car manufacturers raised prices, pocketed the profits, bought off the unions with unsustainable contracts, ran inefficient factories and stopped innovating. The bill came due two decades later as the American auto industry spiraled into bankruptcy and its market share plummeted from 75% in 1981 to 45% in 2012.

unplug tesla

Innovation in the Auto Industry
According to the Gallup Poll American consumers view car salesman as dead last in honesty and ethics. Yet when Tesla provided consumers with a direct sales alternative, the rent seekers – the National Auto Dealers Association turned its lobbyists loose on State Legislatures robbing consumers in North Carolina, New York and Texas of choice in the marketplace.

In these states it appears innovation be damned if it gets in the way of a rent seeker with a good lobbyist.

Much like Paypal, it’s likely that after forcing Tesla to win these state-by-state battles, the auto dealers will have found that they dealt themselves the losing hand.

Rent seeking is bad for the economy
Rent seeking strangles innovation in its crib. When companies are protected from competition, they have little incentive to cut costs or to pay attention to changing customer needs. The resources invested in rent seeking are a form of economic waste and reduce the wealth of the overall economy.

Schumpeter’s theory of creative destruction - that entry by entrepreneurs was the disruptive force that sustained economic growth even as it destroyed the value of established companies – didn’t take into account that countries with lots of rent-seeking activity (pick your favorite nation where bribes and corruption are the cost of doing business) or dominated by organized interest groups tend to be the economic losers. As rent-seeking becomes more attractive than innovation, the economy falls into decline.

Startups, investors and the public have done a poor job of calling out the politicians and regulators who use the words “innovation means jobs” while supporting rent seekers.

What does this mean for startups?
In an existing market it’s clear who your competitors are. You compete for customers on performance, ease of use, or price. However, for startups creating a new market – one where either the product or service never existed before or the new option is radically more convenient for customers -  the idea that rent seekers even exist may come as a shock. “Why would anyone not want a better x, y or z?” The answer is that if your startup threatens their jobs or profits, it doesn’t matter how much better life will be for consumers, students, etc. Well organized incumbents will fight if they perceive a threat to the status quo.

As a result disrupting the status quo in regulated market can be costly. On the other hand, being a private and small startup means you have less to lose when you challenge the incumbents.

impossibleIf you’re a startup with a disruptive business model here’s what you need to do:

Map the order of battle

  • Laughing at the dinosaurs and saying, “They don’t get it” may put you out of business. Expect that existing organizations will defend their turf ferociously i.e. movie studios, telecom providers, teachers unions, etc.
  • Understand who has political and regulator influence and where they operate
  • Figure out an “under the radar” strategy which doesn’t attract incumbents lawsuits, regulations or laws when you have limited resources to fight back

Pick early markets where the rent seekers are weakest and scale

  • For example, pick target markets with no national or state lobbying influence. i.e. Craigslist versus newspapers, Netflix versus video rental chains, Amazon versus bookstores, etc.
  • Go after rapid scale of passionate consumers who value the disruption i.e. Uber and Airbnb, Tesla
  • Ally with some larger partners who see you as a way to break the incumbents lock on the market. i.e. Palantir and the intelligence agencies versus the Army and IBM’s i2, / Textron Systems Overwatch

AirBnb – Damn the torpedoes full speed ahead
For example, Airbnb, thrives even though almost all of its “hosts” are not paying local motel/hotel taxes nor paying tax on their income, and many hosts are violating local zoning laws. Some investors and competitors may be concerned about regulatory risk and liability.  AirBNB’s attitude seems to be “build the business until someone stops me, and change or comply with regulations later.”  This is the same approach that allowed Amazon to ignore local sales taxes for the last two decades.

When you get customer scale and raise a large financing round, take the battle to the incumbents. Strategies at this stage include:

  • Hire your own lobbyists
  • Begin to build your own influence and political action groups
  • Publicly shame the incumbents as rent seekers
  • Use competition among governments to your advantage, eg, if  New York or North Carolina doesn’t want Tesla, put the store in New Jersey, across the river from Manhattan, increasing New Jersey’s tax revenue
  • Cut deals with the rent seekers. i.e. revenue/profit sharing, two-tier hiring, etc.
  • Buy them out i.e. guaranteed lifetime employment

Lessons Learned

  • Rent seekers are organizations that have lost the ability to innovate
  • They look to the government to provide their defense against innovation
  • Map the order of battle
  • Pick early markets and scale
  • With cash, take the battle to the incumbent

Listen to the post here: or download the Podcast here

Who’s Doing the Learning?

In a startup instead of paying consultants to tell you what they learned you want to pay them to teach you how to learn.

—-

Roominate, one of my favorite Lean LaunchPad teams came out to the ranch last week for a strategy session. Alice and Bettina had taken an idea they had tested in the class – building toys for young girls to have fun with Science, Technology, Engineering, and Math, and started a company. The Roominate dollhouse building kits are being sold via their own website and soon, retail channels. They’ve shipped over 5,000 to enthusiastic parents and their daughters.

Roominate kit

As soon as they had designed the product, they found a contract manufacturer to build the product in China. Alice and Bettina are hands-on mechanical and electrical engineers, so instead of assuming everything would go smoothly, they wisely got on a plane to Dongguan China and worked with the factory directly. They learned a ton.

But we were meeting to talk about sales and marketing. They outlined their retail channel and PR strategy and told me about the type of consultants they wanted to hire.

Hiring Channel Sales
“So what would the retail channel consultant do?” I asked.  Alice looked at me like I was a bit slow, but went on to describe how this consultant was going to take their product around to buyers inside major retail chains like Target, Toys R Us, Walmart, and others to see if they could get them to buy their product. “That sounds great.” I said, “When are you leaving for the trip?”  They looked confused.  “We’re not going on any of these calls.  Our consultant is going and then he’s going to give us a report of how willing these stores are to carry our product.”  Oh…

I said, “Let me see if I understand this correctly. What if a buyer asks, can you make a custom version of your product? Can your consultant answer that question on the spot? What if a buyer said no? Will your consultant know what questions to ask right then to figure out how to get them to yes?”  I let this sink in and then offered, “Think about it for a minute. You’re going to pay someone else to learn and discover if your product fits this channel, and you’re are not going to do any of the learning yourself?  You didn’t skip the trip learning how to manufacture the product. You got on a plane yourself and went to China. Why doesn’t this sound like the right thing to do for channel sales?”  They thought about it for a moment and said, “Well we feel like we understand how to build things, but sales is something we thought we’d hire an expert to do.”

Hiring PR Agencies
We had an almost identical conversation when the subject turned to hiring a Public Relations agency.  Bettina said, “We want to drive customer demand into our channel.”  That’s smart I thought, a real clear charter for PR.  “What are they going to do for you?” I asked.  “Well all the agencies we interview tell us they can survey our customers and come up with our positioning and then help us target the right blogs, influencers and press.

This felt like déjà vu all over again.

I took a deep breath and said, “Look this is just like the channel consultant conversation. But in this case it’s even clearer.  Didn’t you get started by testing out every iteration with girls and watching firsthand what gets them excited? Don’t you have 5,000 existing customers? And haven’t you been telling me you’ve been talking to them continuously?”  They nodded in agreement.  I suggested, “Why don’t you guys take a first pass and draft a positioning brief with target messages, think through who you think the audiences are, and you take a first pass at who you think the press should be.  The team looked at me incredulously.  “You want us to do this? We don’t know the first thing about press, that’s why we want to hire the experts.”  It was the answer I expected.Roominate project

“Let me be clear,” I explained.  “At this moment you know more about your customers than any PR agency will.  You’ve spent the last six months testing positioning, messages, and talking to the press yourself.  What I want you to do is spend an hour in a conference room and write up all you learned.  What worked, what didn’t, etc.  Then summarize it in a brief – a one, max two-page document that you hand to prospective PR agencies.  And when you hand it to them say, “We know you can do better, but here’s what we’ve learned so far.”” They thought about it for a while and said, “We want to hire a PR agency so we don’t have to do this stuff. We’re too busy focusing on getting the product right.”

I pushed back, reminding them, “Look, half the agencies that see your brief are going to decline to work with you. They make most of their money doing the front-end work you already did.  You do need to hire a PR agency, but I’m suggesting that you start by raising the bar on where they need to start.”

You Need to Do the Learning
Thinking that founders hire domain experts to get them into places and do things they don’t have any clue about is a mistake most founding CEOs make.  It’s wrong. If you plan to be the CEO who runs the company, you need these resources teaching you how to do it, not reporting their results to you.  For Roominate I suggested that Alice and Bettina needed to try to find a channel consultant who would take them along on the sales calls and have the founders meet buyers directly.  Why?  Not to turn them into channel sales people but to hear customer objections unfiltered. To get data that they – and only they, not a consultant – could turn into insight about iterations and pivots about their business model.  And to see how the process works directly.

A year from now when they will be hiring their first VP of Channel Sales, they want the interview to go something like,  “Well we sold the first three channel partners ourselves – what can you do for us?”

The same is true for hiring the PR agency.  The conversation should be, “Here’s what we learned, but we know this is your expertise.  Tell us what we’re missing and how your firm can do better than our first pass.”

As a founder –  when you’re searching for a business model make sure that you’re the ones doing the learning… not the outsourced help.

There’s Not Enough Time
The biggest objections I get when I offer this advice is, “There’s not enough time in the day,” or “I need to be building the product,” or the more modern version is, “I’m focused on product/market fit right now.”

The reality is that they’re all excuses. Of course product and product/market fit are the first critical steps in a startup –  but outsourcing your learning about the other parts of the business model are the reasons why your investors will be hiring an operating executive as your replacement - once you done all the hard work.

Lessons Learned

  • You need to do the learning not your consultants
  • Most consultants will think that’s their secret sauce and not want your business
    • The smart ones will realize that’s how they’ll build a long-term relationship with you
    • Hire them
  • Not understanding the other parts of your business model is a reason investors hire an operating executive

Listen to the post or download the podcast here

When Microsoft Threatened to Sue Us Over the Letter “E”

By 1997 E.piphany was a fast growing startup with customers, revenue and something approaching a repeatable business model. Somewhere that year we decided to professionalize our logo (you should have seen the first one.) With a massive leap of creativity we decided that it should it should have our company name and the letter “E” with a swoop over it.

1997 was also that year that Microsoft was in the middle of the browser wars with Netscape. Microsoft had just released Internet Explorer 3 which for the first time was a credible contender.  With the browser came a Microsoft logo.  And with that same massive leap of creativity Microsoft decided that their logo would have their product name and the letter “E’ with a swoop over it.

One of E.piphany’s product innovations was that we used this new fangled invention called the browser and we ran on both Netscape and Microsoft’s. We didn’t think twice about.

That is until the day we got a letter from Microsoft’s legal department claiming similarity and potential confusion between our two logos.

They demanded we change ours.

I wish I still had their letter. I’m sure it was both impressive and amusing.

I had forgotten all about incident this until this week when Doug Camplejohn, E.piphany’s then VP of Marketing somehow had saved what he claims was my response to Microsoft’s legal threat and sent it me.  It read:

Response Letter to Bill Gates

Dear Bill,

We are in receipt of your lawyer’s letter claiming Microsoft’s
ownership of the look and feel of the letter “e”.  While I understand
Microsoft’s proprietary interest in protecting its software, I did not
realize (until the receipt of your ominous legal missive) that one of
the 26 letters in the English language was now the trademarked
property of Microsoft.

Given the name of your company, claiming the letter “e” is an unusual
place to start. I can understand Microsoft wanting exclusive rights to
the letter “M” or “W”, but “e”?  I can even imagine a close family
member starting your alphabet collection by buying you the letters “B”
or “G” as a birthday present.  Even the letters “F” “T” or “C” must be
more appealing right now then starting with “e”.

In fact, considering Microsoft’s financial health and legal prowess
you may want to consider buying a symbol rather than a letter.
Imagine the value of charging royalties on the use of the dollar “$”
sign.

I understand the legal complaint refers to the similarities of our use
of “e” in the Epiphany corporate logo to the “e” in the Internet
Explorer logo.  Given that the name of my company and the name of your
product both start with the same letter, it doesn’t take much
imagination to figure out why we both used the letter in our logos,
but I guess it has escaped your lawyers.

As to confusion between the two products, it is hard for me to
understand why someone would confuse a $250,000 enterprise software
package (with which we require a customer to buy $50,000 of Microsoft
software; NT, SQL Server and IIS), with the free and ever present
Internet Explorer.

Given that Microsoft sets the standard for most things in the computer
industry, I hope we don’t open the mail next week and find Netscape
suing us for using the letter “N”, quickly followed by Sun’s claim on
J”.  Perhaps we can submit all 26 letters to some sort of standards
committee for arbitration.

Come to think of it, starting with “e” is another brilliant Microsoft
strategy.  It is the most common letter in the English language.

Steve Blank

Epilogue
Given later that year Microsoft ended up being a large multi-million dollar E.piphany customer all I can assume is that cooler heads prevailed (more than likely our new CEO,) and this letter was never sent and the threatened lawsuit never materialized.

Ironically, since the turn of the century Microsoft has done great things for entrepreneurs. Their BizSpark and DreamSpark programs have become the best corporate model of how a large company can successfully partner with startups and students worldwide.

But I am glad we helped keep the letter E in the public domain.

At times not losing is as important as winning

At times not losing is as important as winning.

Customer Validation
E.piphany was an 11-month-old startup with 31 people and on fire. We had closed four $100,000 deals for our customer relationship management software.

Joe Dinucci, our VP of Sales, was hot on the trail of our next big order. He had just demo’d our product to his friend, the CFO of Autodesk. After seeing the demo, the CFO walked Joe over to the office of Autodesk’s VP of sales, and said to her, “I think this product might solve your sales reporting problem.”

After a demo she agreed it would.

Joe came back to our company excited. If we won the Autodesk account it could be worth half a million dollars or more.

They Have A Problem and Know It
At the time Autodesk’s sales organization was frustrated with their IT department. It took weeks or months for Sales to get financial, sales results and customer reports from IT. Autodesk’s VP of Sales fit the profile of a earlyvangelist: she understood she had a pressing problem (couldn’t get timely data needed to forecast sales), she was searching for a solution (beating up the Autodesk CIO on a weekly basis to solve her problem), she had a timetable for a solution (now) and her company had committed budget dollars to solve this problem (they spend anything to stop missing forecasts.)

A Match Made in Heaven
For the next several weeks, the entire E.piphany engineering department worked with Autodesk’s sales operation team to build a prototype using real Autodesk data. Joe made a compelling ROI (Return On Investment) presentation to the VP of Sales and the CFO. E.piphany and Autodesk seemed like a match made in heaven and it looked like we had a $500,000 deal that could close in weeks.

Not quite.

The CIO
The CFO casually mentioned that as IT would install and maintain the system, they would have to recommend and sign off on an E.piphany purchase. As the CIO worked for the CFO, Joe paid what he thought was a courtesy call on Autodesk’s CIO.

The CIO didn’t say much in the presentation (warning, warning) and he passed Joe on to his manager of data warehouse development. What Joe didn’t know was that months ago, this IT group has been tasked to solve Sales’ reporting problems and was struggling with the complexity and difficulty of extracting data from SAP.

Joe was aware of the tense history between Autodesk sales and its IT department, but given how happy the VP of Sales was with E.piphany’s prototypes plus Joe’s personal relationship with the CFO, he didn’t see this as a serious obstacle. Joe believed the IT organization had nothing but technical piece parts to compete with E.piphany’s complete solution. Given E.piphany had a vastly superior solution, Joe believed there was no logical way they could recommend to the CIO to deploy anything else but E.piphany.

Wrong.

The IT Revolt
Unbeknownst to Joe a revolt was brewing in Autodesk’s IT organization. “Sales keeps asking for all these reports and now they are telling us what application to buy?  If we deploy E.piphany’s entire solution, we’ll all be out of jobs. But if we recommend software tools from another startup, we could say we’re solving the needs of the Sales VP and still keep our jobs.“

Late in the afternoon, Joe got a call from a friend in Autodesk’s IT department warning that they were give the order to another startup. And the CIO would approve the recommendation and pass this to his boss, the CFO, the next day.

We’re Going to Lose
Joe arrived in my office, his face making it clear he brought bad news. E.piphany was now about to lose a half million-dollar Autodesk sale. Joe looked at his shoes while he muttered his frustrations with internal Autodesk politics.

We had a long discussion about the consequences if we lost. It was one thing for a startup to lose to a large company like Oracle or IBM. But to lose the sale to another startup with an inferior product would have been psychologically devastating to our little startup. E.piphany’s product development team had spent weeks inside the account, and they believed the deal was all but won. The competitor would trumpet the sales win far and wide and use the momentum to get more sales.

We couldn’t afford to lose this sale. What could we do?

The Third Way
It struck me that there might be more than two outcomes.Sales had defined the problem as a win or lose situation. But what if we added a third choice?  What if we formally, publicly and noisily withdrew from the account? The worst case was that we could tell our engineering team that we should have won but the game was rigged. While we certainly wouldn’t win the business, withdrawing would solve the more emotionally explosive issue of losing. (And In the back of my mind, I believed this third way had a chance of giving us the winning hand.)

At first Joe hated the idea. Like every great sales guy, he was eternally optimistic about the outcome. However, I wasn’t in the mood to put the company’s future at risk on the testosterone levels of our sales guy. Withdrawing by claiming that Autodesk’s IT staff had already decided that it was “any solution but ours” was making the best of a deteriorating sales situation.

Joe called his friend the CFO, waiting until after 5pm, when he was sure he wasn’t in his office, and left him a message: “Thanks for introducing us to the VP of Sales and your technical staff. We really appreciate the opportunity to work with you. Unfortunately it looks like this deal isn’t going to happen. You have a bunch of smart guys working for you, but they are determined to make sure that the status quo won’t change. We have limited resources and can’t continue to give demos and hold meetings when the outcome is predetermined. My guess is we’ll be back in six to nine months when the VP of Sales is still unhappy. I’m going to call her and let her know that we can’t put in the system that she wanted, but I thought I’d check-in with you first. Thanks again for the opportunity.”

The “Take Away” Gambit
This is known as the “take-away” gambit. I believed that by pulling the deal away, there was at least a 50% chance the CFO would do what I knew he didn’t want to – go to his CIO and help him make the “right” decision. I understood that a potential downside consequence of this maneuver was an uncooperative IT organization when we tried to install the product, but by then their check would be in the bank, and I had a plan to win them over.

Joe was concerned that we had just lost the account, but he made the call and left the message.

Two hours later Joe got a call back from the CFO who said,, “Wait, wait! Don’t pull out. Why don’t you come up and meet with me tomorrow morning. I’ve chatted with my staff and we’re now ready for a contract proposal.”

Autodesk became our third paying customer. Over the next year they paid us over $1million for our software.

After a full-court charm offensive, the IT person who wanted anyone but us became our biggest advocate. She keynoted our first user conference.

Lessons Learned

  • In complex B-to-B sales, multiple “Yes” votes are required to get an order.
  • A single “No” can kill the deal.
  • Understanding the saboteurs in a complex sale is as important as understanding the recommenders and influencers
  • We needed a selling strategy that took all of this into account.
  • In a startup not losing is sometimes more important than winning.

Listen to the post here: or download the podcast here

Unrequited Love

If there’s only one passionate party in a relationship it’s unrequited love.

Here’s how I learned it the hard way.

The Dartmouth Football Team
After Rocket Science I took some time off and consulted for the very VC’s who lost lots of money on the company. The VC’s suggested I should spend a day at Onyx Software, an early pioneer in Sales Automation in Seattle.

In my first meeting with Onyx I was a bit nonplussed when the management team started trickling into their boardroom. Their VP of Sales was about 6’ 3” and seemed to be almost as wide. Next two more of their execs walked in each looking about 6’ 5” and it seemed they had to turn sideways to get through the door. They all looked like they could have gotten jobs as bouncers at a nightclub. I remember thinking, there’s no way their CEO can be any taller – he’s probably 5’ 2”. Wrong. Brent Frei, the Onyx CEO walks in and he looked about 6’ 8’ and something told me he could tear telephone books in half.
I jokingly said, “If the software business doesn’t work out you guys got a pretty good football team here.”  Without missing a beat Brent said, “Nah, we already did that. We were the Dartmouth football team front defensive three.”  Oh.

But that wasn’t the only surprise of the day. While I thought I was consulting, Onyx was actually trying to recruit me as their VP of Marketing. At the end of the day I came away thinking it was a smart and aggressive team, thought the world of Brent Frei as a CEO and knew Onyx was going to succeed – despite their Microsoft monoculture. With an unexpected job offer in-hand I spent the plane flight home concluding that our family had already planted roots too deep to move to Seattle.

But in that one day I had learned a lot about sales automation that would shape my thinking when we founded Epiphany.

I Know A Great Customer
A year later my co-founders and I had formed Epiphany. As other startups were quickly automating all the department of large corporations (SAP-manufacturing, Oracle-finance, Siebel and Onyx-Sales) our first thought was that our company was going to automate enterprise-marketing departments. And along with that first customer hypothesis I had the brilliant hypothesis that my channel partner should be Onyx. I thought, “If they already selling to the sales department Epiphany’s products could easily be cross-sold to the marketing department.”

So I called on my friends at Onyx and got on a plane to Seattle. They were growing quickly and doing all they could to keep up with their own sales but they were kind enough to hear me out. I outlined how our two products could be technically integrated together, how they could make much more money selling both and why it was a great deal for both companies. They had lots of objections but I turned on the sales charm and by the end of the meeting had “convinced them” to let us integrate both our systems to see what the result was. I made the deal painless by telling them that we would do the work for free because when they saw the result they’d love it and agree to resell our product. I left with enough code so our engineers could get started immediately.

Bad idea.  But I didn’t realize that at the time.

It’s Only a Month of Work
Back at Epiphany I convinced my co-founders that integrating the two systems was worth the effort and they dove in. Onyx gave us an engineering contact and he helped our team make sense of their system. One of the Onyx product managers got engaged and became an enthusiastic earlyvanglist. The integration effort probably used up a calendar month of our engineering time and an few hours of theirs. But when it was done the integrated system was awesome. No one had anything like this. We shipped a complete server up to Onyx (this is long before the cloud) and they assured us they would start evaluating it.

A week goes by and there’s radio silence – nothing is heard from them. Another week, still no news. In fact, no one is returning our calls at all. Finally I decide to get on a plane and see what has happened to our “deal.”

Instead of being welcomed by the whole Onyx exec staff, this time a clearly uncomfortable product manager met me. “Well how do like our integrated system?” I asked. “And by the way where is it? Do you have it your demo room showing it to potential customers?” I had a bad feeling when he wouldn’t make eye contact. Without saying a word he walked me over to a closet in the hallway. He opened the door and pointed to our server sitting forlornly in the corner, unplugged. I was speechless. “I’m really sorry” he barely whispered. “I tried to convince everyone.” Now a decade and a half later the sight of server literally sitting next to the brooms, mops and buckets is still seared into my brain.

I had poured everything into making this work and my dreams had been relegated to the janitors closet. My heart was broken. I managed to sputter out, “Why aren’t you working on integrating our systems?

Just then their VP of Sales came by and gently pulled me into a conference room letting a pretty stressed product manager exhale. “Steve, you did a great sales job on us. We really were true believers when you were in our conference room. But when you left we concluded over the last month that this is your business not ours. We’re just running as hard and fast as we can to make ours succeed.”

Unrequited Love
I realized that mistake wasn’t my vision. Nor was it my passion for the idea. Or convincing Onyx that it was a great idea. And besides not being able to tell me straight out, Onyx did nothing wrong. My mistake was pretty simple – when I left their board room a month earlier I was the only one who had an active commitment and obligation to make the deal successful. It may seem like a simple tactical mistake, but it in fact it was fatal.  They put none of their resources in the project – no real engineering commitment, no dollars, no orders, no joint customer calls.

It had been a one-way relationship the day I had left their building.

It would be 15 years before I would make this mistake again.

Lessons Learned

  • When you don’t charge for something people don’t value it
  • When your “partners” aren’t putting up proportional value it’s not a relationship
  • Cheerleading earlyvangelists are critical but ultimately you need to be in constant communication with people with authority (to sign checks, to do a deal, to commit resources, etc.)
  • Your reality distortion field may hinder your ability to realize that you’re the only one marching in the parade
  • If there’s only one passionate party in a deal it’s unrequited love

Listen to the post here: Download the Podcast here

Bonfire of the Vanities

When I was in my 20’s, I was taught the relationship between marketing and sales over a bonfire.

Over thirty years ago, before the arrival of the personal computer, there were desktop computers called office workstations. Designed around the first generation of microprocessors, these computers ran business applications like word processing, spreadsheets, and accounting. They were an improvement over the dumb terminals hanging off of mainframes and minicomputers, but ran proprietary operating systems and software. My third startup, Convergent Technologies (extra credit for identifying the photo on page 2) was in the business of making these workstations.

The OEM Business
Convergent’s computers were bought and then resold by other computer manufacturers – all of them long gone: Burroughs, Prime, Monroe Data Systems, ADP, Mohawk, Gould, NCR, 4-Phase, AT&T. Convergent had assembled a stellar team with founders from Digital Equipment Corporation and Intel and engineers from Xerox PARC.  And once we went public, we hired a veteran VP of Sales from Honeywell.

As the company’s revenues skyrocketed, Convergent started a new division to make a multi-processor Unix-based mini-computer. I had joined the company as the product marketing manager and now found myself as the VP of marketing for this new division. We were a startup inside a $200 million company. A marketer for 5 years, I thought I knew everything and proceeded to write the data sheets for our new computer.

Since this new computer was very complicated – it was a pioneer in multi-processing– I concluded it needed an equally detailed data sheet. In fact, when I was done, the datasheet describing our new computer, proudly called the MegaFrame, was 16 pages long. I fact-checked the datasheet with my boss (who would be my co-founder at Epiphany) and the rest of the engineering team.  We all agreed it was perfect. We’d left no stone unturned in answering every possible question anyone could ever have about our system. As we typically did, I printed up several thousand to send out to the sales force.

The day the datasheets came back from the printers, I sent the boxes to the sales department in Convergent’s corporate headquarters, a separate building across the highway, and sent a copy to our CEO and the new VP of Sales.  (I was thinking it was such a masterpiece I might get an “attaboy” or at least a “wow, thanks for doing all the hard work for our sales organization.”)

So when I got a call from the VP of Sales who said, “Steve, just read your new datasheet. Why don’t you come over to corporate.  We have a surprise for you,” I smugly thought, “They probably thought it was so good, I’m going to get a thank you or an award or maybe even a bonus.”

Fahrenheit 451
I got in my car to make the five minute drive over the freeway. Turning into the parking lot, I noticed smoke coming from the far end of the lawn. As I parked and walked closer I noticed a crowd of people around what seemed to be an impromptu campfire.  “What the heck??” As an ex Sales and Marketing VP, our CEO had a Silicon Valley reputation for outrageous stunts so I wondered what it was this time -  a spur-of-the-moment BBQ? A marshmallow roast?

Heading to a meeting with the VP of Sales, I almost walked past the crowd into the building  until I heard the VP of Sales call me over to the fire. He was there with our CEO feeding things into the fire.  In fact as I got closer, it looked like the campfire was being entirely fed by paper.  “Here, toss these in,” they said as they handed me a stack of…

Oh, my g-d they’re burning my datasheets!!!

The Bonfire of the Vanities
I stood there stunned as I realized that my 16-page carefully constructed, brilliantly written, technically accurate datasheets were being destroyed en masse. I guess I was speechless for so long that the VP of Sales took pity on me and asked, “Steve, do you know we have a sales force?” I managed to stammer out, “Yes, of course.”  He asked, “Do you know how much we pay them?”  Again, I managed to answer, “A lot.” Then he got serious and started to explain what was going on. (In the meantime our CEO watched my reaction with a big grin on his face.) He said, “Steve, I’ve never seen such a perfect datasheet. It answers every possible question a prospective customer could have about our product. The problem is that our computer sells for $150,000. No one is going to buy it from the datasheet. In fact, reading these, the only thing your datasheet will do is give a prospective customer a reason for saying “no” before our salespeople ever get to talk to them.

“Do you mean you want a datasheet with less information?!”  I asked, not at all sure that I was hearing him correctly. “Yes, exactly. Your job in marketing is to get customers interested enough to engage our sales force, to ask for more information or better, to set up a meeting.  No one is going to buy our computer from a datasheet, but they will from a salesman.”

Marketing to Match the Channel
It took me a few weeks to get over the lesson, but it stuck.  When selling a physical product through direct sales, Marketing’s job is to drive end user demand into the sales channel.  Marketing creates a series of marketing activities at each stage of the sales funnel to generate awareness, then interest, then consideration and finally purchase. 

Ironically, over the last decade, I’ve seen web startups have the opposite problem. For web sites with an ecommerce component, the site itself is supposed to both create demand and close the sale. Web designers have to do the work of both the marketing and the sales departments.

Lessons Learned

  • Marketing materials need to match the channel
  • Marketings job in direct sales channels with consultative sales need to drive demand to the salesforce
  • Indirect channels require marketing material with more information than a direct channel
  • Web sites that sell products combine sales and marketing
  • Confusing these can get you your own bonfire

Listen to the post here: Download the Podcast here

Why Pioneers Have Arrows In Their Backs

First-Mover Advantage is an idea that just won’t die. I hear it from every class of students, and each time I try to put a stake through its heart.

Here’s one more attempt in trying to explain why confusing testosterone with strategy is a bad idea.

First mover advantage – great bad idea
The phrase “first mover advantage” was first popularized in a 1988 paper by a Stanford Business School professor, David Montgomery, and his co-author, Marvin Lieberman.[1]

This one phrase became the theoretical underpinning of the out-of-control spending of startups during the dot-com bubble. Over time the idea that winners in new markets are the ones who have been the first (not just early) entrants into their categories became unchallenged conventional wisdom in Silicon Valley. The only problem is that it’s simply not true.

The irony is that in a retrospective paper ten years later (1998), [2] the authors backed off from their claims. By then it was too late. Using this idea to differentiate themselves as the hot new Silicon Valley VCs, some of his former business school students made this phrase their rallying cry. Soon every other VC was using the phrase to justify the reckless “get big fast” strategies of dot-com startups during the Internet Bubble.

Fast Followers – a better idea
In fact, a 1993 paper by Peter N. Golder and Gerard J. Tellis had a much more accurate description of what happens to startup companies entering new markets.[3] In their analysis Golder and Tellis found almost half of the market pioneers (First Movers) in their sample of 500 brands in 50 product categories failed. Even worse, the survivors’ mean market share was lower than found in other studies. Further, their study shows early market leaders (Fast Followers) have much greater long-term success; those in their sample entered the market an average of thirteen years later than the pioneers. What’s directly relevant from their work is a hierarchy showing what being first actually means for startups entering new or resegmented markets:


Innovator First to develop or patent an idea
Product Pioneer First to have a working model
First Mover First to sell the product 47% failure rate
Fast Follower Entered early but not first 8% failure rate

The Race to Fail First
What this means is that first mover advantage (in the sense of literally trying to be the first one on a shelf or with a press release) is not real, and the race to be the first company into a new market can be destructive. Therefore, startups whose mantra is “we have to be first to market” usually lose. What startups lose sight of is there are very few cases where a second, third, or even tenth entrant cannot become a profitable or even dominant player. (The rules are different in the life-sciences arena.)

Ford vs. GM, Overture vs. Google
For example, Ford was the first successfully mass produced car in the United States. In 1921, Ford sold 900,000 Model Ts for 60 percent market share compared to General Motors 61,000 Chevys, a 6 percent market share. Over the next ten years, while Ford focused on cost reductions, General Motors built a diverse and differentiated product line. By 1931 GM had 31% of the market to Ford’s 28%, a lead it has never relinquished.  Just to make the point that markets are never static, Toyota, a company that sold its first car designed for the US market in 1964, is poised to surpass GM as the leader in the US market. The issue is not being first to market, but understanding the type of market your company is going to enter.

If the car business is too removed from high tech as an example, how about the story of Overture. In 1998 Goto.com, a small startup (later Overture, now part of Yahoo!), created the pay per click search engine and advertising system and demo’d it at the TED conference.

It was not until October 2000 that Google offered its version of a pay per click advertising system  -AdWords -allowing advertisers to create text ads for placement on the Google search engine.

Google is a $25 billion dollar company with most of its revenue from AdWords.

Overture was acquired by Yahoo for $1.6 billion.

Implicit Customer Discovery and Validation in Fast Followers
Why do fast followers win more often?  It’s pretty simple. First Movers tend to launch without really fully understanding customer problems or the product features that solve those problems. They guess at their business model and then do premature, loud and aggressive Public Relations hype and early company launches and quickly burn through their cash.. This is a great strategy if there’s a bubble occuring in your market or you are going to bet it all on flipping your company for a sale. Otherwise the jury is in. There’s no advantage. [4]

Astute fast-followers recognize that part of Customer Discovery is learning from the first-mover by looking at the arrows in their backs. Then avoiding them.

Lessons Learned

  • Believing in First Mover Advantage implies you understand your business model, customers problems and the features needed to solve those problems.
  • That’s unlikely.
  • Therefore you’re either going to burn through your cash or pray that the hype can help you can flip your company.
  • None of the market leaders in technology were the first movers

[1] Montgomery, M. Lieberman.1988  “First Mover Advantage.” Strategic Management Journal, Volume 9, Issue S1, pages 41–58, Summer 1988.

[2] Montgomery, M. Lieberman “First-mover (dis)advantages: retrospective and link with the resource-based view.” Strategic Management Journal Volume 19, Issue 12, pages 1111–1125, December 1998

[3] P. N. Golder and G. J. Tellis. 1993. “Pioneer Advantage: Marketing Logic or Marketing Legend?” Journal of Marketing Research, 30(2):158–170.

[4] Did First-Mover Advantage Survive the Dot-Com Crash? . M. Lieberman 2007

Listen to the post here: Download the Podcasts here

Turning on your Reality Distortion Field

I was catching up over coffee and a muffin with a student I hadn’t seen for years who’s now CEO of his own struggling startup.  As I listened to him present the problems of matching lithium-ion battery packs to EV powertrains and direct drive motors, I realized that he had a built a product for a segment of the electric vehicle market that possibly could put his company on the right side of a major industry discontinuity.

But he was explaining it like it was his PhD dissertation defense.

Our product is really complicated
After hearing more details about the features of the product (I think he was heading to the level of Quantum electrodynamics) I asked if he could explain to me why I should care. His response was to describe even more features. When I called for a time-out the reaction was one I hear a lot. “Our product is really complicated I need to tell you all about it so you get it.”

I told him I disagreed and pointed out that anyone can make a complicated idea sound complicated. The art is making it sound simple, compelling and inevitable.

Turning on your Reality Distortion Field
The ability to deliver a persuasive elevator pitch and follow it up with a substantive presentation is the difference between a funded entrepreneur and those having coffee complaining that they’re out of cash. It’s a litmus test of how you will behave in front of customers, employees and investors.

30-seconds
The common wisdom is that you need to be able to describe your product/company in 30-seconds. The 30 second elevator pitch is such a common euphemism that people forget its not about the time, it’s about the impact and the objective.  The goal is not to pack in every technical detail about the product. You don’t even need to mention the product. The objective is to get the listener to stop whatever they had planned to do next and instead say, “Tell me more.”

How do you put together a 30-second pitch?

Envision how the world will be different five years after people started using your product. Tell me. Explain to me why it’s a logical conclusion. Quickly show me that it’s possible. And do this in less than 100 words.

The CEOs reaction over his half- finished muffin was, “An elevator pitch is hype. I’m not a sales guy I’m an engineer.”

The reality is that if you are going to be a founding CEO, investors want to understand that you have a vision big enough to address a major opportunity and an investment. Potential employees need to understand your vision of the future to decide whether against all other choices they will join you. Customers need to stop being satisfied with the status quo and queue up for whatever you are going to deliver. Your elevator pitch is a proxy for all of these things.

While my ex student had been describing the detailed architecture of middleware of electric vehicles I realized what I wanted to understand was how this company was going to change the world.

All he had to say was, “The electric vehicle business is like the automobile business in 1898.  We’re on the cusp of a major transformation. If you believe electric vehicles are going to have a significant share of the truck business in 10 years, we are going to be on the right side of the fault zone.  The heart of these vehicles will be a powertrain controller and propulsion system. We’ve designed, built and installed them. Every electric truck will have to have a product like ours.”

75 words.

That would have been enough to have me say, “Tell me more.”

Lessons Learned

  • Complex products need a simple summary
  • Tell me why I should quit my job to join you
  • Tell me why I should invest in you rather than the line outside my door
  • Tell me why I should buy from you rather than the existing suppliers
  • Do it in 100 words or less.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

Building a Company with Customer Data – Why Metrics Are Not Enough

Gathering real-world feedback from customers is a core concept of Customer Development as well as the Lean Startup. But what information to collect?

Only 57 Questions
Yesterday I got an email from an ex-student lamenting that only 2% of their selected early testers responded to their on-line survey. The survey said in part:

The survey has 57 questions, the last three of which are open ended, and should take about 20 minutes to complete.  Please note that you must complete the entire survey once you begin.  You cannot stop along the way and have your responses to that point saved.

If it wasn’t so sad it would be funny. I called the founder and noted that there are SAT tests that are shorter than the survey. When I asked him if he actually had personally left the building and talked to these potential customers, or even had gotten them on the phone, he sounded confused.  “We’re a web startup, all our customers are on the web.  Why can’t I just get them to give me the answers I need this way?”

Continual Data Flow
Customer Development suggests that founders have continual and timely customer, channel and market information.

Founders need three views of information to truly understand what is going on:

  • First-hand knowledge
  • A “birds-eye” view
  • The view from the eyes of customers and competitors

First-hand knowledge
First-hand knowledge is “getting outside the building” and talking to potential or actual customers. Customer Development proposes that the best way to get customer data is through personal observation and experience—getting out from behind your desk and getting up close and personal with customers, competitors, and the market.

Web startups are at real disadvantage here as founders may confuse web metrics, A/B testing and on-line surveys as the entirety of first-hand knowledge – for most web business models they are not.  In fact, this mistake can be a “going out of business” strategy.  Metrics tell you that something is happening.  A/B testing can tell you that one something is better than another. But neither can tell you why. And getting answers back from customers only with on-line surveys when you can’t watch their pupils dilate or hear the intonation of their voice is not something I’d build a business on.

Of course you need to collect metrics, do A/B testing and run online surveys. It’s just that without having founders “get outside the building”, you are missing a key point of Customer Development – the numeric data you collect may be blinding you to the fact that you’re more than likely working to optimize the wrong business model. Customer needs are non-deterministic.

“Birds-eye view”
The second picture founders need is a synthesized “birds-eye view” of the customer, market and competitive environment. You assemble this view by gathering information from a variety of sources: web sites, social media (Facebook, Twitter, blogs, et al) sales data, win/loss information, market research data (i.e. compete.com, Alexa, etc.,) competitive analyses, and so on. From this big-picture view, founders try to make sense of the shape of the market and the overall patterns in the unfolding competitive and customer situation. At the same time, they can gauge how well industry data and the actual sales match the company’s revenue and market-share expectations.

(Just remember that most market research firms are excellent at predicting the past. If they could predict the future, they’d be entrepreneurs.)

My test for how well you understand this “order of battle” is to hand the founder a marker, have them go up to the whiteboard and diagram the players in the market and where they fit. (Try it.)

See through the eyes of customers and competitors
The third view is of the action as seen through the eyes of customers and competitors. Put yourself in your customers’ and competitors’ shoes in order to deduce possible competitors’ moves and anticipate customer needs. In an existing market this is where you ask yourself, “If I were my own competitor and had its resources, what would my next move be?” In looking through the eyes of a customer, the question might be, “Why should I buy from this company versus the incumbent.” In a new or resegmented market, the questions might be “Why would more than a few early adopters use this app, web site or buy this product? How would I get my 90-year grandmother to understand and buy this product?”

Think of this technique as playing chess. You need to be looking at all the likely moves from both sides of the chessboard. What would we do if we were our competitors? How would we react? What would we be planning? After a while this type of role playing will become an integral part of everyone’s thinking and planning.

Putting it All Together
First-hand knowledge is clearly the most detailed and essential, but offers a narrow field of view. Founders who focus only on this information risk losing sight of the big picture.

The “birds-eye view” provides a view of the market but lacks the critical detail. Founders who focus only on this image risk missing the “ground truth.”

Seeing through the eyes of customers and competitors is a theoretical exercise limited by the fact that you can never be sure what your customers and competitors are up to.

The combination of all three views helps founders form an accurate picture of what is going on in their business and help them hone in on product/market fit.

Even with information from all three views, founders need to remember there will never be enough information to make a perfect decision.

Building an Information Culture
The most important element of data gathering is what to do with the information once you collect it. Customer information dissemination is a cornerstone of Lean and agile companies. This information, whether good or bad, must not be guarded like some precious commodity. Large company cultures reward executives who hoard knowledge or suppress bad news. In any of my companies, that is a firing offense.

All news, but especially bad news, needs to be shared, dissected, understood, and acted upon.

This means that understanding poor click-through rates, retention numbers and sales losses are more important than understanding sales wins; understanding why a competitor’s products are better is more important than rationalizing ways in which yours is still superior. Winning startups build a startup culture that reward not punish messengers of bad news.

Lessons Learned

  • Three views of information: First-hand knowledge, “birds-eye” view, view from the eyes of customers and competitors
  • Web startups can fall into the trap of confusing metrics, testing and surveys with Customer Interaction.
  • Goal is to build an information culture to help you get to product/market fit.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

Ardent War Story 4: You Know You’re Getting Close to Your Customers When They Offer You a Job

In 1985 Ardent Computer was determined to create a market niche for personal supercomputers. To understand our potential markets, we started by analyzing the marketing literature from Cray Research then crisscrossed the country talking to prospective customers – scientists and researchers in advanced corporate R&D centers and universities – to understand their needs.

A week might start with a visit to the MIT Media Lab, the next day at Princeton in the Aerospace Engineering department, then off to General Motors’ advanced research group, across to the computer science department at the University of Illinois, up to Minneapolis to meet with ETA, Control Data and Cray, and across the country to Seattle to speak with Boeing’s advanced propulsion group before returning to to the geophysics department at Stanford.

Simulation applications
After six months, we hypothesized that our most likely customers were scientists and engineers who used one of five applications: computational fluid dynamics, finite element analysis, computational chemistry and seismic data processing and reservoir simulation.

At Boeing we had learned aircraft designers needed to calculate the airflow and turbulence around wings and engines. Instead of building a new wing to test designs, numerical simulation would allow them to use a supercomputer to build a virtual model of a wing on the screen and use an application called computational fluid dynamics to watch the resulting airflow without ever flying a plane. If they didn’t like what they saw (say the wing had more drag than expected), they could change the design and rerun the simulation.

At General Motors we heard from mechanical engineers who needed to calculate the strength, breaking point and failure modes of structures – everything from piston rods to bumpers. Their interest was easy to understand. Before computer simulation, they would test real objects until they physically broke (or get sued when something important broke, blew up, or collapsed.) Now applications called finite element analysis could calculate these stresses and failure modes on a computer screen.

A third simulation market, this one new and just emerging, allowed biologists to examine how drugs would interact by simulating them on a computer.  A precursor to today’s biotech revolution, these computational chemistry applications allowed the active docking sites of potential drugs to be modeled and tested on a computer screen rather than in a test tube.

Finally, we could see that petroleum engineers at oil companies like Chevron and Exxon were using computers in exploration and extraction with seismic data processing and reservoir simulation, applications which were moving oil companies into the supercomputer age.

Traveling around the country had helped me begin to understand how these customers currently did their work, what journals they read, where they got their funding, what other software they ran on their machines, etc. I came back to the company and described the day-in-the-life of each type of customer.

This was one of the happiest times in my life as a marketer. I had known nothing about supercomputers and numerical simulation applications; now there wasn’t a day that went by that I wasn’t learning something new. As I traveled to some of the most arcane trade shows and conferences (AIAA, SPE, MSC, etc.), my hotel room was stacked with the journals and textbooks about each vertical market just to keep up with the people we were meeting. (I was a marketer, not an engineer and most of the fine points were way over my head – and probably not just the fine points. But reading their literature allowed me to discuss the problems and opportunities with customers.)

My Velvet Painting Period

My Velvet Painting Period

You Know You’re Getting Close to Your Customers When They Offer You a Job
I believed that good marketers used their own products. I got facile enough with a few of the applications that I could even run some of them myself. I could build simple finite element models with Patran and set up a run of the Nastran analysis codes.

Later on in the company’s life I went to give a lunch-time seminar to Chevron’s La Habra research center on the use of graphics supercomputers in petroleum applications. I spoke about the state of the art in computational reservoir simulation and what could be accomplished using finite difference and finite element methods on the new class of machines that were coming from companies like ours.  During the question and answer session my heart was in my throat since like any good marketer, my depth of knowledge was no more than one level away from being a complete idiot. At the end of the talk the head of the research facility came up to me and said, “That was a great talk. We’re glad your company hired a real petroleum engineer to come speak to us. We hate when the sales and marketing types come down and try to get us to buy something.”

For one of the few times in my life I was at a loss for words, and I was completely unprepared for what came next.  “Here’s my card, if you ever want to consider a career in Chevron research. We’d be happy to talk to you.”

Marketing was really fun.

Lessons learned:

  • To sell to customers you need to understand them:  how they work, what they do and what problem you will solve for them.
  • You can’t understand customers from inside your building.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Ask and It Shall be Given

Once I recovered from burnout at Zilog, I was working less and accomplishing more. I even had time to find a girlfriend who was a contractor to the company.  One of her first comments was, “I didn’t know you even worked here.  Where were you hiding?”  If she only knew.

What’s the Worst that Can Happen?
Our small training department had been without a manager for months and finding a replacement didn’t seem to be high on the VP of Sales list. We four instructors would grumble and complain to one another about our lack of leadership.  Then it hit me – no one else wanted to be manager – what was the worst that could happen? I walked into the VP of Sales’ office and with my knees trembling, I politely asked for the job. I still remember him chuckling as I nervously babbled on what I good job I would do, what I would change for the better in the department, why I was qualified, etc.  He said, “you know I figured it would be you to come in here and ask for the job. I was wondering how long it would take you.”  I was now manager of Training and Education at Zilog.

All I had to do was ask.

Zilog Correspondence Course Matchbook Cover

Zilog Correspondence Course Matchbook

From that day forward, in my business and personal relationships, I would calculate the consequences of a “No” for an answer against the benefits of getting a “Yes.”  The math said that it was almost always worth asking for what you want. And the odds in your favor are even higher, as most of your peers wouldn’t even get into the game due to some unspoken belief that in a meritocracy, good things will come to those who wait. Perhaps if you have a union job based on seniority, but not in any startup I’ve ever seen.

For entrepreneurs good things come to those who ask.

What’s Marketing?
As part of the sales organization, I thought I kind of figured out what the function of the sales department was. (In reality it would be another 20 years.) And I understood engineering since I interacted with them almost daily.  And since Zilog still had a semiconductor fab next door, I learned what manufacturing did in a chip company, as every training class wanted to see their chips being made. But the one group that had me stumped was something called “marketing.”  “Explain it to me again,” I’d ask.

After a year and a half of running training and teaching the new Z-8000 and its peripheral chips, I began to figure out that one of the jobs of marketing was to translate what engineering built into a description that our salesmen could use to talk to potential customers.  I distinctly remember this is the first time I head the phrases “features and benefits.”  And since I saw our ads (but didn’t quite understand them,) I knew marketing was the group that designed them, somehow to get customers to think our products were better than Intel and Motorola’s.

But Intel was kicking our rear.

One day I heard there was an opening in the marketing department for a product marketing manager for the Z-8000 peripheral chips.  The department had hired a recruiter and was interviewing candidates from other chip companies. I looked at the job spec and under “candidate requirements” it listed everything I didn’t have: MBA,
5-10 years product marketing experience, blah, blah.

I asked for the job.

The response was at first less than enthusiastic. I certainly didn’t fit their profile. However, I pointed out that while I didn’t have any of the traditional qualifications I knew the product as well as anyone. I had been teaching Z8000 design to customers for the last year and a half. I also knew our customers.  I understand how our products were being used and why we won design-in’s over Intel or Motorola.  And finally, I had a great working relationship with our engineers who designed the chips.  I pointed out it that it would take someone else 6 months to a year to learn what I already knew – and I was already in the building.

A week later Zilog had a new product marketing manager, and I had my first job in marketing.

Now all I needed to do was to learn what a marketeer was supposed to do.

MBA or Domain Expert
Years later when I was running marketing departments I came up with a heuristic that replicated my own hire: in a technology company it’s usually better to train a domain expert to become a marketer than to train an MBA to become a domain expert.  While MBA’s have a ton of useful skills, what they don’t have is what most marketing departments lack – customer insight.  I found that having a senior marketer responsible for business strategy surrounded by ex-engineers and domain experts makes one heck of a powerful marketing department.

Entreprenuers Know How to Ask
Successful entrepreneurs have the ability to ask for things relentlessly. In the face of rules that stand in their way they find a way to change the rules. (To an entrepreneur comments like, “you need an MBA, we don’t fund companies like yours, we don’t buy from start-ups, you have to go through our vendor selection committee” are just the beginning of a negotiation rather than the end.) Entrepreneurs are fearless, persistent and uninhibited about asking – whether it’s asking to assemble a team, get financing, sell customers, etc. or whatever is necessary to build a company.   If you are on the path to be a successful entrepreneur, hopefully you are already asking for things you want/need/aspire to.  If not, don’t wait.  Get started asking.  It is a skill you need to either have or develop.

Lessons Learned

Ask, and it shall be given you; seek, and you shall find; knock, and it will be opened to you.

King James Bible, New Testament – Matthew 7:7

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Rocket Science 4: The Press is Our Best Product

At Rocket Science while my partner Peter was managing the tools and game development, I was managing everything else. Which at this stage of the company was marketing and financing.

Our “Hollywood meets Silicon Valley” story played great in Silicon Valley, they ate it up in Hollywood, and the business press tripped over themselves to talk to us.  The story had universal appeal, and we spun the tale and keep the buzz going.  It worked. Judging by the ink we had gotten, we were the hottest company in the game business, with stories in Fortune, Forbes, Variety, The Hollywood Reporter, and the cover of Wired magazine. Yet we hadn’t shipped a single product.

While it felt wonderful at the time, this was a very bad idea.

Wired 2.11 Cover

Everyone Else is an Idiot
The theme of our press blitz was all about how we were going to show the old tired game companies the right way to make video games. Our press infuriated the established companies who had spent years building games that sold well, but had zero press recognition.  (They all accurately predicted our demise because of our lack of game expertise.)  Ah, the arrogance of inexperience. Fortunately I’ve never been good at lying, to be effective in communicating a story I truly had to believe in what I was saying.  At the time I was a true believer that Rocket Science was going to change the gaming world. The positive effect of the tidal wave of press was as a door opener for us to raise money from corporate partners.  Companies in the entertainment business around the world knew who we were, and were interested in meeting us, if only to see what the hype was about. Our VP of Business Development had no problems getting meetings and fund raising was easy.

The Digital Dream Team
Way before the Internet phenomenon, we had created “Rocket Science the brand” that was much bigger in size and importance than Rocket Science the company. One magazine called us the “Digital Dream Team”, young, edgy and hip, and by the looks of the company (great building, nice furniture, and well dressed 20-year olds) we were trying to live up to the reputation.  All this activity occurring before we actually shipped a product.  We were larger than life, but as one potential investor told us, “You guys are all hat and no cattle.”

Believing Your Own BS is Toxic
Lots of noise and smoke before a product ships seems to be a toxic byproduct of enthusiastic entrepreneurs. Every generation of new technology seems to find a willing audience in naïve journalists and eager readers.  However, when the smoke clears the surviving companies are more than likely the ones that focussed on execution, not on creating a cacophony of press releases. If Rocket Science wasn’t a clear enough lesson in the danger of premature enthusiasm, the dot-com bubble that followed should have been. The only difference between us and the Internet bubble that would follow was that we did branding on the cheap by creating our image with public relations, whilethe dot-bomb era was to do it by spending enormous sums on advertising (those large venture rounds had to get spent somewhere.)

Hindsight is wonderful.  For years the one solace I was able to take from the Rocket Science debacle was that I had got the branding right. Then I watched the criminally expensive dot-bomb-bust branding activities to see how futile and wasteful it was to brand a company before it has shipped products.

To a Hammer Everything Looks Like a Nail
In hindsight my failure was that I executed to my strength – telling a compelling story – without actually listening to customer feedback.

It wasn’t that I didn’t know how to listen to customers.  It wasn’t that I didn’t have a smart VP of Marketing who was getting early feedback from customers and screaming that the games didn’t match the hype.  It’s that as CEO I was too busy talking to the press and raising money to hear customer comments directly.

I had outsourced customer feedback and ignored the input. In fact, hearing input that contradicted the story I was telling created cognitive dissonance.  So while the words may have passed through my ears I couldn’t “hear” it.  Not being able to hear negative customer input is an extremely bad idea.

Out of the Ashes
A few of the key tenets of Customer Development, came from the ashes.  The Customer Discovery lessons of “get outside the building and test your hypothesis with customers,” and “the founders need to hear the results,” came from this debacle.

The Customer Validation lesson of, “no formal launch until you have early sales validating the product and sales process” was also born here.  Given the lukewarm feedback we were getting from potential customers and channel buyers we should have dramatically dialed back the hype until the follow-on games could match it. Given the talented people we had, there’s no doubt they would have done so.  Instead the huge mismatch between expectations and reality of our first games diminished the brand and demoralized the company – we never recovered.

Lessons Learned

  • PR is not a product- it is a demand creation activity to fill a sales channel
  • The product needs to come close to the hype
  • Fire the CEO who insists on press and PR before they understand customer feedback
  • Branding is a process that should happen after you have customers

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Rocks in the Rocket Science Lobby

In 1994 Rocket Science Games was the only video game company with a rock in its lobby.

We had moved our game development facilities from Berkeley and Palo Alto and consolidated into one building on Townsend Street in the “South of Market” neighborhood in San Francisco.  (We’re were just around the corner from the future home of SF Giants AT&T Baseball Park, which then was just a rubble-strewn parking lot in a sketchy neighborhood.)

Since we were the hip, new, edgy, “Hollywood meets Silicon Valley” video game company (more about “big hat, no cattle” startups in subsequent posts,) our office obviously had to match the image.

Our receptionists’ desk was built on the wing of a WWII P-51 fighter plane, and the rest of the office décor matched.  All that is, except for our lobby, as our offices were on the 4th floor. When you got off the elevator, you faced a non descript corporate-looking set of walls.

This was about the time Christies and Sotheby’s were starting to auction Soviet space program artifacts, and I was thinking that perhaps a spacesuit in the lobby would be appropriate given our name.

One day, out for a walk at lunch, enjoying one of my favorite activities – watching them tear down the Embarcadero freeway (San Francisco urban upgrade post 1989 earthquake,) – I realized I was looking at the answer.

And it was much, much better than a space suit.

SF embarcadero freeway demolish

A week later as our employees came up the elevator there was a Lucite case on a pedestal with a single grey rock, lit with a single spotlight, on a velvet pillow.  In front of it was a brass plaque that read:

Moon rock, Apollo 18, July 1973 – Copernicus Crater.”

Apollo 16 Moon Rock

For the next few years, people from all around South of Market would come by the Rocket Science Games lobby to see our moon rock. It added to the mystique  of the company – which helped with raising money and getting press ink. Everyone agreed that having our own moon rock was way cool.

————————————

Postscript: In all that time, not a single person who admired the moon rock questioned its provenance or authenticity.  A bit surprising considering the intersection between geekdom and space.  Maybe it was just too much ancient history.

NASA’s moon missions ended at Apollo 17.

The rock was a piece of rubble from the Embarcadero Freeway.

————————————

Only over time would I realize it augured the future of the company.

Listen to the blog post here

Download the podcast here or here

Follow

Get every new post delivered to your Inbox.

Join 149,048 other followers