Monday, 22 September 2008

Choosing an Entry Market Sector

A common issue I see with early-stage companies is over their selection of entry market sector. Obviously, all investors love their portfolio companies to have a huge vision to change large markets in a big way, and on occasion the best way to plan to reach that is to go straight to the big opportunity head-on. However, often that's going to be slow and hard, perhaps credibility is crucial, in which case it's really helpful to find a launch "beach-head" in the lines advocated by "Crossing The Chasm".
So where companies have chosen to use a beach-head, the next question is which one? If you just pick the "largest sector", or the one you're "most familiar with, you face a danger- the best entry sector is not always the obvious one. I think there's a different set of thinking about launch markets, where you highlight a slightly different set of factors as important.

CriterionUltimate marketLaunch market
ScaleIdeally as large as possibleManageable, but low priority in selection process
Differentiation of offering against competitionImportantCritical
Focus on customer problemsCan be more general- boxed product is easier to scaleMay be helpful to have solution type sales initially
Unit saleVery large or small is good- scalability is crucialIdeally ~1 months burn- large enough to be useful, but small enough to avoid lengthy approvals
Mission criticalityMission critical to the customer provides extra valueIdeally not too critical- hard to buy from a startup
Length of buy cycleMay be longShort is incredibly helpful
Easy customer identificationUsefulVital

I bet there are some great suggestions for improvements to this table- please let me know!

Wednesday, 10 September 2008

Plan B for Fundraising

Guy Kawasaki has an interesting post comparing the merits of bootstrapping vs. early VC backing which is well worth reading. He nicely positions bootstrapping as a Plan B, and certainly makes it appear quite an attractive option. My own take would be:

Product Sells Product Doesn't Sell
Venture Backed You exit and have to share some of the rewards* with the VCs The company fails and everyone is unhappy.
Bootstrapped You exit, but probably only after raising some money to give yourself strategic options and thereby boost the price. The company fails and everyone is unhappy.
(* in our experience ventures that have insufficient capital to have other strategic options get sold for a lower price, so maybe the rewards would not be so different too.) So my advice would be to understand the future for your business and really decide if VC money changes the potential outcome in a good way. If it doesn't then don't take the money just to give yourself a salary along the way!

Friday, 5 September 2008

Technology Recruitment in an Early Startup

Daniel Tenner has a great post that is good reading for people looking to build early tech startups. I would just caveat his comments by suggesting that care is needed in understanding how you provide equity to those who help you out in those early steps. Daniel is completely right to suggest:

"You want them to feel that it’s their company, and to do that, you have to give them equity - not options, not promises of options, but actual founder’s equity. Don’t feel like you’re giving stuff away here. If you’ve got the right person for the job, ensuring that they feel ownership of the company will ensure that your share is worth something. It’s better to own 70 or 80 or even 51% of something than 100% of nothing."
However, bear in mind that there are two categories of people you might want to help out with a startup- and both can contribute a great deal
  • Ideal hires- people who you would've hired to do the job at the full commercial rate if only you had the cash, and who you'd expect to continue to be perfect for the job in 3-12 months time.
  • Opportunistic hires- people who are prepared to get involved early, before an ideal candidate would join, but who are probably not long-term management or key staff.
I would suggest that it is wise to think this through, and to talk it through openly with those involved, and make sure that the equity is allocated appropriately. I have seen many many founders who regretted having shared the company, often 50:50, with someone who ceased to be involved pretty quickly. I've seen founders who've been sweating to make the business work five years from the start, whilst their co-founder holds similar equity and has long since departed. Needless to say these founders tend to regret their decisions!