I met with a 10 person company the other day and once I got to Slide 2, I immediately started having questions about the opportunity. What struck me was a company that had a CEO, COO, and a VP of Marketing and a VP of Sales. You have probably heard this many times before but I will reemphasize the point – companies have different personnel needs at different stages of development (start-up, first customer sales, rapid growth, maturity). It is also more costly to bring in the wrong hire then to wait to bring in the right hire. The entrepreneur was obviously quite proud of his team thinking that he would get over some major objections from investors. I, on the other hand, saw a startup that had too many chiefs and not enough indians. I also saw a team that probably did not have enough discipline to ask the tough questions and make difficult decisions. I mean why does a 10 person company need a CEO and a COO? As an early stage investor, I would rather have a company with a clean slate that we can build a team around rather than a fully-baked team when we don’t necessarily know if the market is the right one to go after and if the product is the right product. When I fund an early stage company, I would typically rather have an entrepreneur that has product vision, a development team to execute around that, and the openness to build a team around him as the company grows. It can be death to have a top-heavy organization from Day 1 because startups change and change frequently during the early days. Don’t lock yourself in with big salaries, big options, and big egos until you really know what market you are going after, the skills and experience you will need to win that market, and the product is ready for prime-time. In a future post, I will walk you through one of the biggest and costliest mistakes I have seen early stage companies make – hiring a VP of Sales too early.
When you first release your product to the market, it is extremely important to think long and hard about product pricing. I can’t tell you how many meetings I have had where I have thought that companies were giving too much away for too cheap a price. Or they have given their product or service away for free which can be a great model but they had no plan to monetize in the future. When asked about pricing, I have at times heard a “we want to release it to the market and see what happens.” That can and does work great for testing a product and its features and building a user base, but when you do this, I would also hope that you have a plan for how you will monetize in the future. The allure of undercutting your competition and driving volume is a strong one, but one that can also be quite dangerous to your business. One rule that I have always believed in is that gravity takes over in product pricing. In other words, it is much harder to increase pricing (defy gravity) then it is to reduce the price of your product. The corollary is that it is much easier to reduce pricing then to increase it as customers feel like they are getting a good deal. Over the last twenty years, it is clear that technology buyers expect to get more for the same $ spent last year or to get the same product for less $ this year. This is applicable to consumer as well as enterprise-focused companies.
While I am no means an expert in product pricing, it is important to first analyze the competitive landscape, how your product fits in versus the competition, and then to figure out where you want to play in this market given your strengths and weaknesses. If there are no direct competitors, then look at some potential substitute products that customers are buying and figure out how your pricing looks relative to those companies. Once you get an understanding of the market dynamics, you should figure out how you want to enter the market vis a vis your pricing – do you have the most-feature rich set of services and want to charge the most or charge a similar price for more functionality or do you want to be the high volume-low cost provider. Finally, I would think about your product roadmap and determine if you can get to market aggressively, be different from your competition, and build a model around upselling new features and functionality. More often than not, I see companies not doing enough thinking on product pricing with the idea that they can always change it later on. In addition, many companies seem to err on the side of charging too little, rather than charging a little more with the opportunity to discount and drop or refine pricing down the line if sales do not ramp up as anticipated.
So when you release your product, remember that the laws of gravity take over in product pricing. If you are going to give a product away for free, have a plan to upsell or make money down the line with premium services or other functionality. Also remember that once a customer starts using a product or service that the last thing you ever want to do is take value away from your customer by increasing the price or beginning to charge for a service without adding new features and functionality. How you price your product at market release is not easy to undo in the future.
Congratulations to Greenplum (full disclosure: portfolio company) as it announced its first referenceable customer, Frontier Airlines, last week. To refresh your memory, Greenplum develops software that allows customers to deploy terabyte scale datawarehouses leveraging PostgreSQL at significant price/performance advantages over exsiting solutions. Building credibility is an important step for startups and getting referenceable customers and hiring industry talent are two surefire ways to do that. Here is a quote from Robert Rapp, CIO of Frontier and former CIO of Southwest Airlines, from a Charles Babcock Information Week article:
Frontier CIO Robert Rapp says the airline’s yield management process runs on Bizgres MPP. The system predicts the yield or profit that Frontier will receive on various flight combinations and ticket prices. The system helps Frontier determine where to offer seats at bargain prices and where to avoid what might turn out to be a competitive bloodletting, with no one profiting, says Rapp, the former CIO of Southwest Airlines, a pioneer of low-priced flights.
"Greenplum allowed us a very economical solution for a mid-sized airline. There are large amounts of parallelism in the system," says Rapp. A comparable but higher end commercial system used by retailers such as Wal-Mart comes from Teradata, a unit of NCR Corp. "Greenplum was available at 20-30 times less" than such a system."It was available at a very nice price point for us," adds Rapp.
Congrats to the Greenplum team on reaching this significant milestone and I am sure that this Frontier Airlines story is one that the company and I will be hearing about for a long time, in every sales presentation and pitch. As I have said before, it is important to make sure your first 5 customers are highly referenceable (extremely happy with your solution and influential in the community to get the market’s attention) so you can significantly leverage those first relationships to establish market credibility and even help close some of your sales prospects.
I recently sat in a presentation which a portfolio company CEO gave for a potential strategic partner. He first started out with a two minute explanation of the business and then insisted on diving into the demo. I wasn’t sure if that prospective partner really got it and before we knew it, the CEO said it was much easier to just dive into the demo to explain. I kind of cringed but did not want to stop him from giving the demo as I was hoping he would get to the big picture. While everyone was impressed with the demo, it lasted too long and got us focused in the weeds and not the forest. From that meeting, I was left with a deep understanding of the features and functionality but what was clearly lacking was the vision for the business. If you can’t explain what you do, its context, and the opportunity in a few sentences and have to give a demo for someone to get it, I would suggest going back to the drawing board and thinking long and hard about how you make sense of what you do verbally. It would have been great if the CEO started the presentation with a clear and compelling message of the company (not the product) on where the world would be 5 years from now and how his product or service today would grow to meet this vision of the future.
As one of our marketing consultants, Richard Currier, has always told our portfolio companies, "you market the vision, and sell the product." If you get too locked into talking about a product, then your partner or customer gets stuck into thinking about who else does this and why are you different. Getting into a feature/fucntion battle in the first meeting is not a great way to start. Sure enough, our prospective partner started naming several companies asking us how we differed from them. If you start with a vision first and clearly talk about your view of the market in the future and how your product evolves from where it is today to a roadmap of the future, then it is easier to differentiate your company and bring the discussion to a higher level.
Trust me, the word vision became almost a dirty word during the market crash as no investor wanted to have another entrepreneur or CEO long on vision and short on execution. The problem is that the very skills that got us to the market hype (lots of vision, big thinking) were not the skills that enabled many of us to survive the downturn (tactical focus on generating revenue, conservative business plan, and execution). If I look at the world on a spectrum from focus on all revenue and profits on the one hand and all technology and vision on the other hand, I would like a mix tilted much towards the technology spectrum in the early stages of a company’s growth. Pre-2000, I would argue that the mix was all tech and vision with no focus on building a business. Post-2000, many companies were much more on the business spectrum and less on the tech side. Today, I am asking that entrepreneurs bring back that vision thing and show us the big picture because showing me a point product doesn’t cut it. In addition, in today’s world it is much harder to get public and many of the acquisitions today are not based on how many customers you have or revenue but based on your technology today and product vision in the future. I have a number of companies being looked at right now and having a 2 year advantage on a product can mean alot for a strategic partner or acquirer. I am by no means advocating that you build a company to flip, but I am just stressing that vision is not a dirty word, that you need one, and that as long as you carefully balance that with building a real business you will be in great shape.