Finding your ideal niche
It doesn’t happen by accident. Not every new game site is a Club Penguin or Minecraft. Not every social network is a Facebook or Instagram. Not every texting application is a Twitter.
What are the elements needed to focus upon in making the attempt to take a product viral? Intrigued by the thought, I recently made a list. It was as much in reaction to my getting blank stares from entrepreneurs when I asked that question as it was for me to better understand the problem itself. Here is my list.
First: Planning. Retail or end user web sites do not even receive limited notice without being discovered through a real marketing program, aimed at finding the flywheel effect (the moment
of going viral that makes all the difference between failure and success.) In today’s world of social marketing, it takes someone knowledgeable if not expert in understanding how to use available resources in promotion and marketing.
[Email readers, continue here...] Second: channels. I am past chairman of a company that distributes its product through over one hundred fifty retail Internet travel channels, all websites where someone else spent the money attracting their users and attempting to go viral. We could not have begun to reach a fraction of that audience with any amount of money if we did not reach through these channels. Sometimes, it is just the right idea to brand your product inside that of a known presence.
Third: cost. Even a great marketing plan to gain an audience fails if there is not enough money to prime the pump. And of course sometimes that requires a large amount, far beyond the capability of small companies looking for its initial audience.
Fourth: measurement. If you can’t measure the results of your attempts to gain a viral response, how can you know when to focus upon reinforcing or changing the effort? Well-tuned metrics are an absolute must. And the tools for most are available, sometimes free, for the educated marketer.
Fifth: reaction. If everything goes right in finding the right plan, channel, cost and measure of success, and if you do nothing to reinforce the success or change the focus, the rest of the effort can easily die a slow death.
And sixth: the pivot. A reaction is not often enough. Many times, it takes an intelligent repositioning of the entire offering to try again from the start with revised ideas based upon learned experience.
It’s a cycle that must be learned and followed in order to successfully maximize an opportunity in any industry and for any company. So, where in that cycle are you today?
Plans don’t often work as devised. We are not always smart about the market or the product. Great teams are not bound by their original product or marketing plan. Greatness finds one definition in management’s ability to “pivot,” or change the plan in reaction to its early response from the marketplace.
Investors celebrate teams that quickly find the flaws in the original plan and reallocate resources in another direction before more wasted effort. Even the term, pivot, seems to call up images of a light-footed dancer able to move so very quickly in any direction.
My favorite example of a world class pivot comes from the CEO and board of one of my most successful investments. Green Dot Corporation was formed by an entrepreneur in the year 2000 to create a product to permit those without credit cards to purchase items on the Internet. Think of it: to shop on the web, you must have a card, not a nine digit routing and bank account number. The young, inexperienced entrepreneur had two assets that attracted me – rights to use the MasterCard name on this new product, and a laser focus to make this work in any form possible.
[Email readers, continue here...] Over the years, that vision changed dramatically several times as the world’s first debit cards were invented by the firm, positioning the card to be used by the un-bankable, those unable to obtain credit cards or in some cases even checking accounts. The firm grew to dominate its new field, create an infrastructure to allow any of its 70,000 retail stores to simple activate or load the card with money from any cash register. It replaced Western Union as the preferred way to send money across great distances. And it built a billion dollar market and then some – where it might have been restricted to a small percentage of that.
And we who held early stock celebrated together the ringing of the NYSE opening bell the day that often pivoting company went public.
When making a presentation to a new audience, the smart thing to do, if there is an opportunity, is to ask your audience by show of hands, if they have some knowledge of your industry or space. If you are making a one-to-one presentation, don’t start without a conversation about the other person’s knowledge of your space. With that conversation, you create an immediate connection with your audience even before beginning to present, and you know better how much explanation you will need to accompany your most elementary statements. And you will not insult the industry experts by appearing to talk down to them.
When I give a keynote address, I often start by asking my audience, by raise of hands, to tell me how many are angel or VC investors, and how many are entrepreneurs, how many are service providers such as attorneys. Immediately, I can tell how to orient the explanations behind my pre-cast slides, based upon the response. It always works, and the audience should appreciate that the speaker takes the time to orient the talk to the audience, not the other way around.
If your audience is composed of PhD’s in organic chemistry, would you want to explain the most elementary teachings in the field? On the other hand, it is most often true that only one or a few of your audience members is knowledgeable in your area of expertise. Address them directly with “I hope you will put up with me as I spend a few moments explaining some of our elementary knowledge to the others.” That makes these experts a part of your presentation, able to nod their heads when you do explain these things to the others, instead of looking a bit disdainful that you don’t recognize that there are experts in the room.
Back when we were all trying to figure out the real value of traffic on the web, we investors – and acquiring companies – got a bit crazy with metrics used to value acquisitions and investments. Since in most cases, there was no revenue in many of these companies, all trying to gain market share at any cost, we had to invent the metric to use. And the most logical one seemed to be “eyeballs” or number of unique users finding their way to the site or registering for the service.
And the numbers were staggering. Microsoft paid $9.00 per registered user for Hotmail. AOL paid $40.00 per registered user of ICQ, the early messaging service. I was the original investor and helped to grow GameSpy Industries, attracted to the fledgling company because of its million users each month, even though at the time there was no monetization to the traffic.
But, when the bubble burst in 2000, most of us quickly grew up. Revenue models became more important a measure than traffic, although market share was and still is an over-weighted part of the value of any Internet-based entity.
[Email readers, continue here...] That is the quandary which entrepreneurs face today in building models for new companies around a web presence. Great revenue projections from a small user base lead to worries over sustainability. Low revenue projections but demonstrated (or projected) impressive numbers of unique users lead investors to think that there may be a future method of monetizing the user base that makes the company attractive, even while currently losing money.
I am an investor and advisor to one such company. Gaining users at a rate of 50% a month, the company has yet to find a revenue model that will pay for the increased costs of infrastructure needed to support the growth, let alone the fixed cost of operating the enterprise. And yet, users rave about the service, and spend long durations of time on the site.
Once we had what we thought was the answer, in allowing for display advertising on these sites. But the competition among sites has overwhelmed available inventory of paying advertisers, greatly reducing the cost per thousand views, and making display ads no longer a preferred revenue source for marginal sites.
We experimented with subscription-based charges for game sites and other sites supplying what we thought were indispensable services. In every case, those subscription models failed, as users found free alternatives. One of my companies had four million free beta gamers registered on the site, but lost all but 10,000 when attempting to charge $9.95 a month for a subscription.
What is the answer? New forms of advertising have been created to force user views, including pop-ups, pre-roll ads containing video content, and click-through display ads before allowing content views. Major newspapers and magazines, trying to reinvent themselves, are using the subscription model, as well as all of the above methods in their attempt to become relevant to a new and growing mobile and Internet-focused user base, with varying – but not too satisfying results.
Micropayments, in which services and information are delivered for pennies, requires an infrastructure for collecting, accumulating and billing that is still being experimented with, but showing promising results.
Giants like Facebook and Google have such large eyeball numbers that they can use display and positioning ads to achieve great profits. Most of us are still searching for the combination of monetization devices that work best for us. Free sites without monetization will disappear over time, and we will lose services we take for granted today. It is in the best interest of both Internet users and providers to find an acceptable way to charge for valuable services or information.
Creating a gerat company in a relative vacuum is an exercise in complete trust that the entrepreneur knows what’s best for the customer, perhaps even without interaction with such a customer. It’s probably happened, but not often enough to trust this method as a formula for success.
So, I’ve developed the three step dance in order to help form a repeatable method of how to create a great company from an early idea.
The first step: Involve potential customers early. Even if you know it all – wouldn’t it be an excellent plan to try your idea out on enough actual or potential customers to measure reasonable feedback?
You can use or discard the information you receive. We now know that Steve Jobs created in relative secrecy several of his products that became massive industry drivers of change. The iPad probably would have failed before production, had he used feedback and research from past failures of tablets in any previous form as a guide. On the other hand, most products or services are created in response to a real or perceived need. And most of us are not Steve Jobs.
[Email readers, continue here...] The second step: Take feedback seriously. Making the effort to gather metrics from the field in any form and then ignoring it, takes guts and determination – and in most cases a measure of stupidity. As I analyze business plans, I usually ask the entrepreneur early in the process whether s/he has tried this idea or prototype or mockup out on potential users. And if so, what was the response? And from how many people? In what related universe? I want to know that potential paying customers have been queried using enough information or a good enough model to get a real response worth taking seriously. Without this, any information received is suspect. And failure to make use of the information is a red flag for investors.
The third step: Reiterate and return to customers for comments. Seeking, then analyzing responses allows you to make changes to the plan and product in response. But what if the changes create other problems for the customer, or miss the mark, or don’t drive these same customers to more positive responses? The best possible second round feedback should come from the very same people who took the time to review the offering the first time. They have context and should see effort and progress. Their comments should therefore be more valued than those from first-time respondents.
The three step dance:
- Involve your customers early.
- Take feedback seriously.
- Reiterate and return to customers for comments.
So, why not design your product using your real and potential customers as consultants?
Some businesses are built around a single idea. And sometimes that idea is just too small a slice of the big picture to be interesting to investors. There was a recent investor event where I was keynote speaker, on stage only after several panels of experts had wowed the audience with their predictions and observations. One of the panelists made a point that resonated with me.
She stated that she had rejected the investment being discussed, because in her mind the entire company was “just a button, on a feature, in an app.” That comment sent me thinking about relevance, about longevity, and about market size for some of these entrepreneurial applicants looking for funding.
If you have invented a game that will be marketed as a new app in the app store, have you created enough of a model to create an ongoing company, or just another app that will compete with the hundreds of thousands already in the store? Is your game using a unique engine, or series of animated characters, or method of play that will break ground with potential players, inducing them to look to you for more and more unique games over time?
[Email readers, continue here...] Far too many companies have been created around a button on a feature, and not upon a solution to a need in answer to a void in the market. Investors have seen this game before. We match what we see to what has succeeded for us in the past. And rarely do we see a plan for a single product that is not part of a larger vision, and remain interested long enough to ask for more information.
There are exceptions. The famously popular app, “Draw It,” might at first seem an exception, until you dig deeper to find a dense plan around a series of social engagement products planned to follow. Can you extend your product into a planned series? Plan to create apps, not buttons, and not features.
Guest Post by William Fisher
Dave’s Note: William Fisher is CEO of Quicksilver Software, a software and Internet game development company in Southern California. Bill has survived multiple cycles in the game industry, and writes here his thoughts about his longevity in a volatile niche.
I think the number one factor in my endurance is building strong relationships with members of my team, so that they are supportive when things go badly, as they sometimes do in this business. I’ve gotten into a bit of a hole in the past few years because of the slowdown, but always tried to bend over backward to help people out and treat them as well as possible. Even when they feel they have to leave, they always tell me that their time working for me has been very positive. I develop people, and they know/appreciate that. I support them in moving on. We have a large alumni base now, some of whom bring me work now that they’re in positions of strength at other companies.
Second factor is that we deliver. In a business that’s known for contractors who perform poorly or completely collapse, we have a very solid track record. Not perfect — there’s always the one situation where something went awry — but for us those are few and far between. I think that comes from our ability to truly understand the problem and to propose technically realistic solutions. I get a lot of calls from people who say “I
worked with you X years ago and it was great, so I want to do that again.” Just visited Disney this week, for example, because our producer on a previous product was very happy with us and wanted her bosses to consider using our team. That’s a big win.
[Email readers, continue here...] Third is flexibility. I once tried to focus on a single type of business, on the advice of a business development guy. Huge mistake. When we were unable to get traction in that one business, we just about lost it all. We’re successful because we specialize in “hard problems” but not in any one vertical market. It turns out that that’s a good way for small, nimble companies to survive. Interestingly, we’ve won a number of deals by being the not-offshore alternative. Most people I know have had extremely bad experiences with offshore development. I’m working with a friend who’s got a Silicon Valley startup which made the mistake of hiring a Romanian development team. They’ve promised me founders stock in their company if I fish them out of the hole, which I’m well on my way to doing.
Fourth is embracing change. We know that the market changes every few years, and we’re always looking over the horizon at new technologies. Often, I can get clients to fund efforts to learn new tech because nobody else knows it, either, and we all need to learn it. Did that with iPhone/iPad, for example, which is now a big part of our business. Now we’re doing it again with various Web toolkits, since everything we do now has a heavy back-end component. I hire people who are eager to do new things and work hard not to become obsolete.
Fifth is having a solid ability to understand client needs. Most of the time in meetings, potential customers come away with the impression that I really understand their requirements. When trying to sell your skills, that’s critical. I can do it because I’ve gotten good at drilling down below the surface and seeing the real problem that they’re trying to solve. Plus, I tend to enjoy learning about new subject matter. It’s fun to see what people are doing and to create novel solutions. We’re just starting a new project in the medical field, for example. We are uniquely effective at solving complex user interface issues, and that’s what they need more than anything else. Yet we also understand how to deal with patient privacy laws, which are critical possible points of failure.
By: Arthur Lipper
In the process of raising funds to create and develop a business, entrepreneurs make many statements to those they seek to attract as investors. In my years of investing, I’ve developed a set of tough questions that are sure to elicit both information and a vibrant dialog – questions not on the usual checklists of angel groups or investors. So here are a number of them. Can you answer these? If not, isn’t it worth the work to prepare for the time you’ll be asked some or many of these? And isn’t it worth the effort for your own good as you build for success?
If you are an investor in an early stage venture, wouldn’t a dialog using these questions help greatly in defining and perhaps reducing your risk?
Revenue projections: What will happen to the company if the revenues and earnings projected on a worst case basis are not achieved as predicted? When will the company run out of money if the development of the enterprise is at a slower rate than expected? How much skin do you and your fellow founders have in the game? In a liquidation, would you have profited at the expense of your investors by taking high salary or draws before breakeven?
Liquidity event: Name at least five companies that might be ready to acquire the enterprise if successful. On the flip side of success, which companies or individuals are most likely to want to buy whatever is left of the company if it is unsuccessful?
[Email readers, continue here...] Metrics and management: What might be the first indication the company will not be able to achieve its goals and objectives? When and under what conditions should the CEO and management of the company be changed?
Valuation and fund-raising: How did you arrive at your proposed pre-money valuation? Has this been tested with investors? Who else has been approached to provide funds? What will the proposed managers of the enterprise do if the project does not proceed?Management experience and skin-in-the-game: What has been the experience of the founders and managers in past ventures? Will you and your managers plan to invest cash on the same terms and conditions as you ask? Would you and your managers invest funds, if loaned to them by the investor or others, in the enterprise on the same terms and conditions as is being proposed to the investor?
Profit potential: What is the proportionate profit potential relative to cash investment between the investor(s) and the managers in the event the business is as successful as is predicted? What is the single most important event you expect to foresee for success, and what will happen if it does not occur when anticipated?
As most human endeavors fail to achieve the results originally hoped for the above questions are fair and reasonable – because your angel investor is being asked to accept your forecasts and event predictions to entice him or her to invest in your enterprise.
Arthur Lipper has been a well-respected member of the international financial community since 1954. He has served as advisor to and member of numerous financial exchanges, and was the founder and CEO of Arthur Lipper Corporation and co-founder and Chairman of New York & Foreign Securities Corporation. Today he serves as Chairman of British Far East Holdings Ltd. He has written numerous books and articles for entrepreneurs and investors, and was the publisher and editor-in-chief of Venture Magazine.
The biggest error in planning may not be spreadsheet calculation error. Or cost estimation. It is most often missed assumptions about the market, the competition, the speed of adoption, or other critical metrics you’ve researched, or selected, or even just guessed at to create your plan.
Where did you get the data to drive your assumptions of market size or market share? Most entrepreneurs quote a resource for market size, but fail to then take the next step to eliminate all parts of that market unreachable by the company or product. For example, if you supply software to the chip design industry, do you segment your market into digital and analog users, into high end or inexpensive buyers, and into which languages or platforms users demand or request?
It’s easy to find someone to quote a size of market estimate. I became something of my industry’s source for such a number when I carefully catalogued the 160 players both domestic and international, estimated revenues from knowing the number of employees or installations for each (which were often public knowledge or stated by those companies.) I then created a gross domestic and gross international annual market size estimate for my industry’s products. No-one challenged this number, and it became an unattributed source of the metric for market size for years. Perhaps there was no other way to project the size of that market. But many decisions were made within my company walls, and surely by competitors, based upon those numbers.
[Email readers, continue here...] Then there is the famous entrepreneur’s statement about market share: “All I need to sell is one percent of the total available market to make this a rampant success.” We call that the “gloves in China” syndrome when analyzing assumptions within business plans. Without a trace of how the business will get that one percent, the entrepreneur confidently shows that this is all it takes to make us all rich. Even if the total number of annual units in a market is known, the leap to a percent of that market without a specific plan is often a fatal one.
And these are just two of the many assumptions that underlie any business plan. At the very least, all assumptions should be driven by numbers separately listed in an “assumptions section” of the planning spreadsheet, allowing the reader to manipulate those assumptions to see the various outcomes, and challenge the numbers for the benefit of all who have to defend them.
By David Steakley
This week, David Steakley returns for another bite at the corporate apple, with just the right amount of tart comments that will keep this document legal for now. Read on! – DB
How do you judge a company’s prospects, if a corporate business-to-business sale has to be your game? If your company’s market is huge corporations, how do you convince investors you can crack the market, and how do you deliver?
To answer this, you have to understand the challenges of getting paperwork signed and checks issued, in a big company. You’ll notice I didn’t say “the challenges of selling,” because this is seldom the crucial challenge. I am assuming that you have an awesome product or service which cleverly solves some tough problem and promises to deliver solid ROI for the buyer.
Just to be up front, as an investor, I am allergic to companies which rely on making potentially huge sales to corporate clients. The corporate B2B sales cycle produces a harshly binary outcome: either the company dies while waiting for a corporate client to sign the paperwork and remit the funds, or else it delivers gigantic outsized sales with relatively little effort.
[Email readers, continue here...] I routinely see prospective investments which rely by their nature upon selling to corporate customers. I have learned through bitter experience that little can be predicted from analyzing the company’s product or service. Of course, you’d think the company has to have a useful, valuable, or somewhat unusual product in order to be successful. But, from a standpoint of efficient analysis of the company’s prospects, this is not the place to start.
Big corporations are just slow to act. The time needed for decision increases as a factor of the number of people involved in the decision process. The number of people involved in the decision process varies as a factor of the amount of money involved, the number of places in the company affected by the transaction, and the duration and contractual obligations of the commitment.
I have found that the predictor of success is really extremely simple: tell me the name, phone number, birthdate and favorite brand of scotch of the senior corporate executive who is going to be your first customer, and tell me how much he is going to pay you in the next twelve months. Now, I am not saying you have to sell only to scotch drinkers, but you get my point: the predictor is your intimate knowledge of people you already know who need your product, want your product, and who know and trust you to the point that they will work hard to overcome the obstacles of closing the deal.
In other words, you have to have inside agents. You have to know, find, create, recruit, whatever, senior corporate executives who will relentlessly and stubbornly perform the unnatural acts required to close the sale.
Occasionally, I have seen success with companies getting started by using channels, i.e., other companies which are already providing or selling some product or service to your customers, who will tuck your product or service into their bag of tricks in return for a slice of the revenue. But it is very, very difficult to get a new product started this way. Once you’ve established the product, and the channels can be persuaded that your product provides them with relatively easy incremental revenues; channels are a fantastic way to scale your sales effort without fixed costs.
The great advantage of the B2B market is the potentially huge size of revenues from just one sale. Those revenues tend to be very durable, as quite often, you are getting your offerings wired into the DNA of the customer.
Before you tackle the corporate market, be sure you understand the challenges of this market, and think carefully about your product design and your sales approach, to reduce the barriers to closing sales as much as possible.
David Steakley, a past President of the Houston Angel Network, is a reformed management consultant. He is an active angel investor, and he manages several angel funds in Texas.