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The “ladies’ night” strategy

Many singles bars have “ladies’ night” where women are offered price discounts. Singles bars do this for women but not for men because (heterosexually-focused) bars are what economists call two-sided markets – platforms that have two distinct user groups and that get more valuable to each group the more the other group joins the platform - and women are apparently harder to attract to singles bars than men.

Businesses that target two-sided markets are extremely hard to build but also extremely hard to compete against once they reach scale. Tech businesses that have created successful two-sided markets include Ebay (sellers and buyers), Google (advertisers and publishers), Paypal (buyers and merchants), and Microsoft (Windows users and developers). In some cases individuals/institutions are consistently on one side (buyers and merchants) while in other cases they fluctuate between sides (Ebay sellers are also often buyers).

In almost every two-sided market, one side is harder to acquire than the other. The most common way to attract the hard side is the ladies’ night strategy: reduce prices for the hard side, even to zero (e.g. Adobe Flash & PDF for end-users), or below zero (e.g. party promotors paying celebrities to attend). Rarer ways to attract the hard side is 1) getting them to invest the platform itself (e.g. Visa & Mastercard), and 2) interoperating with existing hard sides (e.g. Playstation 3 running Playstation 2 games).

If you are starting a company that targets a two-sided market you need to figure out which side is the hard side and then focus your efforts on marketing to that side. Generally, the more asymmetric your market the better, as it allows you to market to each side more in serial than in parallel.

Web services should be both federated and extensible

One of the most important developments of the web 2.0 era is the proliferation of full featured, bidirectional APIs.  APIs provide a way to “federate” web services from a single website to a distributed network of 3rd party sites. Another important web 2.0 development is the proliferation of web Apps (e.g. Facebook Apps). Apps provide a way to make websites “extensible.”

The next step in this evolution is to create web services that are both federated (APIs) and extensible (Apps).

In my ideal world, the social graph would not be controlled by a private company. That said, Facebook, to its credit, has aggressively promoted a fairly open API through Facebook Connect. Facebook has also been a leader in promoting Apps. For Facebook, creating extensible, federated services would mean providing a framework for Facebook Connect Apps – apps that extend Facebook functionality but reside on non-Facebook.com websites.

Consider the following scenario.  Imagine that in the future a geolocation data/algorithm provider like SimpleGeo takes Facebook Places check-in data and, using algorithms and non-Facebook data, produces new data sets, for example: map directions, venue recommendations, and location-based coupons. The combination of Facebook’s data (social graph and check-ins) and SimpleGeo data/algorithms would create much more advanced feature possibilities than either service acting alone.

With today’s APIs, if, say, Gowalla wanted to integrate Facebook plus SimpleGeo into their app*, they would basically have 3 choices:

1) Embed Facebook widgets in Gowalla.  These are simple iframes (effectively separate little websites) that don’t interact with SimpleGeo.  Gowalla would just have to sit and wait and hope that Facebook decided to bake in SimpleGeo-like functionality.

2) Pre-import SimpleGeo data. This significantly limits the size and dynamism of the SimpleGeo data sets and doesn’t incorporate SimpleGeo algorithms, thus severely limiting functionality.

3) Host an instance of SimpleGeo’s servers internally.  This requires heavy technical integration, undermining the main benefit of APIs.

In a world of extensible APIs (or “API Apps”), Gowalla could instead send Facebook data back to SimpleGeo.  The data flow would look something like this:

(Note how there are three parties involved – @peretti calls this a “data threesome”). This configuration is much simpler to integrate – and potentially much more powerful and dynamic – than the other configurations listed above.  You could implement this today, but it would create user experience challenges.  For example, Gowalla would be sending Facebook data to a 3rd party (step 3), which might (depending on the data sent) require explicit user opt-in. Things become more onerous if SimpleGeo wanted to share its own user data with Gowalla. That would require an additional oAuth to SimpleGeo (authorizing step 4).

Allowing websites to be federated and extensible will open up a whole new wave of innovation.  Ideally some spec like oAuth could include the multiple authorizations in a single authorization screen.  Facebook could also do this by allowing 3rd parties to be part of the Facebook Connect authorization process.  Inasmuch as Facebook’s seems to be trying to embed their social graph as deeply as possible into the core experiences of other websites, allowing extensible APIs would seem to be a smart move.

* I have no connection to any of these companies (Facebook, Gowalla, SimpleGeo) and have no knowledge of their product plans beyond their public websites.  I am imagining functionality that Gowalla and SimpleGeo might include someday but for all I know they have no interest in these features – I just picked them somewhat arbitrarily as examples.

Good bizdev cannibalizes itself

A few successful websites were built almost entirely through viral growth. The vast majority, however, started off by partnering with other, already successful websites. Even Google began by partnering with Yahoo. As superior as Google’s search algorithm was, it was very hard to get the masses to switch to a new search engine.

In the web 1.0 world (approximately pre-2004), integrating two web services involved lots of manual work, such as negotiating legal contracts and custom technical integration. Creating these kinds of partnerships is usually referred to as “business development” or “BizDev” (personally, I usually just call it “BD”). In the web 2.0 world, it became common for websites to create fully functional, self-service API’s with standardized legal terms. This made it possible to drastically reduce the friction of integrating services. My Hunch cofounder Caterina Fake coined the term “BizDev 2.0″ to refer to this idea (and of course Flickr was a pioneer of super robust APIs).

There is no question that removing legal and technical hurdles is a win for everyone (except lawyers). However, unless your service is extremely high profile and its value is easily understood, it still needs to be marketed to potential partners. Many websites won’t consider using a self-service API until they’ve seen it working on other sites with measurable results. So how do you overcome this particular kind of chicken-and-egg problem?

During his interview process, Hunch’s Shaival Shah, said something that struck a chord with me: he didn’t want to be called “VP BizDev” because, he said, a good BizDev person makes BizDev irrelevant. The idea is to create a number of BizDev 1.0 partnerships while simultaneously building and marketing a full service API.  If you can do BizDev 1.0 with some number of (ideally high profile) websites and demonstrate that it is valuable to them (ideally quantitatively), you can then scale your service BizDev 2.0 style. Maybe this could be called BizDev 1.5.

Shaival wrote up a much more detailed post on self-cannibalizing BizDev that is well worth reading.

The right way to position against competition



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This is Part 4 of the series: 5 lessons from 150 startup pitches.

After seeing hundreds of startup pitches for this year’s Capital Factory program, I can tell you that the two most common errors in positioning a company against competition are, strangely, opposites:

  1. Claiming you have no competition.
  2. Defining your company’s offering and positioning by combining “the best” traits of 6 competitors.

This isn’t just a problem when pitching — it’s a problem with you defining who your customers are, what they want, and your role in the marketplace.

Let’s break down the ways these fallacies manifest and what you can do instead.

There is no competition

Here’s what this sounds like in the wild, and my reaction when I hear it:

  • “I have no competitors.”
    Either you’re ignorant of direct competition, or your not considering alternate solutions like “build it yourself.”
  • “No one is doing it like we are.”
    Of course you’re going to position your company with a unique offering: exclusive features, a distinctive culture, a refreshing pricing plan, an innovative sales strategy, etc.. But uniqueness doesn’t imply lack of competition!
  • “There’s no competition because this is an industry that has never used software to solve this problem.”
    I know that sounds like a good thing, but what this also implies is that you’ll have to convince computer-phobic people to trust software, and that’s a disadvantage. You’re competing against the status quo.
  • “There’s no competition because people haven’t realized it’s a problem.”
    If they don’t already know they have the pain, the sales process is going to be excruciating. There’s a word for that — evangelism — which conjures other words: Expensive, difficult, time-consuming.

If you’re tempted to argue that you’re the exception, here’s how to elucidate the advantages you’re seeing, but in a way that actually makes sense as a business strategy:

  • We’ve carved out a niche specific enough that no one else is actively targeting it. There are similar competitors A, B, and C, but they’re not targeting this niche because of X, and would be hard for them to switch into this niche because of Y. In fact, it’s quite possible that we’d end up partnering with or being bought by A, B, or C exactly because our idea is similar but out of their reach.
  • We’ve identified a market too small for the large, established players to address, but big enough to build a company. For example, because an 800-pound gorilla like Microsoft is so inefficient at building new software, it can’t go after a market unless there’s a billion dollars at stake. We think there’s a solid business to be made in this hundred-million-dollar market. However, whereas Microsoft can’t afford to build this from scratch, if we show good growth and profits it would be an obvious acquisition target for them.
  • We’ve created technology so different from the incumbents that we’re changing the conversation about how people solve this pain.  Though it’s different, our solution is very easy to describe and to use. (Example: Netflix)
  • Our target customer has traditionally solved this pain themselves or just lived with the pain rather than paying for relief. However, a combination of newly-available technology and modern mindset makes this the right time for a new software play.For example, my company Smart Bear created the first commercial peer code review tool. Before us, there was no software competition but there were plenty of alternative processes — looking over someone’s shoulder, sending emails with diffs, code review meetings, even “Formal Inspections.” By tackling a few specific annoyances with peer code review and leveraging newer technology (like the advent of ubiquitous version control), we completely changed what a “code review” could be.
  • It’s true that this industry hasn’t yet seen a software solution, but that’s not because they hate computers, but rather that it hasn’t been possible to address that market with software. Now it is because (pick one):
    • We’ve built an improbable team that spans geeks and industry insiders.
    • New hardware/networks have just appeared which makes this possible.
    • New attitudes towards the Internet (e.g. ubiquity of Facebook even among traditional technophobes) enables new workflows.
    • This industry is commoditized so giving a player the slightest edge is a big deal.
    • This industry is just now starting to show tangible signs of embracing technology.
    • We have three lead customers signed up for alpha testers; if we make them successful the case studies will be all the evangelism we’ll need.

Defining your company by the competition

Your company is defined by its own strengths, values, customers, and products, not by how it compares with other companies. You need a strong position, something that would be equally clear and compelling even if competitors didn’t exist.

Here’s some ways this mistake manifests:

  • “We combine the best traits of our competitors, letting them show the way to our success.”
    I like the idea that you can learn from the mistakes and successes of similar companies, but “combining the best” misses the point. There are specific tradeoffs each of those companies are making; things you see as “not best” might in fact be best for their target market. Why are you sure that your notion of “best” will result in enough customers who not only agree with you, but is so convinced that they’re willing to switch to you?
  • The rubric.
    A chart with one row for each “feature” and one column for each of six “competitors.” There’s checks and X’s everywhere, except of course a glowing, highlighted column representing your company which just happens to be full of checks. C’mon, everyone knows this is bullshit; it’s insulting.
  • “We’re just like competitor X, only we’re Y.”
    In that case you’re betting your future on the fact that Y is overwhelmingly compelling to a large market segment. X automatically has advantages over you (brand, customers, revenue, inside knowledge, a team, momentum), so Y had better be brain-explodingly awesome.
    Oh, and it’d better be impossible for X to implement Y — or even 1/3 of Y — themselves. Talk about putting your fate in others’ hands!
  • “We’re the same as X, only cheaper.”
    Being cheaper is a strategy, but it can’t be your only strategy. It’s too easy for competitors to change price or offer deals. Typically the best customers aren’t as price-sensitive anyway, so you’re actually biting off a less desirable segment of the market. Often this claim is paired with “We’ll do 70% of the features for 50% of the price,” but supplying less for less is not inspirational.

So how do you look inward to establish your company, contrasting with the competition but not letting the competition dictate your identity?

  • We’re targeting the market segment defined by X, Y, and Z.  We’ve spoken with 20 potential customers who match at least two of those criteria, and they agree our product is exactly what they need and that none of our competitors are doing an acceptable job addressing their issues.
  • Our company has core value X that we exude everywhere from our AdWords to our tech support to our product. (Example value: Simplicity. A simple product with few features, low-cost, pain-point obvious, not tackling complex problems, focussed on making life easier rather than on saving money.) We own this value because we’re completely committed; this is the one point on which we will never compromise. Our customers know it and value this too, which is why it doesn’t matter what features, prices, or advertisement our competitors have.
  • This is the competitive matrix. Note that each player in this space is targeting a different market segment, as is clear from feature selection, pricing, and advertising/messaging. We, too, are targeting a niche; as you can see our offering is consistent with owning that niche, and doesn’t overlap significantly with competitors. It would be difficult for any of them to “switch” into our niche, because as you can see they’d have to change the product, pricing, and their company’s persona; that’s a risk we’re willing to take.
  • We’re going after competitor X. We know they already have a ton of advantages over us — well-known, well understood, and a deep feature list. However they haven’t done anything new in 3 years and we have evidence that their customer base is pissed off. Not only that, they’re famous for annoying attributes A, B, and C (Examples: buggy, slow, confusing, must install, expensive, crap tech support). We see a huge opportunity in their wake of destruction, vacuuming up their customers with our overwhelming advantage. They can’t do this themselves because they’re too big to turn the ship, and anyway the past 3 years shows they’re not able to change.

What else?

How do you cope with competition, incorporating it into your strategy while not letting it consume you? Leave a comment and join the conversation.



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The bowling pin strategy

A huge challenge for user-generated websites is overcoming the chicken-and-egg problem: attracting users and contributors when you are starting with zero content. One way to approach this challenge is to use what Geoffrey Moore calls the bowling pin strategy: find a niche where the chicken-and-egg problem is more easily overcome and then find ways to hop from that niche to other niches and eventually to the broader market.

Facebook executed the bowling pin strategy brilliantly by starting at Harvard and then spreading out to other colleges and eventually the general public.  If Facebook started out with, say, 1000 users spread randomly across the world, it wouldn’t have been very useful to anyone.  But having the first 1000 users at Harvard made it extremely useful to Harvard students.  Those students in turn had friends at other colleges, allowing Facebook to hop from one school to another.

Yelp also used a bowling pin strategy by focusing first on getting critical mass in one location – San Francisco – and then expanding out from there.  They also focused on activities that (at the time) social networking users favored: dining out, clubbing and shopping. Contrast this to their direct competitors that were started around the same time, were equally well funded, yet have been far less successful.

How do you identify a good initial niche?  First, it has to be a true community – people who have shared interests and frequently interact with one another.  They should also have a particularly strong need for your product to be willing to put up with an initial lack of content. Stack Overflow chose programmers as their first niche, presumably because that’s a community where the Stack Overflow founders were influential and where the competing websites weren’t satisfying demand. Quora chose technology investors and entrepreneurs, presumably also because that’s where the founders were influential and well connected. Both of these niches tend to be very active online and are likely to have have many other interests, hence the spillover potential into other niches is high. (Stack Overflow’s cooking site is growing nicely – many of the initial users are programmers who crossed over).

Location based services like Foursquare started out focused primarily on dense cities like New York City where users are more likely to serendipitously bump into friends or use tips to discover new things. Facebook has such massive scale that it is able to roll out its LBS product (Places) to 500M users at once and not bother with a niche strategy.  Presumably certain groups are more likely to use Facebook check-ins than others, but with Facebook’s scale they can let the users figure this out instead of having to plan it deliberately. That said, history suggests that big companies who rely on this “carpet bombing strategy” are often upended by focused startups who take over one niche at a time.

Real Unfair Advantages



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This is Part 2 of the series: 5 lessons from 150 startup pitches.

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What if someone copies your awesome business idea?

About twenty people on Answers OnStartups have asked this question in one form or another:

When I meet an angel investor, he may ask: “What if a big company copies your idea and develops the same website as yours after your website goes public?”

How can I answer this question?

No, the question is: What are you doing now knowing that a big company will copy your idea?

No, wait, the real question is: What are you going to do when another smart, scrappy startup copies it, and gets $10m in funding, and is thrice featured on TechCrunch?

No, wait, I’m sorry, the real question is: What are you going to do when there are four totally free, open-source competitors?

No wait, I forgot, actually the question is: What happens when employee #2 makes off with your code and roadmap and marketing data and customer list, moves to Bolivia, and starts selling your stuff world-wide at one-tenth the price?

The good news: There are good answers to these questions!

The bad news: Almost no one I talk to has good answers, but they think they do. And that’s fatal, because it means they’re not working towards remedying that situation. Which means when one of the above scenarios happens, it will be too late.

The first step is admitting you have a problem.

Last week I detailed the most common misconceptions about competitive advantages, so go read that if you haven’t already.

To summarize: Anything that can be copied will be copied, including features, marketing copy, and pricing. Anything you read on popular blogs is also read by everyone else. You don’t have an “edge” just because you’re passionate, hard-working, or “lean.”

The only real competitive advantage is that which cannot be copied and cannot be bought.

Like what?

Insider information

They say the only way to consistently make money on Wall Street is to have insider information. Unfortunately it’s not a joke, and although it’s illegal (and people occasionally go to jail for it), those in the know will tell you it’s the norm.

stock-dance

Fortunately, using intimate knowledge of an industry and the specific pain points within an industry is a perfectly legal unfair advantage for a startup.

Here’s a real-world example of how this advantage manifests. Adriana has been a psychiatrist for 10 years; she understands the ins and outs of that business. During a lull in her practice she got a serendipitous opportunity to shift gears completely and ended up leading software product development teams.  (Turns out that for big-business project management it’s more valuable to be a sensible thinker and counselor than to be an expert in debugging legacy C++ code.)

Now Adriana has an epiphany: Traditional practice-management software for psychiatrists totally sucks; she knows both the pain points and the existing software first-hand. But now she has the vision and ability to design her own software, capitalizing on modern trends (e.g. a web application instead of cumbersome installed applications) and new interpretations of HIPPA regulation (which allows web-based applications to store medical records like patient histories).

Adriana holds a unique position: Expert in the industry, able to “geek out” with her target customer, yet capable of leading a product team. Even if someone else saw Adriana’s product after the fact, it’s almost impossible to find a person — or even assemble a team — who has more integrated knowledge. At best, they could copy. Of course by then Adriana has moved on to version two.

Single-minded, uncompromising obsession with One Thing

A popular comment on the previous post was that a “Unique Feature” could be a competitive advantage in some circumstances. Some examples of a feature being a company’s primary advantage are:

  • Apple compromises everything in the name of design. Their products are over-priced (magically being profitable at half the price 12 months after release), buggy (how many iOS debacles have there been?), and every experience I’ve had with their tech support has been atrocious, but man their stuff looks and feels nice! (I’m typing this on an Air and there’s an iPhone in my pocket, so no Apple fan-boy mail please.)
  • Google’s search algorithm was just better, therefore they won the eyeballs, therefore they were able to monetize. Sure Bing and Yahoo are good now, but the advantage lasted long enough.
  • Photodex is a little company you’ve never heard of I worked for in Austin in the 90′s. We made an image browser with thumbnail previews so you didn’t have to open each file individually to see what it was. (In the 90′s, y’all, before that was built into all the operating systems!) Our advantage was speed. Not the best, not the most stable, didn’t read the most formats, didn’t have the most features, just “fastest.” For many users of that product, speed wins; Photodex now makes tens of millions of dollars a year, and “speed” is still the only point on which they will not compromise.

However it’s not enough for a feature to merely be unique (like my mini-browser) because it’s still easily duplicated. Indeed, most of the innovations we’ve made at Smart Bear in the art of code review have already been duplicated by both commercial and open-source competitors.

Rather, this requires unwavering devotion to the One Thing that is (a) hard, and (b) you refuse to lose, no matter what.

Google has spent hundreds of millions of dollars on their search algorithm, the single biggest focus of the company even today, a decade after they decided that was their One Thing. They refuse to be beaten by competitors or black-hat hackers, whatever it takes.

37signals can build simple — almost trivial — software and earn three million customers because they absolutely will not compromise on their philosophy of simplicity, transparency, and owning their own company, and that’s something millions of people respect and support. Competitors could build trivial web applications too (as Joel Spolsky is fond of saying, “Their software is just a bunch of text fields!”), but without the single-minded obsession it’s just software with no features.

To remain un-copyable, your One Thing needs to be not just central to your existence, but also difficult to achieve. Google’s algorithm, combined with the hardware and software to implement a search of trillions of websites in 0.2 seconds, is hard to replicate; it took hundreds (thousands?) of really smart people at Microsoft and Yahoo years to catch up. 37signals’ ranting platform — a blog with 131k followers and a best-selling book — is nearly impossible to build even with a full-time army of insightful writers.

“Being hard to do” is still a true advantage, particularly when you devote your primary energy to it.

P.S. For more, here are detailed examples of how this mindset also sets up your sales pitch.

Personal authority

codereviewbook-smChris Brogan commands $22,000 for a single day of consulting in an industry (social media marketing) where all the information you need is already online and free. Joel Spolsky makes millions of dollars off bug tracking — an industry with hundreds of competitors and little innovation. My company Smart Bear sells the most expensive tool of its kind. How did we earn this powerful authority, and how can you earn this overwhelming advantage?

I’m a great example of someone who wasn’t an authority on anything, but built that authority over time to the point where now my company (Smart Bear) is untouchable as the leader in both revenue and ideas in the area of peer code review.

Not only was I not an expert on code review prior to building a code review tool, I wasn’t even an expert on software development processes generally! I didn’t give lectures, I didn’t have a blog, I didn’t have a column in Dr. Dobbs magazine, and most interesting of all, I didn’t even know “code review” was going to be what made the company successful!

Unfortunately all this “authority” crap takes years of expensive effort, and even then success is probably due as much to luck as anything else, so is it worthwhile? Yes, exactly because it takes years of effort and a little luck.

Authority cannot be purchased. You can’t raise VC money and then “have authority” in a year. A big company cannot just decide they want to be the thought-leaders in their field. Even a pack of hyper-intelligent geeks cannot automatically become authorities because it’s not about how well you can code.

But how does authority convert to revenue? Here’s one tiny example:

I give talks on peer code review at conferences. My competition pays thousands of dollars for a booth, then spends thousands advertising to attendees begging them to come to that booth, then gives sales pitches at the booth to uninterested passersby who are also being bombarded by other pitches and distracted by the general hubbub.

Whereas, because I’m a known authority on code review and software development, I get to talk for an entire hour to a captive, undistracted group of 100 people, self-selected as interested in code review. After the talk typically 5-20 people want to chat one-on-one. Some head straight to the booth to get a demo; for many I give a private demo of the product on sofas in the hallway. It’s not unusual to get $10,000-$50,000 in sales over the next three months from people who saw me at that talk.

That’s just one example!  Now add to that: What’s the effect of a blog that tens of thousands of people read? What’s the effect on sales of my writing the book that’s the modern authority of code review?

Authority is expensive and time-consuming to earn, no doubt. But it’s also an overwhelming, untouchable competitive advantage.

(P.S. I’m hoping that the authority I’m slowly earning from this blog will help when I launch my next venture. That’s not why I blog, but I certainly will leverage it when the time comes!)

(P.P.S. I apologize for blatantly abusing the word “authority,” considering I just lambasted everyone who does things like that.)

The Dream Team

The tech startup world is littered with famous killer teams: Gates & Allen, Steve & Steve, Page & Brin, Fried & DHH.

In each case, the founders were super-smart, had complimentary skill sets, worked together well (or well enough to get to important success milestones), and as a team represented a unique, powerful, and (in retrospect) unstoppable force.

Of course that’s easy to see in retrospect, and retrospect is a terrible teacher, but the principle can work for any startup, especially when your goals are more modest than being the next Google.

Take the success of ITWatchDogs, the company I helped bootstrap and eventually sell (before Smart Bear). The elements of our Dream Team were obvious from the start:

  • Varied skillsets. One experienced startup/business/salesman (Gerry), one proven software developer (me), one proven hardware developer (Michael).
  • Common vision. We agreed what the product ought to be and that the ultimate goal of the company was to sell it.
  • Insider knowledge. Gerry had done another successful startup in the same space, I had deep experience with the language and tools for embedded software, and Michael had decades of experience building inexpensive circuits and processors.

Of course a Dream Team doesn’t guarantee success but it significantly reduces the risk of the startup, and furthermore is difficult for the competition to duplicate.

This is especially true when someone on the team is already successful in their field, e.g. with a massively successful blog or a big startup success under their belt or a ridiculous rolodex. Since those are the kinds of competitive advantages that can’t be bought or consistently created, having that person on the team is by proxy a killer advantage.

P.S. This is the primary competitive advantage in a new startup I’m working on right now (to be announced soon), so shortly you’ll see another example of this theory and — better yet! — you and I both will witness over the subsequent months whether or not this really resulted in a killer advantage! (Yes of course I’ll share details!)

(The right) Celebrity endorsement

Hiten Shah’s third company is KISSMetrics. On the surface, it’s yet another “marketing metrics” company. This is a crowded, mature market with hundreds of competitors in every combination of large/small, expensive/mid/cheap/free, and product/service/hybrid.

But Hiten has something none of those competitors has: Investors and mentors who are celebrities in exactly the market he’s targeting. Folks like Dave McClureSean Ellis, and Eric Ries, all of whom not only help via conference call but actively promote KISSMetrics on their blogs, Twitter, and personal appearances.

How much advertising will it take for competitors to overcome Hiten’s endorsements and exposure?  Even if a competitor also wanted celebrity endorsement, these guys are taken, and in any field there’s a limited number of widely-known and respected authorities.

Many competitors have more features than KISSMetrics has. I can see the sales pitch now…

The customer objects: “Gee it would be nice to have all those features,” and Hiten responds “Well not really, because Dave, Sean, and Eric all say that those features are actually distractions and don’t add to your bottom line. Our features are the right ones, as evidenced by these 20 companies that have shown increases in revenue.”

Just on the basis of these advisors, Hiten will get hundreds if not thousands of customers. You can’t buy that kind of jumpstart, not even for millions of dollars, because it’s not about faceless leads who saw KISSMetrics in an ad, it’s people who trust Hiten because of his association with other people they already trust.

P.S. If you’re raising money, investors love to see a co-founder or even just an advisor who has been successful before. The VC game is more lemming-like than most care to admit.

Existing customers

…or as Frank Rizzo says: Open your ears, jackass!

Everyone you’ve ever sold to (and those who trialed but abandoned) possess the most valuable market research imaginable, and it’s the one thing a new competitor absolutely will not have.

This is kind of a cheat, because everyone says “I listen to my customers,” which (nowadays) is just as bullshit as “We’re passionate,” but it’s true that if you’re actively learning from your customers and you never stop moving, creating, innovating, and learning, that puts you ahead of most companies in the world.

As a company becomes successful it gains momentum, which means that it’s going in one direction with one philosophy. Like physical momentum, change becomes harder to affect. It’s logical; for example at Smart Bear we have 35,000 users, so making a drastic change to the user interface or typical workflow would mean too much retraining, even if the end result is better.

Even “cool, agile” companies like 37signals are trapped. They’ve been so clear and confident in their philosophy of “do less,” they cannot go after markets where “less” is not more but, actually, just less. For example, with more than a few sales people in a traditional sales organization it’s impossible to use Highrise — the folks-of-many-signal believe pipeline reports and geographic domains and integrated campaign management are unnecessary complications, but actually it’s Highrise that is unnecessary.

Of course the world is changing, and in particular your customers are changing. Normally this leaves room for the next competitor, but if you’re already entrenched you can leverage your existing status, insider knowledge, and revenue stream as long as you’re willing to change too.

You have more money, you’re better known, you have existing happy customers to help spread the word, you have employees to build new things, and you have more experience with what customers actually do and actually need, which means you should have the best insight.

Any new competitor would kill for just one of these advantages. If you’re not using them, how silly is that?

Zoho made exactly this argument to explain why they’re not terribly worried that Microsoft is now a direct competitor:

Companies don’t get killed by competition, they usually find creative ways to commit suicide. Office 2010 will be the end of Zoho, if we stop innovating, stop being nimble and flexible in our business model. Then again, if we stop all that, Zoho will die anyway, no Office 2010 needed to do the job.

37signals is trapped inside their self-imposed philosophy, but you don’t have to be.

Go git ‘em

Imitation might be the sincerest form of flattery, but it’s still sucks when someone does it to you.

Of course you can still battle it out in the marketplace, but you need something that can’t be duplicated, something they could never beat you on, then hang your hat on that and don’t look back.

Don’t despair if you don’t have an unfair advantage yet. I didn’t either when I started Smart Bear! But I built toward having some, and eventually earned it.

What else? What other competitive advantages can’t be easily copied, or if they are copied it doesn’t matter? Leave a comment and join the conversation.



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No, that IS NOT a competitive advantage



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This is part 1 of the series: 5 Lessons from 150 startup pitches.

Listening to first-time entrepreneurs talk about their competitive advantages is as predictably invalid as the local weatherman’s 10-day forecast.

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Between this blog and reviewing applications to Capital Factory I see hundreds of pitches a year. Every pitch has a section on competitive advantages, and quite literally 95% of the time the claimed competitive advantages are pathetic, unoriginal, and not really advantages at all.

The first clue that your competitive advantages aren’t actual advantages is that everyone else on Earth claims those advantages too!

P.S. Next week I’ll talk about what are real competitive advantages.

The following are not competitive advantages:

We have feature X.
This is an advantage only until others copy it, so it’s not long-term protection against competition. Indeed, the next company can observe what works well and what doesn’t, and than improve on your innovation. End users don’t care who thought it up, they just care how it works today.

We have the most features.
It’s common for older products to compete on the fact that they have more features than the competition. Trouble is, customers don’t want more features, they want the right features. As the competition also adds features, they reach a critical mass where they have all the features 80% of your customers want, and then just having “more” is no longer an interesting selling point.

We’re patenting our features.
“No one can compete with my blog because it’s copyrighted.” Silly, right?

That’s what you sound like when you claim that getting a software patent will protect you from competition. Except in certain industries (e.g. food, drug, medical), I’m unaware of companies who stave off quality competitors through patent holdings. Software patents are especially useless for small, bootstrapped startups. It’s even true in hardware: Every mp3 player uses zillions of patents, but that didn’t stop Apple from winning.

We’re better at SEO and social media.
80% of Americans believe they are better-than-average drivers. Can’t be true, right? Well 80% of the folks I meet tell me they’re way better than average at SEO, Twitter, and “building communities” whateverthehell that means.

Social media and SEO is ever-changing quicksand. You’re on top of Google today, gone tomorrow. Other companies being good — or better — is completely outside your control, so claiming that you have a sustainable advantage is poppycock.

We’re passionate.
Everyone has passion. What, you think everyone else quits their job, starts mowing through savings, works long hours, and yet has no passion? Passion is necessary but far from sufficient.

This is like saying, “My children are going to be more successful because I love them more than you love yours.” This makes investors roll their eyes and show you the door.

We have three PhDs / MBAs.
The landscape of successful startups is littered with people lacking post-graduate education. If you’ve lived in the software world for a few years you know the stuff they teach you in school is irrelevant, so who cares what degree you have? In all the interviews you’ve read about founders’ success, how many credit their MBA program? How many even have MBAs? It’s not bad to have a degree, but neither is it a significant advantage.

We work hard.
You hear about the 37signals guys working 30 hours per week and Tim Ferris just four hours (bullshit!), so you figure if you work a “healthy” 70 hours per week, you’ll win! But working harder is not, in fact, smarter. And even you could work 70 on-task hours per week, that’s still blown away by 10 developers at a funded company or even 10 passionate open source developers working part-time.

We’re cheaper.
It’s not bad to be cheaper. Indeed, at ITWatchDogs, the company I did before Smart Bear, being inexpensive was critical to our strategy. The key is that you cannot compete only on price, because then all a competitor has to do is lower their price. Established companies can destroy you with the “loss leader” strategy (e.g. when Microsoft put 1,000 developers on IE and gave it away for free, destroying the market for web browsers), newly funded companies can spend ludicrous amounts of money to get market share (even if it means taking you down with them), and anyone can implement a “freemium” model.

In the case of ITWatchDogs, the reasons we were cheaper were that (a) we sold direct instead through a channel, so our product wasn’t marked up 6x before it got to the customer, and (b) we used the newest, cheapest parts whereas our established competitors had stopped innovating and were using expensive 5-year-old parts.

So where does that leave us?

Haven’t I just claimed that the fruits of intense effort and innovation and one-upmanship isn’t enough?

Yes.

Innovative design and intellectual property are no longer long-term competitive advantages.

You live in the era of the flat world where millions of people have access to technology, education, and a powerful sales, marketing, and communication platform (the Internet).

You live in the era where the most powerful programming frameworks and tools are free, local broadband and high-availability servers are cheap, and world-class people are willing to work 60 hours/week in exchange for Ramen noodles and the chance to be a part of a cool new startup.

There’s too much energy, availability, intelligence and opportunity in the world to hide behind outdated notions of intellectual property.

Almost anything can be copied. In fact, I’d claim that anything of any value will be copied. It should be part of your business plan that other people will copy you.

Fortunately there’s plenty of ways to have true advantages that competition cannot readily overcome. Unfortunately, they’re difficult and rare. Of course they are! What, you thought creating and running a successful, untouchable startup was easy and commonplace?

Next week I’ll go into depth on some true unfair competitive advantages — ones that cannot be overcome even by a giant company, a funded company, a bootstrapped company, or an open-source movement.

Are these assertions unfair? Do you have more false-advantages to add? Leave a comment and join the conversation.



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5 Lessons from 150 startup pitches



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I just reviewed several hundred startup pitches for Capital Factory. Most were on paper and video; 20 were invited to pitch in person.

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Interesting patterns emerged:

  • Everyone makes the same classes of error.
  • Those who avoided just one of those errors stood out in the crowd.
  • These are problems with the business concept or the founder’s attitude, not specific to raising angel money.

You’re probably making a lot of these errors too.

Not that I blame you! After all, these became clear to me only after seeing hundreds of applications; you don’t have the luxury of that perspective.

So for the next few weeks I’m doing a series on these mistakes and what to do about them.  This post serves as a hyperlinked table of contents, so either bookmark this page or subscribe by email or RSS to get notified when new articles get posted.

Here’s the list:

  1. Invalid competitive advantages
    “Superior SEO” and “unique features” are not competitive advantages.
  2. Lacking an unfair advantage
    You need one killer advantage that no one on Earth can beat you on. (‘Cause you might get beaten on everything else!)
  3. No one said they’d buy it
    You don’t need statistically-significant studies before you begin, but it’s astonishing how many founders blaze ahead before they’ve found even a single person willing to give them money.
  4. Incorrect positioning against competition
    The two faults here are opposites: Believing that uniqueness means competition doesn’t exist, or defining yourself by the competition instead of constructing your own message.
  5. No significant route to customers (coming soon…)
    If your marketing strategy is to run A/B tests and build RSS subscribers, you’ve already lost.

There’s also this list, equally common but I didn’t feel the urge to write an entire blog post on each one:

  1. Unable to describe the company in 60 seconds.
    We’ve all heard of the elevator pitch, but when asked to produce it almost no one succeeded. This is important whether or not you’re raising money because it means you understand your customers and why they buy your stuff.
  2. Building for yourself instead of the market.
    “Scratching your own itch” is how many great ideas begin, but it’s not a business strategy. Often you assume your customer is the same as you — sees the problem the same way, wants to solve it your way, and wants to pay for it. But you’re explicitly not like your customers; for one thing, you have enough initiative and insight to quit your job to start a company. It’s easy to let your idiosyncratic preconceptions prevent you from observing what the larger market will accept.
  3. Pretending your faults don’t exist.
    You have all sorts of shortcomings: First startup, inexperienced, ignorant about how “sales” works, buggy software, whatever. None of it’s a problem if you’re willing to acknowledge and cope with it, but if you persist in lying to me and your customers about it, that’s a problem. (And a lie by omission is twice the lie.)
  4. Don’t know what you don’t know.
    I don’t care that your resume doesn’t prepare you for a startup — mine didn’t either! But if your answer to any question is “How do I know? I just do,” then I know right away you’re not only ignorant but incapable of fixing that ignorance. How do I know this will result in your business drifting aimlessly until you finally run out of money? I just do.

Stay tuned!  The first post in the series goes up Monday.



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Competition is overrated

Your #1 competitor starting out will always be the BACK button, nothing else. – Garry Tan

Suppose you have an idea for a startup, and then do some research only to discover there are already similar products on the market. You become disheartened and wonder if you should abandon your idea.

In fact, the existence of competing products is a meaningful signal, but not necessarily a negative one.  Here are some things to consider.

1) Almost every good idea has already been built. Sometimes new ideas are just ahead of their time. There were probably 50 companies that tried to do viral video sharing before YouTube. Before 2005, when YouTube was founded, relatively few users had broadband and video cameras. YouTube also took advantage of the latest version of Flash that could play videos seamlessly.

Other times existing companies simply didn’t execute well. Google and Facebook launched long after their competitors, but executed incredibly well and focused on the right things. When Google launched, other search engines like Yahoo, Excite, and Lycos were focused on becoming multipurpose “portals” and had de-prioritized search (Yahoo even outsourced their search technology).

2) The fact that other entrepreneurs thought the idea was good enough to build can be a positive signal. They probably went through some kind of vetting process like talking to target users and doing some market research. By launching later, you can piggyback off the work they’ve already done. That said, you do need to be careful not to get sucked into groupthink. For example, many techies follow the dictum “build something you would use yourself,” which leads to a glut of techie-centric products. There are tons Delicious and Digg clones even though it’s not clear those sites have appeal beyond their core techie audience.

3) That other people tried your idea without success could imply it’s a bad idea or simply that the timing or execution was wrong. Distinguishing between these cases is hard and where you should apply serious thought. If you think your competitors executed poorly, you should develop a theory of what they did wrong and how you’ll do better. Group buying had been tried a hundred times, but Groupon was the first to succeed, specifically by using coupons to track sales and by acquiring the local merchants first and then getting users instead of vice versa. If you think your competitor’s timing was off, you should have a thesis about what’s changed to make now the right time. These changes could come in a variety of forms: for example, it could be that users have become more sophisticated, the prices of key inputs have dropped, or that prerequisite technologies have become widely adopted.

Startups are primarly competing against indifference, lack of awareness, and lack of understanding — not other startups. For web startups this means you should worry about users simply not coming to your site, or when they do come, hitting the BACK button.

Steve Jobs single-handedly restructured the mobile industry

With the introduction of the iPhone, Steve Jobs achieved something that might be unique in the history of business: he single-handedly upended the power structure of a major industry.  In the US, before the iPhone, the carriers (Verizon, AT&T, Sprint, T-Mobile) had an ironclad grip on the rest of the value chain – particularly, handset makers and app makers.

Ask anyone who ran or invested in a mobile app startup pre-iPhone (I invested in one myself). Since the carriers had all the power, getting any distribution (which usually meant getting on the handset “deck”) meant doing a business development deal with the carriers. Business development in this case meant finding the right people at those companies, sending them iPods, taking them to baseball games, and basically figuring out ways to convince them to work with you instead of the 5,000 other people sending them iPods and baseball tickets.  The basis of competition was salesmanship and capital, not innovation or quality.

The carriers had so much power because consumers made their purchasing decisions by choosing a carrier first and a handset second. Post-iPhone, tens of millions of people started choosing handsets over carriers. People like me suffer through AT&T’s poor service and aggressive pricing because I love the iPhone so much.

I’ve talked to a number of mobile app startups lately who say their former contacts at the carriers are shell shocked: no one is knocking on their doors anymore. I guess they have to buy their own iPods and baseball tickets now.

Yes, Apple has rejected some apps for seemingly arbtrary or selfish reasons and imposed aggressive controls on developers. But the iPhone also paved the way for Android and a new wave of handset development. The people griping about Apple’s “closed system” are generally people who are new to the industry and didn’t realize how bad it was before.

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