Here are some notes from the talk Jeff Clavier gave at BMA this morning. A lot of the talk was about the enterprise side of the equation. “What does it take to get an enterprise software play to market” type of questions. But the discussion started out with a preface not to take generalizations too seriously. People will say “VCs don’t really do that” or “you’re never going to see that from a VC”, but that needs to be taken with a grain of salt. Normally these statements are overgeneralized. Different VCs act differently, and behavior that you would never see from one group may not be that uncommon from another. So pay attention and make sure to contextualize the information you get.
First off, it’s hard to create an enterprise startup. Something like 10,000 enterprise software companies were funded during the bubble, and of those about 5 or 6 thousand remain. That’s a lot of competition. Even if you pick a niche to fill, it can still be very difficult. There are 20 or 30 storage companies for example, entry into that area is very costly and risky. VCs in general recognize that there was an over investment in enterprise plays. It’s not that they won’t back a play like this, it just tends to be the very big deal and it has to be something differentiated.
There are four main factors that commonly go into evaluating an opportunity: whitespace, direct experience, disruption, and the team:
The first is the idea itself. How good is the idea? How differentiated is it? Jeff said this is called “whitespace” sometimes, the blank area between the idea you have and the adjacent ideas. Map out the whitespace and make sure the area is big enough. Is it referencable whitespace? Can you explain to investors why your idea is different?
Direct experience in putting the solution together, like the “scratch your own itch” maxim from open source, is a good litmus test for the general validity of the product. If you made your product because you needed it yourself, there’s a good chance others out there might need it also.
Disruption means cost savings in some way. It may be a sea change in technology that drives cost reduction, or new methods, or a new business model. But it needs to be something big. The savings needs to be significant enough to outweigh the risk of switching to the new system.
Sometimes teams of people just work right. People will toss money at them just to see what happens. If your team has a proven track record it can go a long way toward helping out with the current effort. Jeff said something like if you have the right people you can paint anything on “the canvas of the team”, I liked that turn of phrase. Sifry mentioned paying attention to the corporate DNA that you’re building last week. This is always important, funding or no funding. There’s just no substitute for having good people willing to work together.
Based on your idea you have to define how you sell and what your ecosystem looks like. Ecosystem means your customers, competitors, partners, and people who might be either competitors or partners. How high of a hurdle is there for market entry? Who can you potentially target as a partner? Sizing of the market is one of the most difficult things to do. Pick meaningful numbers. The size of the market overall means nothing, the addressable portion of the market is what you need to know. Everyone likes to say they will have 20 or 40 percent of the market, and that simply never happens. You’re lucky if it’s 1 or 2 percent. Look at behavior within the ecosystem. What are the purchase habits, what is the lead time, budgets, deployment time? What are the trends? Lots of funding in an area is a predictor of price pressure, it’s actually not a good thing. Get out there and talk to people. Network with others in your market. Find people who have started successful businesses in the same area. Research online as well. There are sure to be blogs that give info about the area.
Sharing your sale with a consulting company is not “leaving value on the table”, it’s part of building your ecosystem. Of course you have to find the right consulting company, someone who won’t take the money and run. Eventually that consultancy can be a valuable partner, helping to bring you business.
Frequently there is a point at which you have to choose continued growth or profitability. If you need to reinvest enough of your profits to keep growing, and you need money to do so, that’s a good time to think about funding. You need the right mix of growth, partnerships, differentiation, and guts to keep growing though. That’s true if you need funding or not. If you want sustainability you need diversity. Diversified revenue and multiple product lines. It’s hard to get real big with a singular focus. How do you measure diversity against a loss of focus? Make sure you have a repeatable sales process for what you have and that the product is up and established before looking at adjacent opportunities.
What can you do as entrepreneurs? Find people who want to join for no pay. Find people with the same passion and the same willingness to take a risk. Network. Try to find like-minded people and they’ll show you to the pockets of cash needed to keep your business up and going. Find VCs speaking at events. The VCs are out there normally cause they’re looking to tap into deals, they’re receptive then. Give them your elevator pitch and gage their interest. Don’t bother cold calling on VCs, it’s not worth the time. If the VC seems interested, cozy up to their assistant. The VCs assistant is your best connection, they have great info for you (where the VC is, how you can contact them, when they’ll be back, etc). Mine your own network. Find people with connections to VCs, strong connections, connections that get phone calls returned. Sometimes you can do premarket meetings with VCs. If you’re not ready for funding you can present what you are working on, just to get their feedback and educate them somewhat. Then when you’re ready for funding they’re already familiar with you and what your position is.