Ten questions for a high-tech startup
Published on ZDNet News: April 3, 2003, 4:55 AM PT
COMMENTARY--Things will be looking up for high-tech. With the shakeout being so severe and investments curtailed for so long, innovation is again needed. But spending is still tight so individuals planning to launch a high-tech start-up in 2003 need to make sure their business plans are solid. We'll examine five market issues and five management issues that entrepreneurs need to deal with in order to survive.
1. Is there a 'killer' application for the first targeted niche? Or is there merely ‘a solution looking for a problem’? Even the best high-tech firms such as Nokia, can fall into the trap of thinking that if they build the proverbial 'better mousetrap' the world is going to beat a path to their door. But instead of beating a path to bankruptcy court, the creator of a start-up ought really to think deeply about the value of what they are trying to sell. What is the ‘pain’ that the innovation alleviates? And does is hurt enough to make potential customers spend?
2. Do you know exactly what your target niche is? Do you know why consumers in that niche will buy? Do you know just how to reach them, where they gather? Do you know what media they read, watch or listen to? Who are the opinion leaders among them? It's not wise in 2003 to spend a lot on mass advertising for a start-up. Given that a niche must be addressed and not a mass market, it is, in fact, downright foolish. Better to invest in some good 'frugal marketing', where you can take advantage of media pundits who mold opinion. They'll do much of your early PR work for you if you work smart! This is called 'buzz marketing', and it's a hot new topic in itself – and for good reason.
3. Do you understand the 'adoption process' among the customers in your target niche? The high-tech industry is tremendously interwoven and complex. In many cases an innovation cannot succeed unless various parties adopt the concept. One of the authors served on a supervisory board of a start-up in the mobile telephony sector. While the innovation was terrific, adoption required both the adaptation of the SIM chip, the adoption of the product by handset manufacturers, and the provision of the new service by operators. Breaking into this circle was a real challenge. Have you accounted for these challenges in your plan?
4. Are you aware of the specific needs of each phase of the adoption curve? As the firm matures, the start-up must find managers better suited to the needs of new phases. Early on in the adoption cycle you will need customer intimacy: because the focus is on one or two niches, a deep understanding of those niches is critical. When the product takes off, operational excellence--or the need to effectively run the distribution chain--becomes the key competence. Geoffrey Moore talks about a third phase, the Plus Ones, in which you will have to quickly market a lot of big innovations. In a successful high-tech start-up you can run through all three phases in less than five years. Two revolutions in five years would leave anyone disturbed and breathless!
5. Are your budget estimates realistic? What percentage of the market must you gain for your business to work? What percentage of the customers' budget are you assuming your sales will win? Have you done a scenario analysis for the key variables of your best case, most likely case and worst case? Are those percentages doable or wildly optimistic? Do you feel a sense of optimism while still being but still grounded in reality?
6. Passion and Trustworthiness: does the would-be entrepeneur have a passion to succeed? Business angels and venture capitalists recently listed some twenty-seven investment criteria. The most important was enthusiasm, with trustworthiness placed second. Being a successful entrepeneur is more than a full-time job. It is a calling that demands almost religious commitment. No new firm will succeed without considerable investment of time on the part of its founders. Hard work, however, means nothing unless the new company can establish a reputation for trustworthiness. If a company's management is based upon a short-term philosophy of 'grab the money and run', then that company will not last long. Trustworthiness needs to be a core to the would-be entrepreneur.
7. What kind of track record does a would-be entrepreneur have? If you have experience in the industry you wish to start in, you have an edge over an inexperienced competitor. Even if one has tried other start-ups and failed, the lessons learned make one a better candidate than one who has no entrepreneurial experience whatsoever. It is not whether one has stumbled, but how one reacts when they do stumble that is important. While all entrepreneurs stumble, the ones who keep trying will eventually succeed.
8. Is the would-be entrepreneur coachable? A successful entrepreneur knows he doesn't know it all and will seek advice, gather data, blend conflicting information, and synthesize these inputs to form the optimal path. A smart manager of a new and growing business ought to listen to a whole network of advisors who can not only contribute experience and expertise, but can provide contacts. The ability to hear criticism and new ideas objectively is important for success.
In addition, the courage to ask for help when needed is a requirement to succeed. Although hearing criticism can be difficult, it is important to be able to view this as an opinion. Others’ opinions are not always correct; however, understanding their perception might lead to another solution or useful perception.
Differing viewpoints can be very valuable in understanding how the people around you perceive your situation. Digging past another’s perception and understanding how they arrived at it may be important information for future dealings with them.
9. Leadership and Vision: Entrepreneurs who can motivate, persuade, influence, and communicate effectively are indispensable leaders. A manager whose sole means of motivating employees is to fire them is bound to have limited effectiveness in the long run. Even GE's Jack Welch and Daimler's Juergen Schrempp, despite their initial toughness, recognized all along there is more to leadership than downsizing. High emotional intelligence skills, such as those possessed by Nokia's Jorma Ollila or Nissan's Carlos Ghosn, enhance a leader’s ability to be more effective with employees, strategic partners, and investors.
Also, successful entrepreneurs create meaningful visions of the future, which can inspire involvement in the venture. Followers will go above and beyond the call of duty to help accomplish these far-reaching goals. Leaders with high emotional intelligence and competence in social skills are therefore more effective in building social capital.
In addition, an understanding of global history and different cultures is becoming more and more essential for those wishing to do business in Asia or an expanding European Union.
10. Does the future entrepreneur have a realistic path to a liquidity event if needing investors? A vague plan to some future IPO is not good enough. IPOs have cooled, yet ventures still need an exit to make them attractive for investors. If acquisition potentials are not identified in the beginning, it is unlikely the venture can be acquired to produce the best returns for the investors. Identifying potential acquisition partners will allow you to position your venture most attractively for an acquisition. When entrepreneurs have not thought out a liquidity exit path, it may be an indicator they are not focused on the eventual transition of the company. In addition, this may be an indicator the entrepreneur is more interested in building a lifestyle business rather than a high growth venture. Few goals are met unless you plan for them. The path to an exit may change over time, however, it is necessary to have a plan that is regularly updated and reviewed to allow investors to cash out.
Karl Moore is a professor who teaches marketing and strategy at McGill University in Montreal and an associate Fellow of Templeton College, Oxford University. Karl worked in the high tech industry for 11 years in sales and marketing management positions with IBM, Bull and Hitachi. He has been on the advisory board of Holland Ventures a leading European high tech VC.Kai Peters is the Dean of the Rotterdam School of Management in the Netherlands. Kai has worked in marketing for IBM, and holds supervisory and advisory board positions for both venture capitalists and start ups including Park Ventures in the Netherlands. He regularly advises start ups both through Twinning, and through the RSM.
Richard Sudek is a business angel who has worked in the high tech industry for over 20 years. He is currently is an active Angel investor, sits on the Tech Coast Angels Executive Committee, and is a member of the Orange Coast Venture Group. He currently serves on the Venture Capital committee for the Tech Coast Angels.
