Basis for Altus' methodology published in Harvard Business Review

Regular readers of this blog know that we (Altus Alliance) have been working with Mark Leslie for 2 years putting into practice the framework that Mark and Chuck Holloway have been developing over the last few years that we anticipated would be ground-breaking for the tech startup world. Mark has previewed this framework with some select audiences in the venture community which has led to several people very positively about it. These have included VC’s such David Cowan, Ross Mayfield, Tim Oren, and Jason Ball. There was also a recent post by Ed Sim on “When to hire a VP of Sales” that espoused ideas strikingly similar to Leslie’s framework. One of the most popular posts on this blog has been “What does Vinod Khosla know about Web 2.0 that others don't?” that recapped my take on the applicability of Leslie’s framework in the Web 2.0 context. With the recent publication, we have drafted a news brief that we’re sending out to a few of our contacts that I’ve previewed below.

 

Venture Consultancy, Altus Alliance, delivers on the promise of the Sales Learning Curve – published in the Harvard Business Review this month.

 

For the last 3 years, over 30 companies have sought out a new method to grow their companies and challenge the traditional strategy of startups who are taught to raise as much money as possible, grow a sales force and “get big fast.”  One of the core elements of the new approach is that the cheapest and most sustainable form of capital was revenue.  Another, is that when you introduce new products, there’s an inevitable period of “bumping around in the dark” while you refine your product, marketing and sales strategy and execution where you want to avoid over-investing in sales resources. In other words, slow down the initial trajectory in order to speed up the path to scalable and profitable revenues. These guiding principles formed the basis of a venture consultancy (Altus Alliance) focused on helping early stage companies gain revenue traction in a manner that preserves and expands their limited cash reserves.

 

At the same time, in the Bay Area, the former CEO of Veritas (Mark Leslie who is a current Stanford Graduate School of Business professor) was formulating a ground-breaking framework published this month after years of development in the Harvard Business Review (HBR). This framework had a strikingly similar premise to what Altus was implementing with its clients in Seattle. Mark is a member of an extremely small cadre of entrepreneurs who have taken a company from zero revenue to well over $1Billion while sitting in the CEO seat. With billions of dollars of venture capital residing down the street from Stanford University on Sand Hill Road, Leslie and his Stanford colleague Charles Holloway (the Kleiner Perkins Caufield & Byers Professor of Management) have been attempting to answer a fundamental question, “why does it always take longer and cost more to build a high-tech company than anyone ever expects?” For all the intellect, experience and graduate degrees in the venture capital industry, the sad truth is that 80 percent of venture capital investments do not pan out.

 

The answer (at least a key one), according to Leslie and Holloway lies in the Sales Learning Curve laid out in the pages of the HBR which they hope will prove as powerful a construct in the high tech sector as the Manufacturing Learning Curve (MLC) was to the manufacturing sector at an earlier time. Today, manufacturers wouldn’t think of running their operation without tracking the MLC because of the dramatic improvements in productivity that it offers. Similarly, Leslie and Holloway believe the SLC holds the potential to change fundamentally how high tech companies are managed, and they believe that it will lead to more high tech companies reaching the promised land of “positive free cash flow.”

 

“Because new-product launches often take longer and cost more than expected, many promising offerings are prematurely aborted. Smart companies give themselves time and money enough to climb the sales learning curve before ramping up the sales force.” Harvard Business Review, July 2006

 

Leslie refers to the type of sales people you need at the early stages as “Renaissance Rep” as opposed to “Coin Operated Rep” that you want when you have a proven, repeatable sales process. Renaissance Reps have strong entrepreneurial and product management skills and also must be resourceful, able to develop their own sales models and collateral materials as needed. In addition to its SLC practice, Altus has set itself apart by offering its clients direct assistance as “renaissance reps”, closing initial deals, iterating and improving on the initial sales process and generating initial revenues.

 

In 2004, the principals of Altus Alliance and Mark Leslie had the opportunity to meet and found great commonality in their respective experiences. Mark’s SLC thought leadership provided a more formalized structure to the approach Altus had been using in its work with clients. Since that first meeting, Altus became the first firm to become practitioners of the SLC framework. This approach has been at the core of Altus’ approach (even before hearing of the SLC) and has led to numerous successes with its clients including four successful exits in the last year alone.

 

 

The following is an abstract of the Sales Learning Curve paper published in the Harvard Business Review that I highly recommend reading (you can get an earlier version on our website from when Mark presented at a CEO briefing we hosted):

The Sales Learning Curve by Mark Leslie, Charles A. Holloway
Harvard Business Review - July 2006 Issue Reprint # R0607J

When a company launches a new product into a new market, the temptation is to ramp up sales force capacity immediately to gain customers as quickly as possible. But hiring a full sales force too early just causes the firm to burn through cash and fail to meet revenue expectations. Before it can sell an innovative product efficiently, the entire organization needs to learn how customers will acquire and use it, a process the authors call the sales learning curve: The company--marketing, sales, product support, and product development--and its customers transfer knowledge and experience back and forth. As customers adopt the product, the firm modifies both the offering and the processes associated with making and selling it. The more a company learns about the sales process, the more efficient it becomes at selling, and the higher the sales yield. As the sales yield increases, the sales learning process unfolds in three distinct phases--initiation, transition, and execution. Each phase requires a different size--and kind--of sales force and represents a different stage in a company's production, marketing, and sales strategies. Adjusting those strategies as the firm progresses along the sales learning curve allows managers to plan resource allocation more accurately, set appropriate expectations, avoid disastrous cash shortfalls, and reduce both the time and money required to turn a profit.

Sun Valley Angel Investor event

Yesterday, we wrapped up the angel investor event in Sun Valley orchestrated by the Keiretsu Forum. The weekend offered the attendees a chance to golf, hike, raft, bike, relax, etc. before heading home and making way for Gates, Buffett, Murdoch, the Google guys and the rest of perhaps the biggest collection of billionaires in the world at the Allen & Company conference that takes place each year in Sun Valley. Given the short notice of the event, it was well attended with angel investors coming in from Seattle, Boise, San Francisco, Denver, D.C., Atlanta and Sun Valley. They heard presentations from 3 companies in a wide range of arenas – Voxilla (operates in the VoIP space), Festival Media (trying to do what NASCAR did for stock car racing in the festivals business), and Positron (exclusive licensee of some killer Dept of Energy IP in what’s called “non destructive testing”). They all did a nice job presenting but I was most intrigued by Positron. If they can execute, they are going to be picked up by someone like GE.

 

Friday evening, I hosted a gathering at our place that was highlighted by a fireside chat with Debbi and Paul Brainerd. Paul is credited with creating the desktop publishing industry by founding Aldus which created the landmark PageMaker product. Aldus was purchased in the mid-90’s by Adobe for over a half billion dollars. Paul turned his attention towards philanthropy and became one of the key people who turned Seattle into a hotbed for philanthropic innovation along with a few others such as Scott Oki (longtime MSFT exec who started Microsoft’s international business), Jeff Brotman (co-founder of Costco) and of course Bill Gates. Paul and Debbi are amazing people who’ve done tremendous work with the Brainerd Foundation, Social Venture Partners, IslandWood and many other organizations. They spent most of their time talking about SVP and IslandWood – both stellar organizations I’ve had first-hand exposure to.

 

It was fun to see all of the relationships that were built throughout the few days people were in town. As I’d hoped, I thought there’d be benefit in cross-pollinating angel investors from around the country. There were already discussions about doing this more often as well as having collaboration from a few angel groups around the Northwest that are interested in joining forces with the Keiretsu Forum. For example, there is a great angel group in Boise that has many seasoned entrepreneurs and successful executives who’ve moved to the Boise area. One of their leaders (Phil Bradley – CFO of ProClarity which was recently purchased by Microsoft) attended the event and is the kind of seasoned entrepreneur enriching the startup community in Idaho which is still growing. He saw a number of synergies with the Keiretsu Forum that could benefit Idaho’s startup ecosystem.

Angel investors: How to write off a trip to Sun Valley

The following article about an upcoming "Best of the Best" Angel investor confab was posted on SunValleyOnline.com:

“Angel investors” are a critical part of the funding ecosystem for young companies. Virtually every household name in the technology business (Google, Yahoo, Apple, etc.), for example, got off the ground due to angel investors. There are over 200 angel investment organizations throughout N. America. The largest of them all is called the Keiretsu Forum and has members ranging from the former head of Charles Schwab to numerous “serial entrepreneurs” who want to put their money to work in this exciting (and high risk) form of investing. Dave Chase, a Sun Valley-based tech industry veteran, SunValleyOnline blogger and Keiretsu Forum Seattle member conceived of the idea bringing the best angel investing opportunities from around the country to a forum in Sun Valley that the Keiretsu Forum leadership embraced. The event will take place just prior to the Allen & Company conference at the Sun Valley Lodge (July 6-9).

From the Keiretsu Forum’s release: “This July the Keiretsu Forum will host a special "Best of the Best" Keiretsu Forum weekend in Sun Valley, Idaho. Keiretsu Members and special guests will review presentations from the three "Best of the Best" portfolio prospects, enjoy an evening reception with a fireside chat with PC industry and venture philanthropy pioneer Paul Brainerd and a relaxing weekend of hiking, golf and guided fly fishing with fellow K4 Members from around the country.” The Keiretsu Forum is open to Accredited Investors. If you are an accredited investor interested in attending or joining the Keiretsu Forum, please contact SunValleyOnline (letters@sunvalleyonline.com) specifying your desire to receive an invitation.

If you are an angel investor, I hope you can join us in Sun Valley and learn more about some hot young companies and the Keiretsu Forum.

Moving Memorial Day tribute

I read a moving Memorial Day tribute written by a friend of mine that I thought was worth sharing.

A United States Marine was laid to rest last week at the Veterans Cemetery in Boulder City, Nevada. He was an American hero. A World War II and Korean War veteran. He was a member of what Tom Brokaw calls the “Greatest Generation”. Private First Class, George Donald Lotz was a man I barely knew. This Marine was my father.

Read on for more.

The story gave me goose bumps. The stories of men like my friend's father are unimaginable. It’s hard to say anything more than a huge “Thank you” to them.

Something his father and vets like him may have found surprising was my experience when I lived in Japan as a kid (30+ years after the war). Countless times, older Japanese would walk up to me (seeing that I was an American) and simply say “thank you” which may have been the only English words they knew. At first I was confused why they were saying that to me until I asked some Japanese to explain. They were saying thank you to me as a representative of our country (albeit a 10 year old representative) for how we treated their country after a brutal war. Today, they are now among our best friends in the world due to how we treated them after victory. That was a part of what the men like my friend's dad fought for — demonstrating a humanity that many victors of past wars hadn’t shown.

Blog silence broken

My apologies for going silent for a few weeks. My somewhat limited blogging time has been focused on a blog I have with a local site in Sun Valley (www.sunvalleyonline.com). I blog on both local topics (e.g., growth related issues facing much of the Rocky Mountain West) as well as “Main Street Marketing” related topics. It’s the latter topic that has the most applicability to this blog. While greater and greater percentages of marketing budgets are going to the Internet, there’s been relatively little change with what I’m calling Main Street Marketers. These are the companies that fill most community newspapers and Yellow Pages books. They include restaurant owners, local retailers, insurance agents, real estate brokers/agents, nurseries, contractors, and franchisees of national franchises (and many more). The latest figures I’ve seen have nearly 1/3 of all media consumption taking place online yet less than 1% of the ad budgets of Main Street Marketers’ budgets have shifted to online. From the time I worked on Sidewalk (now CitySearch) starting in ’95 to seeing MSN/Yahoo/Google strive to get local businesses to spend search marketing dollars, it’s been a tough nut to crack as the cost of sale is usually quite high to profitably serve that market. That said, a > 30:1 disparity remains tantalizing and it’s clear that the newspapers and yellow pages companies have the lock on those budgets for now. I’m immersing myself in these issues as I think there will be ample opportunity to correct the imbalance between consumption and spend.

 

As you’ll see if you read some of my posts, many of the issues I’m discussing are what were discussed with “Madison Avenue Marketers” that have huge budgets and tremendous resources to evaluate online. Main Street Marketers don’t have those kinds of resources. Typically the owner of the business is also the Chief Marketing Officer among the many hats they wear. They are often worrying about issues that are in their face (e.g., employee turnover, excess inventory, etc.) versus having the luxury to think strategically about the fundamental changes that have happened with their customers’ behavior. One quote I got from a very successful retailer was eye-opening. He said that he just advertised in the newspaper (cutting out radio & TV) and he didn’t want to complicate his life by taking on online advertising. He went on to say that you never know if advertising works anyway so why complicate things. I had some responses that changed his perspective (and game plan) but nonetheless it’s telling to see where Main Street Marketers’ heads are at. Periodically, I’ll share what I’m learning from talking with the small business owners that I’m getting to know by living in this small town. While there are still big $$ to tap with Madison Avenue Marketers that’s going to towards TV, etc., at least as large of untapped budgets are with Main Street Marketers.

 

Here’s a sampling of some of the posts I’ve had geared toward that audience…

 

Political Phone Spam’s effect on voters -- political candidates and municipalities are also significant buyers of local media so I’m hoping to shake up their thinking so they don’t waste money doing ineffective advertising

Are you part of the problem/solution for 5 million lbs of waste?  -- I did some back of the envelope math on the amount of waste the local papers generate and why local businesses (most of who consider themselves environmentally aware) are contributing to the issue

Once every 50 year occurrence affecting valley businesses - learn more -- this recaps a session I was asked to give by the local chamber of commerce on Internet marketing

Event Sponsorship Risks & Best Practices -- I’ve been a proponent for a long time of the value of event sponsorship however it’s very easy to waste a bunch of money doing it. I outlined some best/worst practices in this mini-series.

How non-profits benefit from blogs -- the local papers get somewhere between $250,000 and $500,000 from local non-profits in a community of 20,000 people. I think it’s a tremendous waste of money that could be eliminated by blogging so I advocated for that in this post.

The story behind Microsoft opening up its IP

With the formation of Wallop out of Microsoft Research, Microsoft's IP Licensing Group is again in the news. Read about it here, here and here. A year ago, Mary Jo Foley reported on the fact that Microsoft has established a new division charged with licensing Microsoft-Research-developed technologies to startups and venture capitalists. This is the next step started over a year ago. My former colleague Bryan Mistele based his new company (Inrix) on Microsoft Research's predictive traffic technology and received one of the largest seed rounds in Seattle in some time (interview here). I'm going to reach out to a friend in that department to learn more. Stay tuned...Here's a list of what they are making available so far.

David Kaefer is the Director of Business Development for Microsoft’s IP Licensing group. The Seattle area’s largest A round in the last year went to the first licensee of this new effort (Inrix) to more broadly license Microsoft’s broad base of under-utilized IP. It’s worth taking note when something as significant as that happens so thought it was worth sitting down for a chat with David. The technologies they are making available tend to be "pre commercial" in that they aren't quite ready for primetime in terms of a final product form in areas that are getting funding. They tend to be standalone products or at least a substantial feature of a bigger product.

Chase Market Velocity (CMV): How are you going to measure the success of the program?

David Kaefer (DK): Success of this program is indicated in many ways, but in the short term it is shown with every licensing agreement we sign. Because of the nature of these agreements, the ultimate success and benefits from this program will be borne out over the long term.

CMV: The first licensee (Inrix) was all ex-MS people? While I assume you don’t have to be an ex-MSFTie to license the technology, why would an ex-Sun person (as an example) consider licensing your IP?

DK: Inrix technically wasn’t a part of this IP Ventures program, but rather that agreement occurred as a result of the kinds of inquiries we received on a regular basis and is an example of some of the impetus for the creation of the IP Ventures program. This program is open to all comers, and we hope that it is interesting to all parties regardless of their former employer. The program offers rich, stand alone technology that is best utilized by a party who has the capability of taking it from the prototype phase into the production phase and ultimately to market. We want to talk with any interested party who has those capabilities.

CMV: What's a typical deal structure? Equity? Royalty? For how long?

DK: Each agreement is negotiated on an individual basis. We can accept cash or up front payments, but we recognize that many start ups need to conserve cash. Equity or royalties or any sort of creative combination of the two are what we expect to see on a regular basis in these agreements. The length of each agreement will also vary on an individual basis and will depend on the parties, the technology, the perceived market for the technology and other relevant factors.

CMV: You have 20 technologies listed on your site that are available. Why these 20? How many others will come out? Are you going to be focused in particular areas?

DK: We started with these twenty based on feed-back we received from the venture capitalist organizations we spoke with. They helped us identify the technologies that are most marketable and the ones that are receiving the most VC backing right now. We expect many others to be unveiled over time, but it’s impossible to predict exactly how many or when or even the particular technology focus of the innovations added to the IP Ventures program in the future.

CMV: What makes these technologies something MS wants to share vs. other R&D that isn't shared externally? Which do you think are most valuable of what they are licensing? Why?

DK: The main reason these technologies are being shared is that we see a market opportunity for them. They are not currently being used by Microsoft in the manner in which another company could use them. We think that all of the technologies available under this program are valuable.

CMV: What kind of assurances do your licensees get that the IP is defensible? If there's a dispute where a 3rd party claims infringement, how is that handled?

DK: Each agreement will be negotiated individually to the mutual satisfaction of the parties. There are many ways that the potential liabilities can be borne and distributed amongst the parties and each agreement will factor in the unique indemnities and assurances necessary for the parties involved.

CMV: Has any form of market validation or input taken place for these technologies? Do you know what markets are likely to be interested in the various technologies? Is there an objective person/team providing that validation?

DK: Right now, the primary form of market validation has been the input of the VC’s and entrepreneurs we have been talking with in the last few months. For example, we have had discussions with VC’s like 3i plc, Advanced Technology Ventures, MDV-Mohr, Davidow Ventures, OVP Venture Partners, and Insight Venture Partners. The true test will occur when the technology is released to the market, but we feel confident that the outsiders we’ve spoken to represent a broad cross-section of the market place with a sophisticated business sense about which technologies are best to pursue right now.

CMV: What's the process once someone sends a mail to the team expressing interest?

DK: The complete details about how to take advantage of this program are available at http://www.microsoftipventures.com.

CMV: With corporate VC investment on the rise, will MSFT ever be a financial backer of these companies in addition to providing IP?

DK: That is not how we envision our participation in these agreements but it isn’t something that we would necessary rule out.

CMV: How will the researchers who developed the technology be available to the startup?

DK: To operate this program successfully, we recognize the need for a high-touch approach. We intend to work with the licensee to provide them with what they need to implement this technology into their products. Access to Microsoft researchers may be important to transfer basic know-how about the products that isn’t well documented in some other form. Access to these researchers will be a consideration for a number of the deals.

CMV: How do you plan to reach out to the entrepreneurial and VC communities to make them aware of what has been developed?

DK: Our outreach has already begun. We have been meeting with VCs and entrepreneurs over the last few months. We have spoken to large groups of VC’s at the NAVC conference in New York last week and the VC summit in the Bay Area this week. Our IP Ventures team is going to Europe next week to continue the engagement we’ve begun with venture groups like 3i plc. Additionally, we’ve issued a press release and conducted many media briefings on this program roll-out.

CMV: Are there any upcoming events where people can learn more?

DK: To this point, we have done 1:1 meetings with VCs as well we are included in forums Microsoft puts on that target VCs. We have also had meetings with established companies looking for specific IP. What often happens is we share some of what we have and they indicate specific areas they are looking for. In some of those cases, we have technologies that are applicable.

CMV: Have you reached out to angel alliances or individual angel investors?

DK: We are experimenting with a variety of different groups to reach out to. While we have spoken with individual investors, it's an interesting idea that we'll consider.

CMV: Do you have any technologies applicable to the emerging Smart Energy arena?

DK: The technology behind Inrix is focused on "machine learning" and has been applied in areas ranging from anti-spam to traffic (Inrix) where there are repetitive and predictable outcomes. It's entirely possible that the same technology could be applied into Smart Energy. In addition, a Utility could use a technology that we call "Zone Zoom" that would allow a utility to drill down on problem areas on the grid. We have also done work in battery cell technologies.

technorati tags: microsoft, ip, licensing, research, socialnetworking, bayventures, karljacob

New West Network and SunValleyOnline become partners

The New West Network (NWN) is a well-backed enterprise focused on covering the changes in the Rocky Mountain West which is region transforming from an agriculture and extraction based economy to a more mixed economy with significant high tech and tourism industries (typically one of their top 3-4 industries economically). New West found that the traditional media in the communities throughout the Rocky Mountain West weren’t adequately covering this transformation. NWN and SunValleyOnline.com (SVO) recently established a relationship where SVO is an affiliate of NWN since they complement each other.

Roughly a year ago I began informally advising the owner of the SVO business. It’s a local site focused not surprisingly on Sun Valley, Idaho. He started it 2 years ago and it has grown into a major presence in the Sun Valley and surrounding area. I have had interest and involvement in local online businesses since I managed half of the Sidewalk (later purchased by Barry Diller’s CitySearch business) cities. [Sidewalk is a whole other story I may blog about at one point that gives a window into big and engineering-driven company politics.] Virtually all of the big Internet players (Google, Yahoo, Microsoft, IAC and AOL) covet the large pool of local ad dollars that are typically captured by monopoly newspapers and yellow pages. To date, the only real success the big guys have had is capturing local advertisers via Search that is most likely affecting yellow pages spend.

The thing that has made the dollars that especially the newspapers have captured attractive for the big guys is the ever growing disparity between media consumption and media spend and the audience loss newspapers have suffered. Consider the following:

• Overall population: 4.7x usage to spend for Internet while 0.3x for Newspapers + Magazines
• Youth population: 11.3x usage to spend imbalance for Internet while 0.4x for Newspapers + Magazines (usage weighted towards magazines)
• The average age of a newspaper reader is ~60 – an age group that has typically passed their peak spending years and have already made decisions on what brands they are loyal to
• Adults 18-54 have the Internet as their #1 media choice (45.6%) vs. newspapers (3.2%)
• Free classifieds such as Craigslist and Google Base are eating away at the most profitable portion of newspapers business

While much has been written about newspapers demise, they are still quite profitable especially in small markets. In fact, the Wall Street Journal recently wrote about the success of one of Lee Enterprise’s newspapers in Bismarck, North Dakota. Lee is an Iowa-based owner of newspapers (mainly in small towns) with nearly $900M in annual revenues. Coincidentally, Lee has a newspaper in the Sun Valley area. Doing “back-of-the-envelope” math, one finds that a site like SVO has anywhere from 1/15^th to 1/40^th the amount of revenue that the local newspapers have yet they have an audience is as big or bigger than their newspaper counterparts.

Since the online local ad market is of ever-increasing focus by the big and emerging Internet players, I expect I will blog periodically on what I’m observing in this local community (Sun Valley) as it ought to be a microcosm of what’s happening on a broader level. Understanding the inherent strengths and weaknesses of both the Internet players as well as the local newspapers and yellow pages will be instructive for other arenas. There are many reasons why small businesses which make up the bulk of newspaper advertising spend in a market like this are only spending 1% of their budgets online yet their customers are spending more than 30% of their time consuming Internet media. The real question is when the consumption vs. spend gap will close as it has done on a national basis even though that disparity is still large.

technorati tags: NewWest, SunValley, Idaho, Rockies,localadvertising

The 6 most valuable letters of all time

Fred Wilson recently commented on whether technical innovation or business model innovation was more powerful for a startup. He cites examples of both being drivers. I'd argue that business model innovation is more durable. Mark Leslie (a rare CEO who took a tech company from $0 to over $1B in sales) has commented on the fact that execution risk for most startups has shifted from technology to go-to-market as development tools have gotten so much better. Consequently, technical innovation has become much easier to replicate. One only has to look at a couple of the most sustained successes in tech over the last few decades to see how busines model innovation has been very durable -- IBM and Microsoft. Having competitive (though not always the best) products was clearly important but not sufficient to drive their long-term success. For IBM, it has been their world class sales & marketing machine that allowed them to weather their darkest days yet still have over $60B in revenue. With Microsoft, they've had two monster successes that boiled down to 6 letters encapsulating their business models that each changed the rules of the game in their market space and proved to be very durable.

Windows -- The 6 critical letters were O-E-M and I-S-V. There's little doubt that OEM'ing Windows to hardware companies rather than taking the path to maximize short-term profits as Apple did in the 80's and 90's by controlling both the OS and the hardware was instrumental in their success. Secondly, their investment in and success with ISV relations dwarfed any of their competitors. The byproduct was many customers had no choice but to go with Windows as that was the only platform that their applications ran on top of. While Microsoft certainly has taken a beating for the issues that come along with a platform that has infinite combinations of software and hardware vs. a limited set with the Mac, they have happily taking that beating as they ran to the bank with trainloads of cash.

Office -- It boils down to 6 letters again -- b-u-n-d-l-e. Initially they just did "marketecture" (initially there was no integration between Word, Excel & Powerpoint) by slapping three products in the same box for a combined much lower price than buying WordPerfect, Lotus 123 and Harvard Graphics. Over time, the products became more integrated but they changed the discussion within I.T. shops from individual productivity apps to having an Office suite. Their competitors were slow to move and then got severe indigestion while acquiring companies to compete with office. There were 6 other letters that were also critical in Office's success -- S-e-l-e-c-t (another business model innovation). Select was the name of their volume licensing program with enterprises that made Office very difficult to unseat.

Each of those 6 letters for Windows and Office have probably generated more combined profits than any other product over their lifespan in the computer industry.

technorati tags: FredWilson, MarkLeslie, IBM, Microsoft, businessmodel, innovation, Windows, Office, Select, bundle

Tips on Working with Microsoft

Jim Lejeal, CEO and Cofounder of Oxlo Systems Inc. has been a partner of Microsoft's in a few different companies. He has some great tips on how to work successfully with Microsoft. Having worked on various partner programs at Microsoft, it was terrific to see companies who leveraged the heck out of Microsoft, but it was also frustrating to see others spin their wheels.

technorati tags: Microsoft, partnering

Segmentation's benefits

While a simplistic view of segmentation could be viewed as “selfish” as stated in Seth Godin's blog entry on segmentation, there’s much more to segmentation than simply efficient targeting schemes. As Seth states, “You do it by creating something worth talking about!” In order to do that, you need to understand what makes customers tick even if they can’t articulate it themselves. If you look at the benefits of market segmentation (paraphrased from a Segmentation presentation given by Mohan Sawhney – a noted Kellogg prof), many of these don’t strike me as selfish. Rather, they provide a framework to understand customers and then reach them while avoiding what Professor Sawhney calls “wastage”. Said another way, it’s avoiding pestering people with marketing that isn’t something they’d be interested in – that doesn’t sound selfish to me.

• Customer focus: Customers have different needs and priorities, so you cannot please everybody with the same offering. Segmentation allows firms to be more costumer-focused by responding differently to different customers

• Profitability: Not all customers are equally valuable. Segmentation allows firms to focus their resources and marketing programs to identify, attract, develop and retain the most valuable customers.

• Competition: Segmentation helps firms to identify customers that are most “vulnerable” to competition and customers that are most “winnable” from competition.

• Differentiation: Segmented offerings are more differentiated and therefore less commoditized; the basis for comparison shifts away from price to value.

• Productivity: Segmentation reduces “wastage” in marketing communications spending by allowing the right messages to be sent through the right channels to the right customers at the right time.

For the early stage businesses I've worked with and observed, segmentation can be an effective tool to avoid wasting precious resources trying to serve a market that doesn't value their offering.

An Economics lesson for the computer industry

Joel Spolsky lays out a nice economics lesson on micro economics for the hardware and software industry, and the accompanying implications that are sometimes ignored by the likes of Sun to their demise. One of the key concepts he discusses is the criticality of understanding your products "complementers" and what complementer pricing can do to your own product's pricing. Well worth reading this "oldy but goody".

Demo tips from DEMO

Periodically, you'll have opportunities to demo your product in front of influential customers, partners or investors. David Hornik has some useful tips based on his observations from the well-known DEMO event.

A new tactic against Advermin

John Cook reports on an effort to thwart 180Solutions that sounds like a similar approach to what I suggested back in January to "out" what I called "advermin". I don't know about whether 180Solutions tactics are clean today but any organization (whether they are the advertiser or the enabler) that undermines the health of the overall online ad market deserves being shamed IMHO.

technorati tags: advermin, adware, spyware, advertising

Combining productivity and staying fit

Two things I'm fanatic about are productivity and working out. I try to squeeze every ounce of productivity out of my work day and I rarely miss a day of working out. If I haven't worked out, chances are I'm on the proverbial death bed with the flu. When I worked in the typical corporate environment, I had a gym membership. One of my little productivity habits was printing out non-urgent emails and articles that I'd read while on a machine where I could read while I worked out. Since my "gym" is now the pic you see on the right, I had to make some adjustments since it's impossible to read while running, snowshoeing, skiing, mt. biking or climbing.

There are two ways I've solved that issue. One thing I do to organize my week is write down "think" items. These are items where I don't need to be at my desk. In fact, being at my desk can be an impediment to clear thinking. Those think items go with me on my mountain adventures along with a voice recorder if/when I have a nugget I don't want to forget. As I've said many times, most great ideas come don't come while you are inside a conference room or office. The other productivity enhancement is listening to podcasts. One of my criteria for the MP3 player I bought was to also have a voice recorder so I can also capture thoughts while I'm out and about. My current podcast subscriptions include Joseph Jaffe's Across the Sound, Adam Curry's The Daily Source Code, iMediaConnection's podcasts, and various podcasts from NPR and Business Week.

Brad Feld has taken this productivity bent to a whole new level with his Tredputer. The thought of jumping on a conference call while I'm on a hike or while I'm on a trainer bike has definitely crossed my mind but I'm generally at too high of a heartrate to be able to do it without irritating the others with panting. For now, I'm happy with my approach to productivity.

Penny-wise, pound foolish

One of these days, I'm going to come with my Top 10 list of ways emerging businesses are Penny-wise, Pound-Foolish. While there are plenty of counter-examples such as RightNow's bootstrapping story and the Inc. magazine story of my friend Dave Morgan (founder of Real Media & Tacoda), too often I see organizations tout how great they are at being frugal by sharing symbolic gestures like desks built out of doors (last I checked, I could get a desk at IKEA for roughly the same price as a door) while wasting real money in other areas. The most common mistake is over-hiring sales people too early in the process which is often coupled with over-spending in marketing. Mark Leslie's Sales Learning Curve framework outlines this in great detail using his composite company example -- Nano Optical Customer Adaptive Software (NOCASH). His whitepaper and presentation are posted here from his CEO Briefing that Altus Alliance hosted.

Sucking down more important than sucking up

Tips from Guy Kawasaki remind me of #11 on my list of Uncle Bill's words of wisdom he shared upon his retirement after a successful 46 year career as a "new products" guy.

#11 Never trust a person who is Dr. Jekyll to those above him and Mr./Ms. Hyde to those under him. Click here for the rest of Uncle Bill's list.

The one from Guy's list I believe in the most is...
8. Rack up the karmic points. I believe that there's a karmic scoreboard in the sky. It keeps track of how many points you've earned and how many you've used. Therefore, when you have the opportunity to help others, do so--and do so with glee. You'll build up points, and someday your kindness will be returned to you. However, understand that you need to accrue these points before you need them--you cannot go negative.

Company politics bog down Market Velocity attainment

I was reminded of the negative impact politics can have on gaining market traction (if people are focused internally, they limit their opportunity to learn from and sell to customers, partners, etc.). Why does it seem that company politics are more common in "BigCos" and how do you avoid it whether you are in a BigCo vs. LittleCo? When my partners and I were chatting with Mark Leslie (ex-Veritas CEO), he shared some insights on how he kept politics largely out of Veritas even as it grew dramatically in size. His view is that people trying to control access to information is usually the seedcorn of company politics. He combated that by having extremely open communications (short of violating SEC rules) with his employees. Even when it's bad news, sharing information builds trust in management. With the rise of blogs and the like, we are living in an ever more transparent world (though there are plenty of holdouts :)). Lack of transparency, I'm convinced, will become an impediment to hiring quality people.

What comes around goes around

This Washingon Post article highlights the congressional Republican rebellion against President Bush. There are plenty of other cliches to apply here including "don't burn bridges", "Never trust a person who is Dr. Jekyll to those above him and Mr./Ms. Hyde to those under him", etc. Whether you are a Bush supporter or not, these are lessons you can apply to business. That is, when you are in a position of power, it can be easy to be arrogant or abusive and you can get away with it...for awhile. I've seen it personally and heard of many examples ranging from Apple to Microsoft to Yahoo/AOL (during the dotcom heyday) to most recently Google. Since I never worked on the so-called monopoly businesses at Microsoft (i.e., Windows and Office), I would be appalled when I'd hear some stories of what people in those businesses would say or do. Unfortunately for Microsoft, a lot of that came to light during the DOJ case. Likewise, these things usually trickle out years later when the perceived bully loses some of their power and it's payback time.

I'm a globalist which is one of the reasons I've had concerns about the approach we have in U.S. Foreign Policy/"Diplomacy". I'm 100% sure there are countless under-the-radar examples where U.S. companies are at greater disadvantage than they've ever been to compete in the global market. It's "death by a thousand paper-cuts" that is introducing friction for American companies in an incredibly competitive global market. I'm convinced we will hear about these more in the years to come. I'll end with yet another cliche -- those that don't learn from history are doomed to repeat it.

Early bird rewards

Being an early bird has made me unusual in the tech industry. The majority of the people I've worked with are night owls but my productivity level goes in half after 6pm so I just accept my body clock. Normally, my habit of waking up between 4 and 5 am allows me to get caught up on email, perhaps post a blog, etc. but all work and no play isn't something I espouse especially when there's been a foot of new snow overnight. So this morning, by the time most of you were getting to your desk, I'd climbed 3,000+ feet and skied down and was back at my desk (not to mention listened to several NPR, Adam Curry, Joseph Jaffe and iMedia podcasts). It was a classic bluebird day with clear skies and fresh powder/tracks all done by 8:30. Hard not to have a smile on your face.

 

 

Book Review: Wisdom of Crowds

I liked this book so much I wrote a book review originally published on iMedia in the Fall of 2005. iMedia is the “Ad Age” of Internet marketing so it was written with a marketer’s point of view. You can get the book here. Though I read and reviewed this about a year and a half ago, the notion of “collective intelligence” has risen in prominence quite a bit since then so thought it was worth sharing again.

If you look beneath the surface of some successful companies, you'll see they employ strategies espoused in James Surowiecki's book. A great example is a company run by my friend Ian Morris -- the CEO of HouseValues. There's much more than meets the eye that drives their success. The full title of the book is "The Wisdom of Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations," by James Surowiecki.

Surowiecki aims to be the next New Yorker contributor to have a mass appeal book, ala Malcolm Gladwell. He clearly wants to position this book as the next "The Tipping Point" -- combining cognitive science and other disciplines into a book addressing business, politics, society and economies. The book’s relevance to marketing may not be as obvious as The Tipping Point, although there are examples from our industry. As Surowiecki states, “Google is built on the wisdom of crowds. The core of the system is the PageRank algorithm -- a calculating method -- that attempts to let all the Web pages on the Internet decide which pages are most relevant to a particular search.” He goes on to say “With most things, the average is mediocrity. With decision making, it's often excellence. The idea of the wisdom of crowds isn't that a group will always give you the right answer but that on average it will consistently come up with a better answer than any individual could provide.”

While the stakes in marketing may not be as high as space shuttle missions or stock markets (two of Surowiecki's other examples), there are lessons in this book that marketers could apply in a variety of ways. Whether you're making business strategy decisions or developing a marketing campaign, many of us have seen the ill effects of "groupthink" versus bringing together diverse groups within an effective framework. Fortunately, the Internet can enable the elements of a "wise crowd."

This book made me think about how collective wisdom could affect decisions such as ad campaign development (creative decisions, media buying, etc.), product development decisions, industry standards (surely there's a way to move things forward more rapidly) and many other decisions made within your company or across teams representing clients, agencies and technology providers. From my own experience working with technology companies targeting the marketing community, I can see many ways to apply principles in this book to product development, sales and marketing.

Corporations and industry bodies have generally been unwilling to improve their decision making by tapping the collective wisdom of their employees and members. Those who can harness the potential for wisdom that exists within crowds of people will have the world as their oyster.

Perhaps the most significant point for readers isn’t the perspective Surowiecki provides to the inward-facing, organizational structure/behavior perspective, but rather the outward-facing: how marketers can better understand their customers -- how they think, why they think that way, and how their ability to communicate with each other (rather than just with customer service and technical support) raises their collective IQ.

It could be said that the wisest crowd out there is the billions-big horde of Internet users, who consistently use the Web in smart ways that neither technologists nor marketers would have dreamt up. The companies and marketers who grasp the implications of this will in turn develop products and services more in tune with their customers’ needs, as well as have the accompanying Web sites and marketing campaigns to harness these insights.

While our society often trusts experts and distrusts the wisdom of the masses, Surowiecki argues that "under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them." He uses a variety of examples ranging from simple challenges such as a crowd guessing the weight of an ox to incredibly complex: another crowd located a lost submarine where the best approximation was 20 miles wide and thousands of feet deep. It was eventually found 200 yards from where the group estimated it would be. This despite the fact that no one knew why the sub sank, no one had any idea how fast it was traveling or how steeply it fell to the ocean floor. Other compelling examples include how SARS was solved, and a method for predicting election outcomes with great accuracy.

The author outlines four elements required to have a wise crowd:

• Diversity of opinion: Each person should have private information even if it's just an eccentric interpretation of the known facts. 
• Independence: People's opinions aren't determined by the opinions of those around them.
• Decentralization: People are able to specialize and draw on local knowledge.
• Aggregation: Some mechanism exists for turning private judgments into a collective decision.

He also cites examples of groups where these elements are missing with sometimes disastrous consequences. Small groups can make very bad decisions because influence is more direct and immediate and small-group judgments tend to be more volatile and extreme. Large groups missing the four elements can also have disastrous results.

One significant example that Surowiecki describes concerns the Space Shuttle Columbia's Mission Management Team (MMT). The team violated nearly every rule of good group decision making. As Surowiecki outlined, “the team's discussions were simultaneously too structured and not structured enough. They were too structured because most of the discussions -- not just about the debris strike, but about everything -- consisted of the MMT leader asking a question and someone else answering it. They were not structured enough because no effort was made to ask other team members to comment on particular questions. This is almost always a mistake, because it means that decisions are made based on a very limited supply of analysis and information.”

One of the consistent findings from decades of small group research is that group deliberations are more successful when they have a clear agenda and when leaders take an active role in making sure everyone gets a chance to speak. In small groups, diversity of opinion is the single best guarantee that the group will reap benefits from face-to-face discussion.

Conversely, in a stock market bubble all the conditions that make groups intelligent -- independence, diversity, private judgment -- disappear. Whether it was the dot-com bust or the run-up of bowling stocks 40 years ago, stock markets have the potential to lose key elements that make them generally effective. As we are on the 75th anniversary of the 1929 stock crash, we need to remain conscious of the limits of the risks when all the elements of a wise crowd are absent.

The following are additional ideas from this useful book that are salient to the four elements of “wise crowds” -- Diversity, Independence, Decentralization and Aggregation:

Diversity of opinion and background

• When there is a lot of uncertainty, such as in the early days of an industry where the winners and losers haven't been sorted out, it's key to have a system that encourages, and funds, speculative ideas, even though they may have only slim possibilities of success. Even more important is diversity -- not in the sociological sense, but rather in a conceptual and cognitive sense. What makes a system successful is its ability to generate lots of losers, recognize them as such and then kill them off. Sometimes the messiest approach is the wisest.
• Diversity helps because it adds perspectives that would otherwise be absent and because it takes away, or at least weakens, some of the destructive characteristics of group decision making.
• We know that the crowds that make the best collective judgments are crowds where there's a wide range of opinions and diverse sources of information, where people's biases can cancel themselves out, rather than reinforcing each other. Individual irrationality can add up to collective rationality.
• Decision markets are well suited to companies because they circumvent the problems that obstruct the flow of information at too many firms: political infighting, sycophancy, and a confusion of status with knowledge. The anonymity of the markets and the fact that they yield a relatively clear solution, while giving individuals an unmistakable incentive to uncover and act on good information, means their potential value is genuinely hard to overestimate.
• Studies have found that groups of smart and not-so-smart people almost always do better in decision making than a group just of smart people. The development of knowledge may depend on maintaining an influx of the naïve and ignorant, because competitive victory does not reliably go to the properly educated. My take-away: Teams I've worked on always benefit from the fresh perspective of a newcomer.
• Homogenous groups are great at doing what they do well, but they become progressively less able to investigate alternatives. It also fosters the palpable pressures toward conformity that groups often bring to bear on their members.
• Diversity contributes not just by adding different perspectives to the group but also by making it easier for individuals to say what they really think.

Independence

• Paradoxically, the best way for a group to be smart is for each person in it to think and act as independently as possible.
• Independence doesn’t mean isolation but it does mean relative freedom from the influence of others.
• Independence is critical for two reasons 1) it keeps mistakes that people make from becoming correlated; 2) independent individuals are more likely to have new information rather than the same old data everyone is familiar with.
• If you want to improve an organization's or economy's decision making, one of the best things you can do is make sure, as much as possible, that decisions are made simultaneously rather than one after another.

Decentralization

• What do we mean by “decentralization?” Power does not reside in one central location, and many of the important decisions are made by individuals based on their own local and specific knowledge, rather than by an omniscient or farseeing planner.
• Decentralization’s greatest strength is that it encourages independence and specialization on the one hand, while still allowing people to coordinate their activities and solve difficult problems on the other.
• A decentralized system can only produce genuinely intelligent results if there's a means of aggregating the information of everyone in the system.

Aggregation

• Groups generally need rules to maintain order and coherence, and when those elements are missing or malfunctioning the result is trouble. Groups benefit from talking to and listening to each other, but, paradoxically, too much communication can make the group as a whole less intelligent.