For those of you who just can't resist investing in the "Next Great Thing", you may benefit from this article that a friend sent me. I'd like to add one more step to the ones mentioned in the article:
(5) Go public, hype your IPO, and sell as many shares as you can while the going is good.
Here's the article.
Sun Tzu
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"Good thing, where have you gone
My good thing, you've been gone too long"
Fine Young Cannibals, Good Thing
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Only in a country where we regularly pay farmers not to grow crops would a
venture capitalist argue that if you have a good business idea, you might want
to think twice about moving forward. But that is exactly what I intend to do.
The problem is not that "good ideas" are bad, but rather that good ideas may in
fact be too good. In other words, the idea may be so intuitive that the
playing field becomes littered with opponents, the message is over-hyped,
expectations grow out of control, and what once was a hot idea becomes
yesterday's flash in the pan.
Structurally, there has never been a more fertile environment for new company
creation than exists today. Venture capital levels have grown steadily for
over 10 years, and stand at record highs. The support services that aid in
company creation - lawyers, bankers, accountants, PR firms - all have special
programs that target the start-up. Some of these programs even include
pro-bono work until venture capital is raised. In addition software companies
such as Microsoft give away free development tools if you build around their
platform. Entrepreneur interest is also at an all time high. Magazines tout
the successes of the 20-year old billionaires, spurring Harvard MBAs to pass
on $170,000/year jobs on Wall Street to come starve in Silicon Valley.
Free-agent Silicon Valley executives are more than willing to cut loose and try
for another home-run. The obvious problem with this environment is the
likelihood that too much money and too many people are chasing too many of the
same ideas.
Interestingly, the current behavioral patterns of the companies involved in the
startup ecosystem exacerbate the "good idea" problem. Over the past several
years, the following four-point plan has become a standard new company launch
program for startups in Silicon Valley.
1. Start a company; define a product or service; begin production.
2. Declare that your product doesn't fit in any of the previous markets that
have ever existed, but rather is the defining entry of a soon-to-be-hot and
huge, new market. You then further legitimize the process by assigning a
prestigious but arbitrary three-letter acronym to the market.
3. Declare yourself the leader and king of this hot, new emerging market.
4. Shout from the highest mountain how great it is to be king of this wonderful
new kingdom. Get quotes from others saying that you are king.
There is a method to this madness. By establishing that you are in fact in a
new market you hopefully convince the world that your value-add is not an
embellishment of an old product, but rather an entirely new category. By
establishing yourself as the leader you (1) improve the likelihood of
establishing partnerships with other kings in other categories, and (2)
differentiate yourself from the competition. This works especially well if
your competitors are later forced to describe themselves as players in your
three-letter-acronym market. Lastly, by waving the flag loudly you ensure that
everyone knows who you are - a definite key to success.
Let's look now at how this four-step process can backfire within the current
rich and fertile startup environment. First, the more intuitive your idea, the
higher the likelihood that someone else is working on it as well, so from step
1 there are multiple players. By announcing the new market you've created and
persuading the press to buy in, you encourage other struggling startups to
redefine their focus on this hot new space, thereby attracting more
competition. As you declare yourself king and the greatest thing since sliced
bread, you begin to annoy the really big kings in neighboring lands. These
kings, jealous of the attention you're receiving, and with great assets they
can bring to bear, redirect their business development group directly on your
space. Before you know it, there are 15 companies in or committed to the
market, and you are just leaving beta.
The first market where the "good idea" problem reared its head was "push".
During the 1996 Internet World conference, the Wall Street Journal ran a front
page article that disclosed how push technology was going to change the face of
the entire world. At the time, the aggregate revenues in this space were
probably no more than $10M. Nonetheless, numerous small companies, as well as
Netscape and Microsoft, announced their own initiatives and standards. Today
the market we once knew as "push" is no more, and the companies that once
graced this market have greatly reduced expectations.
One interesting fallout from the "good idea" problem is a phenomenon known as
"buzzword implosion." When an over-hyped market begins to disappoint relative
to expectations, the kings and queens that helped define the market begin to
shy away from the moniker much in the same way that a vampire avoids daylight.
Try mentioning the term "push" around a push-company executive and you are
likely to risk physical harm. The once famous players in this space are now
leaders in "knowledge distribution," "network service distribution," and
"active business information."
The cycle from boom to bust appears to be accelerating. Take the case of the
marketing automation market. After watching the success of business automation
software in sectors such as human resources, accounting, manufacturing, and
sales force automation, many investors intuitively assumed that the logical
piece of the company to automate next was marketing. This intuitive assumption
resulted in over $30M of capital into new startups, and spurred the
re-direction of numerous existing companies. Yet before these products could
reach beta, ComputerLetter declared, "we're bemused by the latest example of
herd instinct that sometimes causes investors and entrepreneurs to seize
simultaneously on the same good idea and proceed to trample it in the ensuing
stampede." Six months later in August, the same newsletter declared "For
marketing automation, Internet time may be running out." Before 10 customers
had been sold, buzzword implosion was already underway.
Another interesting case study is the market for enterprise procurement
automation software. It was quite intuitive to assume that companies would use
Internet technologies to automate and control internal purchases of products
such as office supplies and computers. However, a few years after the creation
of the market and despite over 10 startups working on new technology, powerful
market players such as SAP, PeopleSoft, and Trilogy have all entered the market
or announced their intention to do so. Its impossible to be sure, but you have
to wonder if the early players might not be better off had they not made so
much noise.
Looking forward, one market that appears particularly susceptible to the "good
idea" problem is outsourced application services. While I believe that
Internet-centric services will be huge, some people have extended the
outsourced concept to include the simple notion of running applications such as
SAP, PeopleSoft, and Oracle remotely at an alternate location. Though this is
certainly a "good idea" the number of startups attacking this space is
remarkable. Moreover, most of these companies plan to run actual copies of
prepackaged applications. These applications were not designed to host
multiple companies or scale to millions of users, and therefore the business
model may not prove to be all that economically appealing. Service
architectures run over the Internet will look technically more like Yahoo or
Amazon than a tradition client-server application. Additionally, one key to an
Internet based service is the communication that is enabled as numerous
participants or customers are hooked to the same system. Running someone's ERP
system in an offsite closet does nothing to facilitate communication.
You might ask how a venture capitalist is supposed to get by in such a world.
For starters, one should expect a shift away from full-volume bravado as the
standard marketing plan. Beyond that, smart venture capitalists will need to
be more selective. As with stock picking, it doesn't matter if you forecast
correctly if everyone else has the same forecast. The real value is found in
accurate, non-consensus ideas. You must have a unique angle. You must
establish true barriers to entry and a true, differentiated advantage. And you
must avoid funding something just because it's a good idea. |
