Techno File/Infotech/The Trends And Products That Drive The
Tech Industry; Above The Crowd
Got a Good Idea? Better Think Twice With money flowing freely
in Silicon Valley, a good idea just isn't enough. You've got to
have something more to make it.
J. William Gurley
12/07/98
Fortune Magazine
Time Inc.
Page 215+
(Copyright 1998)
Only in a country where we regularly pay farmers not to grow crops could 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 intuitively obvious that
the playing field becomes crowded with opponents, the message gets
overhyped, expectations balloon out of control, and a hot idea becomes a
flash in the pan.
Structurally, there has never been a more fertile environment for new
companies. Venture capital investments have grown steadily for more than
ten years and stand at record highs. The support services that aid in creating
a company--lawyers, bankers, accountants, PR firms--all have programs for
startups. Some even offer to work pro bono until venture capital is raised. In
addition, software companies such as Microsoft offer free development tools
if you design programs on their platform. Interest in entrepreneurs is at an
all-time high. Magazines tout the successes of the twentysomething
billionaires, prompting Harvard MBAs to pass on $170,000-a-year jobs on
Wall Street to come and starve in Silicon Valley. Free-agent Valley
executives are more than willing to cut loose and try for another home run.
The obvious problem with this environment is that too much money and too
many people are chasing the same ideas.
It's hardly surprising that startups themselves engage in behavior that
exacerbates the good-idea problem. Over the past several years, a four-stage
plan has become the standard for launching a business in Silicon Valley:
1. Start a company; define a product or service; begin production.
2. Declare that your product doesn't fit any market that has ever existed but
rather is the defining entry of a soon-to-be-hot-and-huge new market. You
further legitimize the market by assigning it an arbitrary but
prestigious-sounding three-letter acronym, like ERP (enterprise resource
planning) or CRM (customer relationship management).
3. Declare yourself the leader and king of this 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 you are king.
There is method to this madness. By establishing your presence in a new
market, you may convince the world that the value you add is not just an
embellishment of some old product. By asserting your leadership, you (a)
improve the likelihood of forming partnerships with kings in other
categories, and (b) differentiate yourself from the competition. This works
especially well if your competitors are soon forced to describe themselves as
players in your three-letter- acronym market. Also, by waving the flag and
shouting, you ensure that everyone knows who you are--a key to success in a
three-letter- acronym world.
Let's look at how this process tends to backfire in Silicon Valley today. First,
the more intuitively obvious your idea, the higher the likelihood that
someone else is working on it as well, so even at step one there may be
multiple players. By declaring that you've created a new market and
persuading the press to believe you, you encourage other struggling startups
to shift their efforts toward this hot new space, thereby attracting more
competition. When you declare yourself king, you annoy the really big kings
in neighboring lands. Jealous of the attention you're receiving, they redirect
their great assets and focus their business development on your space. Before
you know it, there are 15 companies committed to the market-- and your
product is still in beta testing.
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 described how push technology would change the face
of the world. At the time, the aggregate revenues of push companies were
probably no more than $10 million. Nonetheless, Microsoft, Netscape, and a
slew of small companies announced their own push initiatives. Today the
market we once knew as push is no more, and nobody mistakes a company in
this market for the next big thing.
One interesting bit of fallout from the good-idea problem is a phenomenon
that might be called buzzword implosion. When an overhyped market begins
to disappoint, the kings and queens that helped define it begin to shy away
from its moniker like vampires avoiding daylight. Mention "push" around a
push-company executive, and you risk physical harm. The once-famous
players in this space are now self-declared leaders in "knowledge
distribution," "network service distribution," and "active business
information."
The interval needed to go from boom to bust appears to be shrinking. Take
the case of "marketing automation" software. After watching
enterprise-software outfits grow big by helping companies improve human
resources, accounting, manufacturing, and sales-force automation, many
investors assumed that the next piece of the company to automate would be
marketing. This resulted in an infusion of more than $30 million of capital
into startups and spurred the redirection of numerous existing companies.
Yet before their products could reach beta, ComputerLetter (a newsletter
published by FORTUNE columnist Richard Shaffer's Technologic Partners)
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, ComputerLetter declared, "For marketing
automation, Internet time may be running out." Before even ten customers
had signed on, buzzword implosion was already under way.
Another interesting case study is the market for "enterprise procurement
automation" software. It seemed intuitively obvious that companies would
use Internet technologies to automate and control routine purchases of
everyday products such as office supplies and computers. Despite the fact
that more than ten startups are working on this technology, powerful market
players such as SAP, PeopleSoft, and Trilogy have also entered the market
or announced their intent to do so. You have to wonder if the early players
wish they had made a little less noise.
Looking forward, a market that appears particularly susceptible to the
good-idea problem is "outsourced application services." The concept is that
enterprise software applications such as those of SAP, PeopleSoft, and Oracle
can be run remotely via the Web, and that customers don't need their own
servers or specialized staff to enjoy the benefits of these applications. This is
certainly a good idea, but the number of startups attacking this space is
remarkable. Most think they can succeed without modifying the prepackaged
applications in question. But that may be a problem--these programs were
not designed to host multiple companies or scale themselves to millions of
users. Service architectures run over the Internet will have to look
technically more like the simpler versions run by Yahoo or Amazon rather
than the complex configurations that traditionally govern a client-server
application. (For more on the enterprise market, see Cover Stories.)
You might ask how a Silicon Valley venture capitalist is supposed to get by
in such a world. For starters, 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, forecasting correctly gives
you no edge if everyone else has the same forecast. You must have a unique
angle; the real value is in accurate ideas that defy the consensus. You must
establish true barriers to entry, true product differentiation, and true
competitive advantage. And you must avoid funding something just because
it's a good idea.
J. WILLIAM GURLEY is a partner with Hummer Winblad Venture
Partners, a venture capital firm. Except as noted, neither he nor his
partnership has investments in the companies mentioned. To receive an
expanded version of his column, Above the Crowd, visit www.news.com; to
subscribe to the E-mail distribution list, send E-mail to
subscribe-above_the_crowd@atc.revnet.com. If you have feedback, please
send it to atc@humwin.com.
INSIDE: The Dreyfuss Report: six cool laptops, page 219... Software for
travelers, page 224... The cheapest desktop PC, page 224... Alsop looks back
from 2004, page 227
{BOX}
BUZZWORDS
Vertical Portal: First there were search engines. Then there were portals.
Here's the new, improved edition. According to Red Herring, a Silicon
Valley trade magazine, "vertical portals" are one of the top ten trends of the
"post-PC world." As we understand the term, these Websites will let you buy
stuff, read content, and chat with fellow surfers. The site hopes all these
extras will keep you around longer. We don't yet get the difference between
a "vertical portal," a "portal," and an E-commerce Website. But if we needed
funding for our startup and were writing a business plan, we're sure we'd
use the term.
Quote: WHEN YOU DECLARE YOURSELF KING, YOU ANNOY THE
REALLY BIG KINGS IN NEIGHBORING LANDS.
COLOR ILLUSTRATION: ILLUSTRATION BY MATTHEW MARTIN
{People with nets chasing thought bubble with light bulb in it} |
