olivergajek

Lots of pitchfests and competitions going on just now. And some people really worried about how to prepare and how they will perform.

Unfortunately, there is no silver bullet. You will just need lots of practice. And to deal appropriately with the fact that this kind of public performance is easier for some people and really not so easy for others. 

But don’t be fooled. Putting on a good show on a stage in front of a jury is very different from having a thoughtful and engaged conversation with e.g. investors, advisors, potential employees, big customers, strategic partners. That is what really counts and where you need to make sure to bring your A-game. Which will be easy if you know your stuff and have done your homework. 

Conversely, this also means that you had better not let pitchfest success get to your head. Looking good in front of a jury may or may not bring you more customers. Probably not.

Lots of discussion in the last weeks about optimum pricing for cloud services for business customers. Trying to balance the need for easy and frictionless user adoption with the need for maximum revenue generation. A thin line to navigate.

A fallacy that keeps coming up is the need to adopt a freemium pricing model, whereby users get significant value for free and may then, hopefully, convert into paying users based on some kind of trigger point (functionality, number of users, amount of storage space, etc.).

This is fundamentally the right approach for consumer offerings and fundamentally wrong for B2B products:

• Consumers love getting stuff for free. Read up on Dan Ariely’s amazing experiments  if you want to know more. 
• Business customers, on the other hand, do not want anything for free. Why? Because free offerings come with no guarantees for quality, service level, long-term availability. It’s as simple as that.

Of course business customers do want to:

• Not pay more than they should.
• Get a great deal.

This has immediate consequences for your price list design:

• Have a tiered pricing where the customer can calibrate their own understanding of what they will need. And where they also see that there is an upgrade path in case their needs evolve. Look at the Box.net price list to see what this could look like. Look at the Salesforce price list to see a much more complex example for a much more complex product. Pay attention to how they guide the customer’s interest towards a specific tier.
• Make sure your prices are at the top end of what you will hope to extract. Any customer that has direct interaction with you or with your resellers will want to negotiate advantageous terms and you need to have the ability to do that.

“Free” does play a role in B2B offerings, of course:

• You absolutely need to offer a free trial. This will communicate loud and clear that your service is easy to use and does not require complex installation or training. This will give the customer champion a chance to kick the tires and to convince any other members of the buying center. Use a 14-day period if your product is not overly complex and if you have lots of e-mail nudges and inside sales agents who drive the customer along. Use a longer period if you don’t have the resources to follow up actively. 
• Depending on the product characteristic there can be value in offering a “personal edition” for free. Think of this as a reward for the customer champion who has made the investment to check out your offering. If the personal edition delivers true value for that individual then this could be useful. Makes sense for storage, databases, contact managers, etc. Does not make much sense for anything collaborative, where you would have to think about a “small team” edition.

…or at least don’t get it blatantly wrong.

Cardinal sins include:

Company name different from product name. Come on, you and I know that you’ll only have one product for the foreseeable future. What do you gain from two different names? Yes, there is RIM and Blackberry, but I’m not sure that is such a great lead to follow. And, at the very least, make sure you position the important name (presumably the product) prominently and the company name very inconspicuously. Otherwise you’ll just confuse your audience and you’ll be wasting their precious cognitive resources.

Include German (or any other non-English language) pieces or allusions. Do you really want to constrain your brand-building efforts to the large but oh-so sluggish German-speaking markets? Bad idea.

Easy to pronounce but not so easy to spell. Especially when it comes to hyphen placements. Only viable if you own all conceivable permutations so that people will get to you no matter where they put or don’t put the hyphens.

Easy to spell but difficult to pronounce. Don’t expect me to promote your product to my friends if I don’t even know how to pronounce it. 

Read this excellent post by Dharmesh Shah for very useful advice. 

Interesting discussions with some early-stage teams recently on whether it is a good idea to take an informal meeting with an investor, where you get to know each other, toss around some ideas, learn what the investor is looking for, but where you’re not pitching or in full-on demo mode.

Some people think that this is a bad idea, others think it’s really important. As always in life the official answer is “it depends”.

My recommendation to early-stage teams with first-time founders would be to be careful here. You never get a second chance to make a first impression. If your pitch is well-crafted and practiced and/or you have a cool demo then go for it.

If, on the other hand, you are still building or refining your pitch then I would recommend to do that with people who know you better and will help you get it right. So that you don’t blow your first chance to make a first impression.

Giving a talk later this week on some of my experiences and lessons learned around making innovation happen in large and small companies.

I wanted to start off with a very specific question: Why is it so hard for large companies to innovate?

I have some insights from my ten years at Siemens way back when. At first glance you might actually think that this type of environment would be ideal to get things done. After all, there seems to be a lot of money flying around. People used to boast about how many tens of millions of dollars they had sunk into some failed initiative. We also had great customer access and strong credibility. You would have expected customers to work with us and to help us. And we had a deep and broad talent pool which should have allowed us to marshal the resources needed.

The difficulties became clear when we tried to come to grips with new business opportunities in the area of “multimedia”. This was just before the Internet conquered everything but we didn’t know that yet. We spent millions in internal resources and external consulting (the usual suspects) to identify markets and potential offerings. For all the good ideas we had on the drawing board we hit several walls when it came to defining how to execute. Hard walls.  Especially:

• Lack of investment capital. In a large company any business venture that doesn’t scale up to e.g. 500 million in year three is not very interesting. And therefore doesn’t get funded. Even though it may ultimately be huge and important. You just don’t know exactly when that will be.
• Talent: Lots of talent in the organization but missing critical ingredients. Which we would have found very difficult to hire. Both rockstar engineers as well as creative as well as dealmaking talent comes to mind. We offered big paychecks, but to no avail. They just wouldn’t come.
• Time: This is probably the hardest wall we hit. We just couldn’t imagine how we might get from here to there in a finite amount of time. Given that everything in a large company takes months not weeks and years not quarters, any implementation plan ended up taking many years. And you know that the world will be different in three or four years so it makes no sense to plan a project that takes that long. It just doesn’t. We simply had no idea for how fast a smaller, more nimble, and more focused company can move.

Lots of discussions recently with founders on how companies grow and how they grow within them. A daunting topic for first-time founders who may not really know what they want out of life. But also daunting for repeat entrepreneurs, who mostly tend to know what they do not want.

In this case I think it is important for people to look in the mirror and be honest about what exactly is the size of their ambition. Which may determine the preferred approach to starting and building out their business. If ambition and business model do not fit then you may be in for rude surprises. 

If you look around you will find that there is a only small number of business model options available. Go ahead and pick one that fits your ambition. 

• Systems integrator or consultant: Has a small number of customers that they are very close to (in terms geography and/or in terms of vertical domain expertise). Build some technology, buy some technology, make sure your customer gets what they need. Make money on margin, more importantly on billable hours. Make sure not to grow beyond at most a dozen people. End-game scenario: Fat salaries for the founders and a nice company car. Nothing wrong with that. Just make sure you stay really really close to your customers.
• App boutique: Has an app or a tool. Very small team, one or two would be best. Solution is distributed widely. Monetization through voluntary contributions, freemium conversions, and, of course, app store purchases. Make sure not to hire any more people. End-game scenario: Pull in a couple 100K p.a. and milk it for as long as you can. Preferably develop the next app in your spare time, if you have any. Instapaper my favorite example, but there are many others. 
• Product vendor: Has a product of some complexity which is sold or rented. Product is significantly better product for an existing market (needs to better because otherwise you couldn’t enter the market in the first place) or creates a new market (good luck to you). Early adopter customers buy first version because they need something now and because they believe in your roadmap. You now deliver on your roadmap. Meanwhile, if the market you serve or create is of any interest at all, there are dozens or hundreds of market entrants nipping at your heels. Some of them smarter than you, some of them with more funding, some of them active in larger markets. So your mission is simple: Win or go home. There is no place for a middling competitor. You are now condemned to grow or die. The bad news is that you can never sit back and take a breath. The second you do that somebody will have outperformed you, mostly by just giving away what you were charging for. Which means that your company will either die or grow to be 8, 15, 35, 70, 120, 200, etc. people. Make sure you’re comfortable with that and make sure that you can envision your changing role in such an organization. 

So today we learn that Evernote is starting a stand-alone Chinese incarnation. More info here. 

This is packaged as a way to deliver a faster experience to the Chinese user. The “great Chinese firewall” by any other name.  CEO Phil Libin:

The most common request we get from our Chinese users is to make Evernote faster, more reliable and better integrated with the rest of the Chinese Internet. Due to poor network connectivity between the US and China, there’s only one way to definitively fix the problem: have a separate service in China. That’s what we built.

This is a smart move for many reasons:

They are actively preempting the likely scenario of a Chinese clone.

Using a separate brand will protect the existing brand from the usual concerns about cosying up to the Chinese government and their potentially problematic interpretation of data privacy. 

Even more importantly this is an important part of the growth strategy of a “new style” software company. In the olden days (think Microsoft or, if you can remember that far back, Lotus) all the creative energy of the company went into developing more and more features for your product to make it richer for the sophisticated buyer. For a product like Evernote this is not an option, however. They may have maxed out on features already. So the primary options available for growth are platform (think Dropbox) and/or entering adjacent markets. And this is one hell of an adjacent market.

Some interesting discussion yesterday around the new European Angels Fund from the EIF. More information here.

First impression: A great idea. Instead of looking at companies and individual investments they look at the business angel. If they like you then there’s a framework agreement and they match your investments. All of them, no cherry-picking allowed.

That seems like a huge advantage in terms of speed and aligning investor interests over other governmental co-investment programs where the co-investor needs to perform due diligence on the individual investment. 

And apparently significant echo with a large number of “surprisingly qualified” candidates applying for inclusion in the program. So far so good.

But it’s not clear that this is for every investor.

On the the one hand you might have a “drive-by” business angel doing lots of transactions, keeping a relative distance from the company (possibly because they invested as part of a syndicate), and moving on to the next transaction. Their motives for EAF involvement could very well be to make more cash available and thereby have more capital available until the next round. Possibly keeping some of their cash to participate in the next round. That seems to make sense.

On the other hand you might have the “hands-on” angel doing a  much smaller number of transactions, but investing significant time and effort in the day-to-day business of the company. Let’s say 1-2 days a week and more in case of need or crisis. This type of angel will want a special price for their shares that acknowledges the unique contribution they are making. You may even argue that their investment is not so much a cash infusion but the mechanism for capturing the value that is being created by the “hands-on” angel. In this case the unique valuation required by the angel would then also be extended to the EAF co-investor. That does not make much sense. If more cash is needed it would be smarter to look for additional hands-on help to join the investment round. 

Just found this great post by David Skok on the previous post’s topic of pricing power for early sales. He calls it multi-axis pricing. Must-read. I especially like his comments on “emotional willingness to pay”.

There is a very significant difference in the willingness to pay amongst various customer types. Car manufacturers have known this for a long time, and usually include a highly profitable model at the top of their range that appeals to the non-price conscious buyer, who likes to feel that they have bought the very best.  Take a look at the Mercedes Benz S-Class as an example: The base model S550 starts at $94k, but for those that aren’t price sensitive, they sell an S600 version for $160k, or an S65 AMG version for $211k.

Several discussions with entrepreneurs in the last weeks about product pricing. Both for consumer and SME offerings the price pressure is huge, similar products brought to market by startups with high amount of capital are given away for free or for very little.

And, at least for a certain category of product/market (more later on “zero-gravity” business models), affordable pricing is a key to rapid market adoption. So people spend a lot of time thinking about how to price for easy uptake and viral growth. That all makes sense. What we now have is the price list for steady-state. 

The challenge: This price list is really low. And all of a sudden it becomes impossible to understand how the business will make any money before it has thousands of customers. And now we are stuck.

The solution: You don’t use that price list to make your first sales. Your first sales are all about:

• Customer validation: There are dogs and they eat the dog food and they pay for it. Repeatedly and gladly.
• Path to Ramen Profitability: Trying to ramp up some revenues so you can fund your hopefully very minimal cost base. More on the virtues of ramen profitability here.
• Extracting maximum margin contribution from each customer interaction: If you want to become ramen profitable you have to get as much money out of as few customer transactions as possible. The bigger the transaction the better. At the same time you cannot be too picky about who you accept as a customer, so the goal is to get the most from every customer, which may be a lot for some and not so much for others. No matter, as soon as you have extracted all of it.

The key instrument for this is a long and complicated price list. Think Oracle database licenses. Better yet, study pricing for products such as Salesforce CRM. Ideally you have multi-dimensional price drivers, e.g.

• Number of seats. Possibly different kinds of seats (e.g. heavy vs. light, internal vs. external, etc.)
• Different modules, e.g. CRM+SFA+Helpdesk+etc. etc.
• Different editions, e.g. Basic vs. Professional vs. Platinum

This price list is your secret weapon for constructing custom deals where you sell more or less the same product to one customer for price X, and to another for something very different from X. And where both you and the customers feel that this has been a fair and reasonable transaction. Remember, your goal is to:

• Take all of the captive budget
• Be comfortable when customers meet and compare prices. They must feel that their own offer has been logical and fair.

Use this price list for your first phase of customer interactions. Switch to the zero-gravity price list at a much later date. And sweeten the transition for your installed base via special promotions if you can. If you cannot then relaunch your product under another name…