Niche-ization: A New Source of Revenue Oxygen
April 6, 2008
A One-Minute, One-Act Comedy
Mise en scène. An industrial wasteland in Silicon Valley or a new Euro building in Stockholm.
Set up: a conference room. Nothing flashy. No windows. Plugs and Ethernet cables in a jumble under the table. So-so lighting. A screen. A projector. A plug seeking a video connection. The whisper of air conditioning.
The money folks: 30 to 50 year old guys, casual lux, recently groomed hair and nails, movie star smiles. Testosterone. Mucho testosterone.
The techno-serfs: 20 to 30 year old engineers. Mostly thin. Laptops. Dark clothes. A few hippie-dippie hair doos. Earnest. Serious and very earnest. Less testosterone.
The agenda: Generating revenue.
The testosterone-energized VC speaks,
Money person 1: “Hey, guys, let’s get started. The agenda today is pretty simple. Let me give you some back ground and then let’s dive right in?”
Money person 2: “Right. Right?”
Techno-serfs in unison: “Okay. Sounds good.”
Money person 3: “Let me do the background, guys. We put in $1.2 million over the last three months. You guys pulled out $400K a month. That sound right.”
Serf 1: “I think we are running under that figure. Maybe we’re at $185K this month and will use the rest for payroll next week.”
Money person 3: “Like I said, You have burned $1.2 million.”
Money person 1: “May I ask a question?”
Everyone in unison: “Sure”.
Money person 1: “What are you guys going to do to generate some revenue?”
Money person 2: “Let me rephrase that, ‘How are we doing relative to the plan?”
Money person 3: “Screw the plan. What are you guys going to do to make some sales. Generate revenue.”
Serf 2: “We’re in beta.
Serf 3: “We have some great leads.”
Serf 1: “The competition sucks, man.”
Money person 2: “Forget leads. Produce revenue or we’re cutting off your oxygen.”
Money person 3: “Let’s take a bio break, shall we?”
Curtain falls. House lights up.
Discussion of this Aeshylean Tragedy
Has this happened to you? If not, you’re lucky. If it has, you know what this means. The start up–what I have called the “serfs”–has not made any sales. The friendly venture capitalists–what I have called the “money person”–have shed their fraternity rush warmth. Beneath that cheerful Norman Vincent Peale veneer is the real VC illustrated below:
As the economy deteriorates, venture funded search and content processing start ups may find themselves in meetings similar to the one dramatized in this essay.
Lead times for licensing complex software to the enterprise are long. If a vendor chases a US government agency, the acquisition cycle may extend until the next infusion of cash from the Federal budget in October 2008. Non-profit organizations are far from cash rich. Even the Goodwill in the US is running an eCommerce auction site to generate cash. You can bid on jewelry, clothes and electronics from Goodwill stores across the US here. Money is like oxygen in collapsed coal mine–scarce. Without air, the coal miners die. It is as simple as that. To start ups, cash is oxygen. Without it, the tender shoots of capitalism wither, die, and decompose to their constituent elements quickly.
How do search start ups generate sales?
I assume that you will now think I will reveal the keys to search and content processing success. Nope. I will not. What I will do this fine spring morning is describe the two trends emerging among the handful of start ups with which I am familiar. I know this is as filling as my mother’s weird veggies finger sandwiches she made for her canasta group in the 1950s, but this is a free Web log.
PR and Marketing Blitz
The idea is that the start up search and content processing company generates buzz, tweets, and viral infections that lead to sales. The buzz magically just turns into revenue. Now I know that this sounds crazy, but it’s a time-honored tactic in use in thousands of search, content processing, and information companies. If a company has a way to ease the pain of a really big problem, a person in authority at a company with that problem and money may pick up the phone and call, maybe send an email. This technique worked like a champ for a company called Purple Yogi (now called Stratify, which was acquired by Iron Mountain in late 2007) almost a decade ago. Spawned in Silicon Valley, the founder targeted the US intelligence community, caught some big wigs attention, and leveraged those inquiries into a content processing business. Today, the company a unit of Iron Mountain and selling six-figure processing systems to law firms and other organizations struggling to manage the terabytes of content that a legal matter generates. You can see the same technique in use with the promotional program of PowerSet, a natural language search and content processing company asserts that it will move beyond beta soon, real soon.
Contacting Buddies for Favors
Most search and content processing start ups describe this type of fast-cycle revenue generation by one or more of these terms:
- Networking or social networking
- Contacts
- Calling acquaintances and describing the need for “oxygen,” which is the code word for revenue
- Riffling through digital Rolodexes in order to find people whom you can leverage into buying or getting past a gate keeper.
The surge of interest in business contact mechanisms is evidence that this approach to sales in a deteriorating economy is evidence that humans still play an important role in the digital economy. Some companies have institutionalized this notion of using business contacts to make sales. At Booz, Allen & Hamilton, for example, the firm makes an effort to run a club for former consultants. The purpose of this type of post-employment meeting and greeting is making sales. Wharton graduates use their school’s alumni contact system for the same purpose. Say what you want about Twitter, but the contacts available from blue-chip consulting companies or prestigious MBA programs have significant value.
Asking Mom or Dad to Help
Even less visible than the shadow networks is the reliance on relatives. Nepotism is alive and well in the world of high tech. Examples range from the easy deals flowing from some giants in the tech industry to magic sales. Here how it works. The young entrepreneur contacts mom who works at an investment bank. Mom makes a couple of calls. The scion of this well-placed mom receives a call and lands a contract. I want to identify two or three of these types of rescue efforts, but my cheerful attorney who looks a great deal like the VC illustrated at the head of this essay, tells me, “No personal names. No company names.” You will have to do your own sleuthing or dismiss this method of generating revenue “oxygen” as the squawking of an addled Kentucky goose.
Hire a Real Salesperson
Often the least desirable action, the revenue-starved start up has to look for a professional who can sell. If you are not familiar with this type of individual, there are two characteristics that set him or her apart from the techno-serfs. First, the salesperson wants to know what the big problem the software solves. If the problem is not “big”, the professional sales person will not make much of a difference. Solving small problems means modest revenue in the short term. Every day without a sale to a professional salesperson is a day without income. Forget that, thinks the pro.
The second question is, “What’s the payoff for me?” In effect, the professional salesperson wants to know how much money he or she can generate when making a sale. “Money” in this context translates to base, perquisites, and commissions in the first year and then upon renewal. If there’s no big upside, the professional salesperson will dither. When you need “oxygen,” you don’t want anyone to dither. You want results.
The downside of the “real” salesperson is that this individual doesn’t care too much about the plumbing in the product. The salesperson wants to know: [a] benefits, [b] problem solved and its magnitude; [c] competition; [d] pricing. These factors are often of little interest to the techno-serfs, which is one reason why the VCs don’t see any sales for their infusion of cash.
Bringing down the Curtain
I use these four contacts to determine a survivability factor for start ups. You can take each of these points, use them as a checklist, and plot your favorite start up against them. When all four factors can be assigned to the start up, you know that it is making a significant effort to survive. The downside of a start up trying to survive is that the likelihood that the company will generate revenue traction is low. The best start ups have oxygen and don’t need to activate these four life saving techniques. The company’s product or service is in demand, and the revenue growth is taking place “organically”. This “organically” buzzword means that the growth of the company takes place without unnatural actions. I am often asked to look at new companies and their technology. I throw a mantle of expertise over my work, but in many cases, I look at these four factors, pretend I am a professional salesperson sizing up the company, and think about what the company is doing in the context of my knowledge of the search industry. It’s simple, and I am surprised by the small number of cash- and testosterone-fueled investors, super-smart entrepreneurs, and problem-riddled organizations who don’t take the time to look at the basics of making sales.
Stephen Arnold, April 6, 2008
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