The wall - not only a pink floyd song

Does the following scenario seem familiar?

You started a new venture. There was a lot of energy in the air: innovation, cutting edge technology,  great satisfaction when the prototype worked, financial presentations, legal aspects, and more. The excitement was immense.

After a while, you were one of the lucky ones. You raised some money (maybe a lot of money). You were riding the horse. Maybe you even made some descent income, or at least you could afford paying hosting fees, office rent and some marketing without losing your own shirt.

You were a shiny star. Even Tech Crunch published an article about your company.

And then comes the day that you realized that hmmmm....  the business is stuck and you face a wall, the size of china's wall.

The market is far from what you imagined it, and not too many buyers are interested in your product. Alternatively, there are enough users but the business model is ..... yes, free.

The money in the bank is running to frightening low levels. The mortgage is like a collar strangling your neck. Your wife or husband is saying "You played this stupid startup games for too long. Now, please find a real job."

Getting a new round of fund raising is a nightmare. You are not such a hot potato anymore and even if you can get some dollars the dilution is horrible. Basically, you give your company away.

You are depressed. You might show a happy face and play the optimistic guy to the outside world, but in your own room you look at the mirror and think "What the heck am I doing here? Is there a way to proceed? And if yes, how?"

First of all, you need to realize that almost any business and and product goes through many crises, evolutions and revolutions. The minority of businesses remain similar to the starting point and they were simply enjoying a great deal of pure luck.

A business is first and for most people, spirit, passion, and vision to do something differently. Intel started as a memory company. HP started with measuring devices. IBM started with scaling tools. Sony started with a passion to bring Japan back to greatness after the war.

Most business comes to a halt at some point and then they ask "Is there a away out?" If there isn't, then there is no reason to proceed.

Another question is whether you have the energy and patience to run this ultra marathon. Most entrepreneurs put a very short limit to what they can afford. They think of months or 1-2 years adventure.  This is not the way, this is pretty much impossible and this is what breaks most people.

To me a real entrepreneur is somewhat "mad". Where people see problems and risks, s/he sees opportunity or a chance to go forward. Maybe the technology can fit a different need or maybe there is someone that to him the product is great and he can be the channel to the market with the proper budget.

An entrepreneur turns problems into solutions. Take a nice example I read many years ago. Say you invented a car but when you built it you realize it is damn slow. Say 10 miles/hour. Instead of shutting the down the project you might think that near schools where kids are walking this could be great safe vehicle. This is a potential market. The disadvantage becomes a clear advantage.

In short, you do not give up. There is always a solution and a light in the end of the tunnel. And if there isn't, you shovel a new tunnel.

How do you finance it?
There are some basic rules

1. Choose a venture where the founders have enough skills to make it happen by themselves with minimal external help.
2. Everyone (no exclusion) roll up their sleeves and do everything. There is no such thing as "I am the CEO" I am not coding. There is no such thing as "I am a programmer, I cannot sell"
3. You do not throw money. You save on offices, cellphones, cars and fun stuff
4. Manage the cash flow like your life depends on it. It is better to pay somewhat more per month but not to get into a long term commitment.
5. You save money at the personal level. Everyone would like to live in Manhattan in a 4 bedroom sky scraper and dine out all the times. Do this and don't be surprised that your personal bank account is running low
6. Supportive family. I cannot stress how crucial this is. If your family does not support you, either replace it or don't play the game.

Finally, even if you tried and "failed". Remember, life is a long and continues . You need to enjoy the ride and be satisfied with what you do. In the end you always succeed since you always learn and improve.

All the best,
Amir

Product segmentgation chapter two - segmentation types

In my former post about segmentation I described the basic aspects of pricing and used bicycles as an example. In this post I will try to show you more techniques and methods to segment your product or service.

Before I start, here is a small reminder of what segmentation is all about.

When you build a product, in most cases you do not want to have a one-price-fits-all strategy for the following reason:
There are 3 groups of potential clients -

• One that the price is indeed more or less appropriate,
• One that this price is too high and they cannot afford to pay it. Some of them might still buy your product and complain about the price
• One that is more than willing to pay much more. 

If you choose a single price point then basically you sacrifice much of your market.
Therefore you wish to come up with a flexible pricing scheme that will be appropriate for all of your potential buyers and different clients know about the different pricing they will grasp it as fair.

Featured based segmentation

This is the simplest method of segmenting a product. The more features you get, the more you pay. Examples:

1. iphone with 8Gig, 16Gig or 32Gig
2. ipad without phone abilities (or iPod touch vs. iPhone)
3. antivirus - basic and premium

Usage based segmentation

This model has been in use for years in Electricity and phone companies - if you consume more you pay more.

I am not sure but I believe that Xerox started this method for physical goods. They used to give a Xerox machine basically for free and charge only per copies made on the machine.

Gillette uses the razor/razor blade scheme where you buy the handle for modest price (well, not so modest today) but you have to switch blades constantly and hence the more you shave the more you pay.

HP uses a similar model in printers - the more you print the more you consume ink, the more you pay.

In the IT arena this is quite popular - You pay per user with  ERP systems. You pay per bandwidth, storage, memory, CPU power you consume in a cloud.

Value based segmentation

This is the most difficult way of charging. The price you get correlates with the value you bring to your client. Examples can be a form of consulting agreements based on bonuses when profitability goes up, or a portion of the savings you bring to your clients. You can give the same consultation and receive a totally different amount. It is obvious that the consultation can be just an "envelope" of your product.

When you build your product or service, think upfront about the pricing schemes, it may affect the way you build your product.

And for a smile, I cannot think of sales and marketing without recalling a great episode from the movie "Jerry Maguire". It is not about segmentation but who cares. Here it is


Good luck,
Amir

Product segmentation chapter one - bicycles

Hooray, I bought a bicycle

After 4 years of long distance running I decided I need some diversity and I am about to try a sprint triathlon this year and maybe later on, an Olympic one. Not to worry, I will not skip my first full marathon planned for Jan, 2012.

What shall I buy?

There are several good brands and each brand has about 2-3 beginner-intermediate models which vary by materials (e.g aluminum or carbon), system's accuracy, weight, and so on.

Now comes the interesting part - if you are not familiar with bicycles, you might think that the price range is "sane", but it isn't. The entry price is very high and the range is immense.

Just to give you a taste, an entry level bicycle costs about 800-1,000$. An upgrade to a slightly better model will up the price by at least 500$. Should you wish to start with the carbon frame (even the basic one) you will pay at least 2000$ and a somewhat nicer carbon set will cost you about 3000$.

I have not even started to describe the choices of wheels, saddles, etc. The prices go up and stop somewhere around the 14,000$ for a "war machine". Guys, this is almost a price of a car.

I asked my coach: "Why are these prices so ridiculously high?" His answer was: "The materials are expensive, the systems are more accurate and the cost of production is high".

Now as much as I respect my coach, neither he, nor I (nor you) is fully aware of the cost of production.

So, what dictates the price?
I am not about to start lecturing you about supply and demand, but I do want to get out of your heads the notion that the prices you see at the stores are related directly to the cost of production - THEY AREN'T!

The only thing that dictates the price is the answer to the question that the sellers ask themselves "how much can we charge? In most cases the sellers are trying to sense how much people are willing to pay and multiply it by the number of buyers.

A simple example (a very imaginary one):

Suppose I produce a new fancy dining table and it costs me about 1,000$ to make (but no one outside my company knows that). Check out the following scenarios:

Price	Number of buyers	Total Income	Net Profit
50,000	20	1,000,000	980,000
10,000	250	2,500,000	2,250,000
2,000	500	1,000,000	500,000

The first conclusion is that the price point point is about 10,000.


Segmentation
My next move will be to think of the potential clients that I lost. There are two groups

1. The people that wish to buy the table but cannot afford it
2. The people that consider the table is too cheap (yes, too cheap) and not fancy enough.

Therefore, I want to have a higher price point and a lower price point for basically the same product. If I am smart, I will do it without any consumer feeling cheated and even more positively, all of them should be satisfied.

First lets address the consumers that consider the price too low. I will use a different wood and make some hand-made carvings. I will use a different color that is considered more stylish, etc.

For the second market, I will do the opposite. I will choose a wood that is still very good (hey, my brand is all about quality) but is considered by people as an old fashion wood and I will brand it as "made in Taiwan".

The nice thing about this method is: Suppose Andrea, Dana and Jennifer are good friends. Each of them will buy a different table and all of them visit each other once in a while, none will feel bad. To them it is a totally different table. For me it is almost an identical product. This is called market segmentation.

The bicycles companies do exactly that. They generate very similar systems but they make sure we see and feel them in a totally different manner. We pay very nicely for different models and we feel good about it.

Are we suckers? good question, if you ask a cyclist, s/he will tell you "no" and start to lecture you about shifters, transmission, materials and how much a 20 grams lighter saddle can save the day during a hill climb. If you ask his/her spouse, well the answer is: "the idiot is spending much money and is likely to get injured"

It is important to understand that there is no good or evil about it, this is a way business is done.

And me? I was lucky enough to find a nice carbon bike, second hand, 2007 model which due to its small size the store could not got ridden off so I got myself a good deal.

Amir

Can a small ripple create a tsunami?

In many companies, trying to do our best (even not according to plan) is ingrained in the culture. We reward these people that stepped up from their comfortable chair and did something extra to fix a broken situation. We tell their stories, we use them as examples, and we honor them.

Consider these two examples that we typically consider as very positive:

• The sales person who was able to convince a client to proceed in the sales process by promising something new and exciting
• The software engineer who added a really cool feature

I am not against creativity. On the contrary, I like to think outside the box and push into uncharted waters. In addition, it is difficult for me stick to the master plan once I see something better. Also remember that Israelis are "masters of improvisation". However, I wish to show you in this post the negative aspects of doing so because the impact of such negative is much higher than most of us imagine.

In a book that I am reading these days, there is a great example of such phenomenon.

In one of the chapters, the author describes a big division of Boeing called FOTV (flight operations, test & validation). The general manager of the division says that their culture is of people that are trying their best to save the day. He explained:

We are under immense pressure to test and validate new planes. Now, suppose a flight test went bad but it was not the plane's fault but rather the weather. The flight crew will try their best to go for another flight the same day which sounds reasonable to them (they wished to do their best to stick to schedule). The crew does not understand the impact on the maintenance team that should wait for them on the ground missing another task. They also fail to realize that the the fuel truck will not be available afterward since it needs to be somewhere else and hence the plane won't have fuel for tomorrow's flight. etc. etc. etc.

The analogy is that in a complex organization where many parts are interlinked, a small ripple starts to create many new ripples and they intensify each other until they form a tsunami.

Consider the "new cool feature" that the software engineer decided to add or that the sales person promised in order to try to save a deal. This new feature creates a small ripple in the development plan of the engineer, and

• it needs a new graphic user interface (GUI) which means that the UI designer to stop an existing task and come to help, and
• it needs a new interface with other programs affecting more engineers, and
• it needs a quality assurance test plan and testers time, and
• it messes with the help guide that was already printed out for all new customers, and
• it messes up the demo for the upcoming exhibition, and ...

You get the picture - not sticking to plan disorients an entire organization. the more complex the organization is, the more effect a small ripple has. But even for small companies the effect can be significant. For a startup company a delay of 2 months might mean "wrap your bag and close the doors, game's over"

So, what will you do about it? My guess is - business as usual (or maybe not)

Showing value, value and more value - NOT ENOUGH

When you pitch your product, where is your focus?

For the vast majority of people I know, and definitely entrepreneurs, the focus is on the value their product brings (or the problem it solves).

The problem in this approach is that even if a product indeed solves a real need, this pitch rarely advances you in the sales process. Am I right or am I right? :)

Then sales people cry that the client is an idiot, or convince R&D to build a new useless feature, or take the blame and crisp their pitch. However, results remain the same, the client does not buy.

People forget that there are more things than the value the product brings. Not addressing them is the real problem.

When you try to convince others take a change such as buy a product, you need to address 4 points:

1. What is the gain in taking the change
2. What is the risk in taking the change
3. What is the gain in not taking the change
4. what is the risk in not taking the change

At this point, you probably think that I am full of logical bullshit and that all four points are kind of identical. I assure you, THEY ARE NOT and all 4 points are critical !

The gain in taking the change

This is the pot of gold, this is what we typically pitch. If you take our product, marvelous things will happen ....

I see no reason to explain it any further, I think this is pretty clear

The risk in taking the change

We tend not to talk about this point at all or shove this aside.

We have to recognize and appreciate that the client sees negatives in the change.

Even if the pot of gold is immense, it is risky. Think that the pot of gold is up a steep hill and the client needs to climb a ladder to get it. Climbing a ladder is risky, one can break his/her leg during the process.

The gain in not taking the change

We always forget about this one, we do not even realize that the client has things to gain in not taking our product.

These are not negatives that might be associated with our product or the change itself. These are positive things in the current situation.

Think that the pot of gold is up the hill and we live in sea near beautiful mermaids that sing to us and cannot leave the sea when we go out to the land for the gold.
 

The risk in not taking the change

We do tend to speak about that, but we confuse it with the benefits that the product brings. The first one is benefits that the product brings, while this one is negatives in the current situation. This is the alligator biting our ass and forces us to change.






When you make a sales pitch, you need to address all 4 points, don't neglect them.

You can check this short animation for a better explanation

Good luck,

Amir

Why many companies are now raising HUGE amounts of money

Recently we see many companies raising huge sums of money based on amazingly high valuations. I am talking of course of facebook, twitter, groupon, etc.

This post is not about the companies’ valuations. Whether it is a bubble or not, history will judge best.

This post is about why do such companies need so much money, so quickly. I know the rule of “raise when you can and not when you need it” and generally I agree. But I also think that there is some limit to what companies need.

The simple answer is greed. Since valuation is now high companies can get much money for very small portion of equity.

However, if the companies believe that their valuation is real and will continue to grow, what’s the rush?

I think that there are other phenomena that can explain this

Examples:

• Everyone realizes that facebook changed the Net and our lives. However, I do see that many of my friends invest less and less time in facebook or even stopped using it. I see people are less responsive and that “thrill threshold” is  getting higher, while I do see business that market themselves more and more and spam my wall.
  
  In addition, it is clear that facebook changed their focus from finding what they are and helping us people into monetizing in any way they can. Why is that? What’s the urgency?

• Groupon affects much on how people are buying and even more how local business advertise. It is really nice, but what’s the real value to a local businesses that offered coupons? Does it really make an impact in their ability to make more money? Still hard to say.

I think that these companies are now in such a unique time that the success potential still seems freakishly high. The money generation mechanisms reflect (at least in the short term) their ability to demonstrate real income and not just eyeballs model and "this is a new economy... this is not a bubble ...". Then, they capitalized on this potential and can get their hands on very large investments.

Their urgency is stemming from their own realization that their model might collapse.

Facebook still has no real user locking mechanism. Users can abandon it pretty fast if a better social network with better targeted content, friendlier UI and less spam evolve (Skype has shown us how fast people are moving with their friends when they find new value).

Groupon is in a rush since when statistical analysis about their model will become public knowledge, it might prove that the promise is phenomenal. In such a case their value will decline pretty fast. This is not to say that they will not be a good company but they might not become the great next big company that changes demand/supply and advertisement habits.

These companies are very smart to create cash buffers for rainy days. This money is not just for growth, this money is to allow them to find the real model that will help them survive should their promise will not be as expected (and we should expect that).

And we, we are the stupids that provide such ridiculous amount of money for so small an equity jumping in without thinking and hoping valuation will raise infinitely.

Amir

To think or not to think? This is the question

Let's admit it. Most of us human beings are lazy in terms of thinking really hard. We like simple problems. How many times do you face a riddle and when you cannot solve it in 5 minutes you ask for the answer or put it aside?

However, we also like to think of ourselves as smart. We look for data, we read a lot before we take a decision. But this is not thinking. Most of the times we simply bury ourselves with tons of irrelevant information. We do not really analyze it.

When it comes to rely on consultants, this is even worse. We tend to quote what others that are considered professionals say. This is not only dangerous in terms of not thinking, but it also means that it is okay be wrong because we follow some "smart" person. This is just ass-covering in disguise.

I'll share with you a personal anecdote. When I was 10 years younger I founded my first startup (today called invoke.com). In its early days it was about education. My partner and I put together a detailed business plan and we quoted a famous analyst claiming how the online education market is about to grow exponentially.

Then we needed to check how people respond to it. Luckily for us a good friend of my father is Dr. Eli Goldratt who founded Theory of Constraints and he was willing to listen to us boys. So we presented Eli with our plan. Men, he killed us. One question he asked is "how do you know the market will grow?" With a broad smile we showed him the slide with the analyst's opinion. His response was "the starting point of his analysis was also valid last year, so how come the market did not grow last year?". Oops, we haven't thought about that.

Next he told us "never quote someone without really checking his/her logic, otherwise if he says something stupid, you are even more stupid to follow!" Eli became my mentor, he made me work hard then I have ever imagined I can.

Another example is not the use the lessons from the book called "built to last" without thinking. Please, don't get me wring, I really appreciate this boo and I think any entrepreneur and business person must read it. However, using lessons from this book is dangerous for two reasons:

1. It contains only correlations and not causality.
2. The correlations are not perfect so it means that they have inherent flaws in them.

One of the correlations of the book is that great companies must have a CEO that comes from the company itself (do not bring an outsider). I think this is a good rule in general. But think whether IBM would still exist today if their board was not courage enough to bring Lou Gerstner to revive the company when it was about to die.


Thinking is difficult. We are not used to really analyzing. We are used to sift through data and opinions of others and postpone decisions and when it is almost too late to quickly decide. We feel much better at execution mode rather at logical analysis mode.

Each one of us should have someone like Eli Goldratt on his tail to force them to think until it becomes our natural mode of operation. By the way, This critic can be anyone as long as they ask "Why is this true?" and not let go until they get a real good simple answer.

Amir

Small fish eats big fish

I read the Innovator's Dilemma (by Clayton M. Christensen) many years ago. Nevertheless, I think this is a great book, very relevant and a great opening to this new post. The book copes with the following question:

Why do great companies, that are well managed, have their antenna up, invest in great new technologies lose market dominance?

In simple words - how come a small fish eats the big fish?

The books then discuss a phenomenon called disruptive technology which is a new technology that is not necessarily very good in many aspects, it is cheap, it is not based on the need of the current market, it offers a new benefit to a non mainstream customer

The disruptive technology is not "under the radar" it is very visible, but no one grasp it as an attack. Then suddenly after several years, the company that develops this technology becomes a giant that takes over the market.

Example: the 5.25 inch hard drive that took over the 8 inch hard drive

The new 5.25 hard drive, in its early days:

• Had smaller size
• Performed lousy! Slow and much less capacity than the 8" drive
• Was more expensive per megabyte!
• Mini computers clients hated it (so why producing it)

However, at the time, the PC market started to grow and the size of a hard drive was important for them. Therefore, PC manufacturers needed smaller hard drives.

In addition, the facts that the 5.25 hard drive had less capacity and was slower was not so bothering for the new market of PC users since home users were much less demanding than business users.

Finally, even though the cost per megabyte was higher, the total cost per hard drive was cheaper since the hard drive contained less capacity.

As time passed by, the hard drive became faster, larger, and cheaper (technology tends to improve very fast). And .... they took over the market since now the mainstream clients wanted them as well.

Then came the 3.5 inch and of course they did not concerned the PC market, but then laptop market emerged. The story repeated itself. What do you think you have inside your PC today? 5.25" or 3.5"? The story continues to 2.5 inch drive and so on. Nowadays Apple is using flash solid state drives in their iPads. What will this do?

Why am I telling this?
Well, first, I think this is very interesting and that the book is worthy of reading and internalizing.

Second, I think that during the last several years, we see this happening in many other aspects of life which are more interesting to me than hard drives.

Each time, we see a giant company and we say "They cannot be defeated". Several years after, some start-up shakes them badly.

Think of

• What Google did to Microsoft. A search company that disrupted an operating system company
• What Facebook is doing to Google. A social company to a search engine. Today it is easy to understand how can Facebook compete with Google. No one can deny that Google has been investing huge amount of money and energy in its search engine and in many other technologies and yet it failed to recognize the threat on time
• Think of what Groupon will do and to whom. The started as a coupon based, social buying to local business. But they can and probably will change dramatically the way companies advertise and attract clients. Groupon is only 2 year old.
• See what twitter does to news networks
• What Facebook credit for virtual goods will do to banking? They can be the bigger bank on earth.
• Zinga - they started as a parasite of Facebook but now they can be the social gaming network. Hey, they can even make a console soon and compete with Playstation, Wii and Xbox
• What Rovio with their lovely angry birds and their new in-app-purchasing platform will do to micro payments'
• What amazon.com and salesforce.com are doing using their cloud computing infrastructure to hardware and middle tier providers.

Things are happening rapidly. Companies and investors do understand it. You can see it when companies refuse to be bought for a very nice figures by Google and Facebook. Companies reject Billion Dollar exit deals.

This is a huge opportunity to entrepreneurs. We can think big again. We can change the world. We just have to be very creative about the angle we choose to attack the market and they way we define a market.

One mistake you should not do is: never threat directly the big fish.
If you are going directly into its market, you are bound to lose. This mistake was made by Netscape, they threatened Microsoft directly by revealing the potential of a web browser to become the next operating system. Even though Microsoft woke up very lately to adopt the internet and was damn  slow, they won the battle. They could not afford to lose, so they did whatever it took.

Amir

Is the madness back?

I am amazed during the last several weeks seeing what's going on with valuations, investments and potential IPOs.

Do not get me wrong, I am a techie and an entrepreneur. I bet on my ventures making money in one way or the other, but what I see outside is scary; it is like we have learned nothing from our past experience and we had several bubbles during the last decade.

Take facebook for example. This is a great company making a real revolution in the social lives of people! However, when people speak of valuation of 70 Billion and there are also people that speak of a trillion dollar in the future, I think this is terrible and ridiculous. Yes, this might happen but hey, even though facebook is amazing, we know that this is still a young company with an evolving product that gets more troubles and more competition (some of it disrupting such as social games). How can we even think of such high valuation?

Another example is groupon. Again, this company is a great new company, with a new refreshing model. But, it is easy to compete with, their model is less than 3 years old and people now speak of 15 Billion dollar IPO.

Greed is the source of the problem. Not necessarily the owners' greed, but rather the VCs and the banks supporting these companies. They keep shoving more money at a higher valuation expecting to push them up and get an even higher return.

Since money is not invested in new companies they can put large bulks into selected few companies and push them harder. Note that there is zero collateral.  Note also that if they fail, their ass is covered since everyone bet on the same horses. It is okay to fail.

To me this is more frightening than the sub-prime crisis. The stock will collapse at one day, maybe sooner and maybe later. There is no rational. The P/E ratio simply ceased to exist. It is fine for a VC to fail (this is their mandate after all). But now we see banks getting in, and after an IPO the public will get it. Everyone will want a piece of the pie, many will suffer in the end.

Please bring the sanity back to the world
Please do not let the greed blind your eyes

Amir