Feature, Product, Company

Is it a feature, a product, or a company?

The 'it' can vary, but for the sake of simplicity, in this discussion I'll assume the innovation is technological. But the issues are similar for others, e.g., a new service idea.

Is it a feature, or at least a product? Here are two of my favorite ways to probe this:

Is the function separable? Can it be implemented without the necessary existence or cooperation of supporting functions or businesses? For an example: 15 years ago the idea of a 'public network search engine' was invalid. The open standards and content base of the Web did not exist. To the extent that consumer online content existed, it was locked up in proprietary online services, each running on a closed network. The idea of a separable search engine product or service was nonsense - the market was not ready. Now we have Google.

If the answer to the separability question is 'no', then there's a subsidiary question: Does the necessary supporting infrastructure exist already, as part of an operating business? If not, add the necessary support to your business plan, and reanalyze for value and ROI. If yes, you are a feature to someone else's product or service.

Will the customer pay for it separately? And not just that, but pay enough to achieve an ROI including reinvestment over time. An historical example is the linkage of achievable software prices to the cost of the underlying hardware. Another common case is the difficulty in revenue extraction when the supporting functionality is seen as 'free' by the customer - either actually or as part of a bundle. Add-ons to MS Outlook could be an example.

You can approach this problem with common sense or reasoning by analogy with existing markets, but at the end of the day, you'll need some customer endorsement. The question is not whether the customer perceives value, but whether and how much they will pay for it. If the answer to this question is 'no', you may be out of luck.

Being analyzed as a feature is definitely harmful, though not always fatal, to VC support. If the underlying market is fast moving and competitive, the time premium assigned to innovation may be enough for you to carve out a position as a supplier to incumbents in the underlying product/service space, or force one of them to buy you out to maintain their position. But this is inherently a 'timing play' which can lead to disaster if market momentum slows, as the last few years showed.

If you are an entrepreneur in such a position, and still want to continue, you should look very hard at whether you want to go the VC route. The number of firms that will consider you is going to be less, and you will find yourself pushed towards the timing play.

If both the above questions - and others appropriate to the case - were answered 'yes', then congratulations. You might have a product. You still must show you can make money at it, of course: that you can build it on time and in budget, get it to the customers economically, and defend your market from imitators well enough to recoup the investment and a return. But, I'm going to assume you can pass all of those tests as well, so we can move on to the next fork in the road:

Are you a product, or a company? If your product win is big enough, if it defines a big new category, the question might be academic. But if you make that claim to VCs, be prepared for them to look askance. 99% of the time the statement 'defines new category' means one of two things: The actual customer value has not been correctly analyzed, or the company has overlooked (or wants us to overlook) a class of potential competitors. This is quite common with technical entrepreneurs, who will often analyze in terms of whether a competitor solves the problem in the same way, overlooking options that are substitutable in the eyes of the customer.

So assuming your first product isn't enough for a profitable exit, what distinguishes a 'one hit wonder' product from a company?

Here's the point where 'market space' comes in. It's a nebulous phrase summing up a lot of potential ways of expending from an initial market position, as well as the opposition you will meet in doing so. There's no way to enumerate all of them but here are some of the options that can create 'space', as well as some of the challenges and competitive rebuttals that may occur:

  • We'll add functionality and raise our price point over time. [Good luck putting up prices, and if you succeed, you'll exceed the buying authority of your first customers.]
  • We'll expand our market by creating a lower-featured 'lite' version. [Some of your regular customers will think it's good enough and your gross will drop. You'll create channel conflict.]
  • We'll get others to use our product to support their businesses, and that will grow our value. [That's called a 'platform play.' Microsoft or Intel will integrate your functionality and squash you like a bug once they figure out what you're doing.]
  • We'll use the momentum and profits from our first product to buy up more technologies to integrate, and products to brand and sell through our channel. [That's called a 'roll-up.' Have fun integrating the management and sales teams, and keeping customers who bought into different value propositions happy.]
  • We'll integrate backward, and assimilate the functions and revenue of supporting businesses. [Who does the customer want to do business with, an upstart or an established company?]
  • We'll go international - 2/3 of the market is offshore! [It takes time and money, you don't have the cultural skills, and local champions will get there first.]
  • The underlying market is about to explode, Moore's Law guarantees it! [Some analyst cooked up numbers to sell a report, and made gross assumptions on market elasticity.]

Now these are obviously pairs of wide-eyed optimism and jaded cynicism. Truth will usually be somewhere in between for each possibility. What you want is at least one convincing growth argument of this sort, after considering the structural barriers and competitive responses, preferably also buttressed with a couple of other plausible alternatives if they are necessary.

Again, if you got a 'no' answer, and still want to persevere, ask again: Do you want to go the VC direction? There are many valid products that never create a VC style equity exit, but may create profit and cash flow for the entrepreneur and value for the customer. What's your goal?

By Tim Oren


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