The Founding Myth

If you want to gain real insight into a start up company, ask someone to tell you the story of how the company was founded. Start ups have precious little history and culture and therefore, since these stories may be all they have to bind the company together, they are elevated to the status of myth.

In The Hero with a Thousand Faces, Joseph Campbell deconstructed classic myths and identified a recipe for myth creation that spans cultures. (For those of you who are not aware, George Lucas borrowed heavily from Joseph Campbell's recipe when he wrote Star Wars). Founding myths also have a common recipe:

1. The founder(s) was toiling away in a related, but somewhat different, job
2. He/she identified a problem or need
3. He/she developed a vision for how to fix the problem/fill the need
4. He/she became so convinced in its widespread appeal, they were compelled to start a company

Founding myths are incredibly powerful. They are critical recruiting tools for start ups, who in absence of more tangible factors like rapidly accelerating revenue, use them to sell the promise of the company to prospective employees. Internally, they provide a common vision that everyone can hold on to - especially important as companies are finding their way in the market. Founding myths actually grow more powerful over time. Companies use them as a lens that sees every success as a reinforcement of the myth's validity and setbacks as caused by other factors.

However, founding myths also have a downside. If (actually when) the founding myth collides with market reality, it takes a very long time for a company to adapt. The myth is so interwoven with the fabric of organization that it takes a major negative event before companies are willing to let go.

Documentum, where I worked in the mid 1990s, is a company whose founding myth cut both ways. Documentum was founded to be the Oracle of Content. Buried into this myth was the vision that like Oracle, Documentum would have one repository into which all types of content would be stored. Initially, the myth led to the creation of the most scalable, feature rich, and flexible content management system on the market (it had to store everything). This enabled Documentum to easily tailor its solution to meet the needs of its customers. However, the myth ran aground when the Internet and HTML came along. Unwilling to part with the idea of a single repository, the company tried to force fit HTML into a system that was never designed to support it. As a result, the company opened the door to Vignette, Interwoven, and other web content management companies. Only much later did the company abandon the one-repository vision.

While failing to challenge the founding myth ended up costing Documentum a major opportunity, it can be fatal for companies whose founding myth runs into market reality earlier in their lives. Therefore, we recommend that challenging the founding myth be an integral part of all strategy development work. Start by listing the core beliefs about the company (one repository for all content, we are Open Source, etc.) and consider the following three questions:

1. Where did this core belief come from?
2. What facts do you have to support or refute its validity?
3. What would happen if you tossed it out?

If you are short on supporting facts and you can come up with a few good things that would happen if you tossed it out, it may be time to let go.

Adoption: When is it Too Much of a Good Thing?

The primary challenge for all start up technology companies is adoption. How do you get people to buy something new from a company they have never heard of? To be sure adoption is a good thing. However, it does not necessarily follow that maximizing adoption is always best. Remember, the ultimate goal for companies is to maximize revenue and there are many cases where the two are not necessarily linked.

In the past, when the predominant business model was selling high ticket item solutions to enterprise IT, adoption directly drove revenue. However, today, where many business models are predicated on providing low cost or even no cost entry level versions, the relationship between adoption and revenue is no longer a sure thing.

At Topline Strategy, we break markets into three categories – high, medium, and low – based on the correlation between adoption and revenue and recommend companies set their strategy accordingly.

High: These markets are ones governed by the network effect. Under the network effect, the intrinsic value of a product or service increases exponentially as the number of users increases. Therefore, more adoption drives more value which in turn drives more adoption, etc. For these companies, the strategy is simple – acquire users. YouTube, where more users means more videos, and eBay, where more users mean more products up for auctions and more buyers, are both examples of network effect businesses.

Medium: These are businesses, like technology platforms such as databases or application servers, where the value of the company’s products is enhanced by a community of companies offering value added products and services. While adoption is important for generating a community, it is not necessarily true that the company that has the most adoption wins the market. Instead, it is the company that generates the most robust community. These companies strategies need to focus on community development.

Low: These are markets where the fact that one user has adopted a new technology has little bearing on the value that the next user receives. Application software companies, online content providers, and search engines are all examples of businesses where the intrinsic value of adoption is low. For these companies, the strategy needs to focus on acquiring profitable users, not just any user. The most common mistake companies make in this segment is to under price their offering based on the assumption that all adoption is good adoption.

One example where this dynamic has played out is the Vulnerability Management (VM) market. VM solutions are corporate security solutions that scan devices attached to corporate networks to identify vulnerabilities to hacker attacks. Two of the main competitors in this market are the SaaS company Qualys and the Open Source company Tenable. Since Tenable gives away the base version of its solution, it has a total user base that is over thirty times larger than Qualys. However, Tenable has been able to convert only 250 of its 75,000 free users into paying customers. In contrast, Qualys has over 2,000 paying customers, nearly ten times as many as Tenable. Ultimately, Qualys gained adoption where it mattered most, among paying customers. It didn’t matter that Tenable had the most total adoption.

How to Know Whether Your Idea Will Fly by Lunch on Wednesday

Launching a new product or taking an existing product to a new market is a leap of faith.  By definition, the company has little experience in trying to sell the product to its target customer so while the idea may be based on sound judgment, you don’t know for sure that the dogs will eat the dog food.  Given the percent of start ups that fail, it is safe to say that often, they do not.  However, it isn’t that the successful ones come out with the right food for the right dogs the first time.  It is that they are quick to adjust if they haven't.

To that end, we’ve developed a 20 hour test that can tell whether or not you have it right. Therefore, if you start at 9:00 Monday by lunch on Wednesday you will have your answer.

The 20 hour test comes from applying our Market Immersion methodology to dozens of new market projects.  In a nutshell, Market Immersion is a methodology for beta testing sales. It enables companies to rapidly build real world selling experience so they can figure out what works, what doesn’t and adjust accordingly.

The first step in process is for the company to cold call prospects to set up beta test sales meetings.  Cold calling is admittedly an unpleasant task, but here are the cold hard facts about cold calling.  If it takes you more than 20 hours to cold call a qualified beta test sales meeting, something is very wrong. 

Here’s why:  When you cold call, you are reaching out to people who you believe should need what you have to offer.  If it takes you more than 20 hours of calling to convince just one qualified prospect that it is worth 60 to 90 minutes of their time to learn more, then what you are saying is just not that compelling – there is just not enough pain around the problem you are proposing to solve or value you are proposing to bring to build a business.

For people who say, “Well maybe the problem isn’t the technology, it is that people just doesn’t understand it or are not ready for it.”  To that, I respond, “Precisely.”  Failing the 20 hour test is not a death sentence. It simply means that you need to go back and retool – different target, different message, different features, different business model.  On the other side, passing the 20 hour test doesn’t mean that you have it nailed. But it does mean that you are at least playing in a market where there is real pain.

I’ll add one more caveat – the 20 hour rule only holds if you run a good test. Here are some of the basics.

·        Position the meetings as discovery meetings with the explicit understanding that if they are interested, it will move into a sales cycle.  We typically say the following, “We are launching a new product in your market that does X.  The reason for our call is that we want to make sure we get it right and to that end, are interested in getting your feedback.”

·        A qualified meeting is a meeting at a company that is a legitimate prospect with a Vice President or someone who reports directly to a Vice President.  Lower level people are more willing to meet and are not a reliable gauge of interest.

·        You can’t delegate the cold calling.  The key to setting up the meeting with mid and high level individuals is having an expert on the phone with them

·        You have to doggedly dial the phone for 20 hours – Practice your skill at sweet talking administrative assistants, begging for email addresses and following up relentlessly.