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Why I’d Prefer 1,500 Mid-Market Customers over 25 Fortune 1000 Customers

An interesting blog post came up on my Google Reader the other day that really resonated with me.  Adam Smith founded Bessemer Venture Partner’s Herzliya, Israel office.  He blogs at Savants in the Levant.  Last week he did an interesting post entitled Wanted: Small, No Name Customers.  Adam’s central thesis is that tech companies have a higher probability of success if they eschew trying to sell large scale enterprises and instead focus on mid-market or individual consumers.  Adam has invested in and profitably exited from a number of startups so he has a clue about what he’s talking about.  Here are a few interesting quotes:

Large Can Be Longer, High Touch, Expensive, Non-repeatable & Unrewarding.  A lot has changed since then. First of all, post 2000 these large customers have grown wary of working with and relying on start-ups, hundreds of which have disappeared, changed direction or simply never reached scale. The result is that the sales and testing processes of large customers is longer and more arduous for start-ups than ever before. Additionally, the procurement process of these large customers is more stringent, built on the premise that they are always better off buying from a select group of large, established vendors(even with an inferior product). Even where they have no alternative, their reluctance to buy from start-ups persists with attempts to indentify a middle man, place the start-up’s IP in escrow(in the event of shut down), or extract a hard commitment to fulfill the product roadmap(rarely accompanied by any NRE dollars). And once an order is finally placed, the long coveted joint press release is blocked by the legal department”

“Small Can Be Quick, Low Touch, Repeatable & Inexpensive. With large customers no longer worth the effort, start-ups should consider focusing on smaller customers and/or consumers. Luckily, several trends play in favor of such a “no-name” customer strategy. Performance marketing including targeted online advertising and affiliate networks allows start-ups to reach a wide audience cost effectively and with minimum up-front investment ( see “When Marketing and Sales Becomes Scientific”). Similarly, advancements in delivery methods, including downloads, virtual appliances and software-as-as-service lower the cost of sales, deployment and maintenance. Of course, strategies focused on small customers and consumers do not preclude sales to large customers as mentioned in my previous blog post “A Preferable Route to Market.” The challenge for Israeli companies is to build a product that emphasizes usability and simplicity as much as technology and performance. I have little doubt that such skill sets exist in Israel, but the key is to make this a priority.”

I have been in the technology business for almost 27 years.  I spent the first 18 years of my career in the classic enterprise software market.  We targeted the 15% of the Global 2000 that drank the 1980’s Information Engineering Kool-Aid.  While our products targeted a niche, it was a very profitable niche that grew into a $300 million business by 2000.  The bulk of our revenues were concentrated in about 500 global enterprises.  Other companies I have been an executive of worked to ride the coattails of large ERP companies like PeopleSoft and Oracle.

The overarching theory was that big enterprises were always a much better market than mid-market and the SMB space.  The challenge with this strategy is that most enterprise software companies only ever succeed in winning a small share of the Global 2000.  As Marc Andreessen recently noted during the launch of his new venture capital firm, Andreessen-Horowitz “The problem is that there aren’t valuable companies being formed. And there never have been . . .There are on average 15 tech companies launched a year that will ultimately do $100 million a year in revenues, and these companies are responsible for 97 percent of the returns in the venture industry overall.”  I also attended a CIO Roundtable event last week where 40 Atlanta CIOs gathered for a panel discussion.  Most of the CIOs were from multi-billion dollar enterprises like Coca-Cola, GE Energy Services, First Data and even Popeyes Chicken.  The theme of the event dealt with the challenges of buying and selling technology in today’s world.  Several of the CIOs discussed their concerns with working with startups.  They told a few war stories about how they had ‘crushed’ startups through their tough, global requirements.  Most admitted that they focused their procurement on a few, large, well known vendors that they had long track records with.  A key take away from that event was that most startups today had a better chance of winning the lottery than they did trying to crack their way into a Fortune 500 shop.

For the past 9 years of my career I have worked with firms that targeted both the enterprise space as well as the mid-market space.  By mid-market I mean organizations with revenues between $50 million and $1 billion a year.  Conservatively, there are about 25,000 organizations in that size range in the United States.  There are probably another 75,000 outside of the USA for a global market of 100,000+ organizations.  In comparison to the Global 2000, the mid-market offers fifty times more opportunity to sell a solution to a specific customer.  Without a doubt, the deal sizes are radically different.  For a typical enterprise-scale customer, a technology company can reasonably expect to extract $2.5 million of revenue over the life time of that customer.  For a tech company that focuses on the mid-market, the number is more like $50,000 over the customer life time.  When you do the math, 25 enterprise customers generate $62.5 million in life time revenues.  It takes about 1,500 mid-market customers to generate the same amount of life time revenue.

Selling to mid-market customers is fundamentally different than selling to enterprise customers.  First off, the classic enterprise software big elephant hunter sales team strategy does not translate into the mid-market space.  Enterprise sales people typically have annual quotas of $1 million to $3 million.  They use a direct sales model and focus on closing a few very large deals to make their annual nut.  They spend countless hours courting, wining, dining, and developing relationships.  They rack up massive travel expenses since there are typically only a few elephants in their home towns.  Some sales people may go 18 months between closing big deals.  When they land a deal, however, the massive commission checks more than makes up for the dry spell between deals.  Startups that hire enterprise sales people often find, however, that while they may be able to close one deal, most often they are unable to repeat that achievement before the company’s venture funding evaporates.

Mid-market selling is typically done without the rep ever having to travel or meet their customers face-to-face.  The telephone and webinars replace on-site visits.  Web-based demand generation and lead nurturing replace the enterprise sales person’s personal rolodex.  A typical mid-market rep will close between 100 and 300 transactions a year in comparison to the enterprise sales person’s 5 to 10 deals.  Mid-market teams are highly dependent on their company’s ability to establish a well known brand in the marketplace and highly credible/effective web-based marketing.  Mid-market reps become expert at long distance conversations.  They are rarely in the same room as their prospects so they must learn to hear the signals their prospects are sending instead of being able to read their body language.  Successful mid-market technology firms are masters of execution when it comes to selling and supporting their customers.  In fact, superior company execution often makes up for technical deficiencies in their products and services.

Another strategic benefit for startups focusing on the mid-market versus the enterprise space is revenue risk.  Startups that focus on the enterprise space tend to have ‘lumpy’ revenue.  The revenue tends to be concentrated in a few very large customers and comes in fits and spurts based on when the big deals close.  Given the challenges of today’s economy, predicting when a new deal will close is always tough.  Also, recurring revenue (like software maintenance fees or monthly usage fees) are concentrated in a few customers.  The loss of any single customer, or groups of customers, can be catastrophic.  Historically, the finance, banking, & insurance vertical has been one of the richest for enterprise software companies.  Dozens, if not hundreds, of enterprise software startups has shutdown in the past two years because they focused on the finance vertical and their target market simply stopped spending money on new purchases and significantly curtailed the spend on maintenance contracts.

Technology firms that focus on the mid-market don’t share the same risk.  Typically their revenues are spread out across hundreds, if not thousands of customers in dozens of verticals.  The loss on any single customer is not catastrophic since a single customer contributes such a small percentage to the company’s overall revenues.  This benefit, however, is tempered by the fact that for such firms, revenue tends to grow slower than enterprise-focused firms because it takes time to acquire hundreds of customers.  While the revenue may come on slowly, it also tends to decrease slowly in tough economic times since it requires the defection of hundreds of customers before revenues are materially impacted.

In the middle of 2009 if I were given the choice of joining a technology firm that either targeted enterprise customers or mid-market customers I would choose the mid-market player.  As discussed in this post there are simply too many barriers to entry in the classic Global 2000 market place today.  I’d rather take my chances that superior execution against a market with 100,000 participants could lead to the pot of gold at the end of the startup rainbow.

I’ll trade you 3 lifestreams for 1 blog

With all the bluster around blogs being dead AGAIN, I thought I just might approach the topic from a personal perspective. The theory being floated around is that blogs are being replaced by lifestreams or at least something smaller than blog, if it is not a lifestream.  A lifestream is a series of links, short content and general real-time communication which represent your life.  Think Facebook wall post and Twitter.

The premise of the latest death knell is that things are going real-time and there isn’t much real-time about blogs, so they must be dying.  At least that is a theme which appears to be developing on the demise of blogging.

Real-time communication while interesting, ultimately doesn’t allow for true synthesis or analysis, it is clearly good for witty retorts alike, but seldom is something I come up with in real-time as valuable to share in the long run.  Think about those great ideas you have when you are brainstorming and the next day when you come back to the list the next day or think about it for a while it just doesn’t work.

Net-net – An idea or comment could be good for the moment, but longevity of something requires a little more thought – even if it is retweeted a bunch.

It’s All About ME Anyhow

I started my blog to have a central repository of ideas and content which I could refer back to and if it happended to be of interest to others, then cool.   Over time I’ve been using my blog for both content I create and for sharing content from others, so I may be sorta lifestreaming, but never really thought of it as such.   Although, I see sharing folks content in the purist form as providing access to others who may not otherwise fish it out of a twitter stream or their increasingly clutter RSS reader.  If you are like me, I have every blog I ever added in Google Reader and way too many tweets in under 5 minutes to stay on top of what is really out there or what might be hidden in a lifestream.

While this blog may at times have a lifestream feel, it’s not like I’m really going to integrate Twitter or move everything over to my Tumblr account, but over time, I’ve found myself sharing more morsels of good content, than creating my own. This is a function of time, not interest or relevance.   Jeremiah puts it best around the latest uprising:

It seems as if blogging is becoming old hat, or at least evolving into something smaller, faster, and more portable. I’m with Louis Gray, (who has finally blogged his stance –great graphics) I’m not going to give up my blog, instead, I think of it as the hub of content, and the rest of the information I aggregate (notice the Twitter bar up top and the Friendfeed integration below). To me, joining the conversation is certainly important, but it doesn’t mean the hub (or corporate website) goes away.

Over the last 30 days I’ve been integrating my life more and more with my blog, but that’s not to say I’m going to quit blogging, like Ruebel, but I’ve made the decision that if I find good information that I want a repository for, then my blog is as good as anything and hopefully others will see value in it.  During one of the last turns at the blogs are dead crank, Brian Clark indicated:

the early bloggers who gained pseudo-celebrity status because they were, well… early, are dwindling in relevance, at least in blog format.

I think it just might be the whole pseudo-celebrity thing which is dying, microblogging is an equalizer for the masses and allows more people access to pseudo-celebrity, if there really is such a thing.  I’ll take cold hard cash over a celebrity and debt any day. What am I saying? Well celebrity is interesting, but doesn’t pay the bills.  I’ve been at dinner twice which two different “celebrities” in the past 6 months whose credit cards wouldn’t support an <$50 bill – ouch!

Twitter and other platforms are changing the shape of the conversation and the number of participants and if you want a larger audience, then perhaps you should change it up a little, but abondoning a platform is probably not the best way to go.  If you want to remain a pseudo-celebrity then you might want to declare blogging dead, it just might sell some books and increase your relevance by citing the obvious – people have limited attention spans.  That doesn’t mean that blogs are dead, just that more people are participating.

Novels are SO DEAD!

Well ok, maybe not, clearly the bound book is getting challenged, but even those aren’t dead.  That of course begs the question how can novels survive if bits are what folks want to consume, must be that it takes all kinds or another way to look at it is that your target market might be different.   There is only so much content a person can come up with which may be why some are moving to shorter venues.  If I focused on 140 characters at a time, I’m fairly sure I’ll never run out of things to type, but maybe things to say.

  • At a conference #conference
  • Just saw X speak, can you believe he just said blogs are dead?
  • Having dinner with @importantpersonA and @importantpersonB
  • I’m so NEVER going to see a cold play concert again!
  • Crappy weather, but at least I have an internet connection

While it might seem that blogging is less relevant among the 140 character crowd, not sure that real time does it justice.  So here is Steve Ruebel’s declaration:

Blogging feels old. Publishing today is all about The Flow. Posterous, my new home, feels more like flow and where the web is going so it’s time for me to do the same with my publishing, which will become daily once again!

It seems more like Steve is trying to publish daily more so than anything or I may be getting it wrong.  I wasn’t aware that daily publishing is what made a blog or even weekly, if that’s the driver then perhaps one should re-evaluate the decision criteria.  Louis Gray nails it:

In the last two years, the rise of microblogging tools and lifestreaming services has given blogging a less-prominent role on everyone’s tongues, but it, in my opinion, is as important as ever. One just needs to make a conscious decision as to what type of data is most appropriate where. Longer, more thoughtful pieces with graphics and type style should go on blogs.

The interaction on Twitter, FriendFeed or other services while interesting, it’s not about critical thinking per se, which is why I try to blog and share ideas.  If all we cared about what the headlines, then we should all just get our news from the “newticker” on the bottom of CNN.

Key Takeaways

  • There has been a population explosion on key platforms which are not long content friendly, but that doesn’t obsolete ideas which should be shared in a more verbose form than supported for status updates.
  • Attention is getting to be a scarce commodity, but that doesn’t mean folks don’t want to read good stuff.
  • Brands, products and people need a home base to drive folks to.
  • New toys, trends and opportunities will continue to present themselves and just with any market you have to pick your channels and target market.