Saturday Night Dinner Parties
We all have a strategy, and then we get hit…. Mike Tyson
Maybe it's just the Saturday night dinner parties I get invited to.... Or perhaps my ears prick up when people start talking about their big idea as that's my business – turning ideas into fast-growing businesses... but I am always amazed at how everyone can be a Saturday Night Dinner Party Entrepreneur ....
Every entrepreneur has a secret. They understand something that the world doesn't yet, and they are surprised that it doesn't exist or isn't done well. Their obsession is delivering this secret to the world.
That secret is an insight – typically and increasingly into consumer behaviour. That women will want to design their shoes (FunInDesign) or want cut flowers curated & delivered and will pay a subscription for them (Bloomy Days) – whatever. It can also be that they want to manage their wealth themselves (Nutmeg), or want a single dashboard for their money (Moneydashboard), or want to back other business people (Zopa).
And it is terribly fun to share your ideas, secrets and insights at Saturday Night Dinner Parties.
However by Monday morning, few have a plan or a clue as to how to turn these light bulb moments into products or services, the manifestation of the consumer insight. Most forget, and again, most don't realise how little the idea (stage 1) means beyond being the guiding light to the venture. But imagine that you do get a product built. The good news is that you can build a product today on a much smaller budget than ever before. The bad news is that getting a product built means relatively little (you're at stage2 now), but allows you to go to market.
Everything hangs on how you go to market
Going to market is the critical phase (stage 3) in building a company because it gives the founder the opportunity to demonstrate that the insight he/she has – has a market. Many a great product has been launched, only to find that there wasn't really a market. Sometimes this mistakenly gets labelled as a market failure, and skillions of government money (code word for our taxpayer money) gets piled into further confusing the fact that there isn't a market for the product. I'll say this very slowly as it's really important: S o m e t i m e s, there just isn't a market. This is a core principle of capitalism. Those 'market failures' don't need to be funded by government money, they need to be abandoned.
Do people really want to fly the Concorde? Do they really need De Lorean car? The market said no.
Market Need is not Market Demand
But the next phase of going to market is to prove market demand: that is, that people will buy what you sell. Not that they will admire it, nor that they will be happy to use it if you give it to them for free, but that there is a trade. The market is about trades. You give me a shiny Swiss watch, I hand you £5,000. You make an awesome Australian steak, and we will go to dinner at your fancy London restaurant where you make your steak dinners. You make a newspaper, and I will subscribe to it ..... I find a better way to get my news or a better form of news, and I will no longer subscribe to it.
Don't confuse market need with market demand. You'll know when you hit demand as you'll feel a tug, a yank or a tsunami into the market. There are a lot of graveyards of start-ups in 'market need' not 'market demand'.
The Consumerisation of Technology
It used to be that people experienced new gadgets and technology in the office. The entire IT industry was built upon the premise of sales into the enterprise. Gates' fortune was established by its monopoly of the operating system which the western world operated in offices for nigh on 20 years.
But that all changed after 2000. The consumerisation of technology became a reality and people's first experience with tech came through their downloading of Skype, or their purchase of an iphone, or the services which became available through broadband in the home.
But even outside of the technology world, as a generation of people either born into an internet world or matured into one emerged, we were empowered profoundly by consumer choice brought to us by the web.
Importantly, the arrival of 3G and then 4G had to be 'sold' or rather pulled into the market by 'selling' what consumers would be able to do with this capacity.
From a venture capital perspective, stage 3 is the risky one as if you get it wrong, you can waste a lot of money, and not figure out your operational model.
As previously discussed, corporates represent an important highway to go to market at this time. Their customer bases are significant and a key asset for them.
But here's what's changed: all B2B businesses are ultimately B2C2B businesses. You cannot escape having to demonstrate consumer demand in today's world, but then you need to march that market demand back into your channel to scale. This is fundamentally the opportunity for start-ups: for Davids in a world of Goliaths. Digital David is able to engage with consumers around his core insight / product much better than Goliaths.
Stage 3 is also where you figure out your operating model, ie what is your business model when it hits the market. As Mike Tyson said so rather eloquently, 'we all have a strategy, and then you get hit.' Entrepreneurs get hit by the market. What they do, when they do, shows their true colours. If they are good, they process the blows fast and clearly and adjust. They recognise that their rev share is off, or they've picked the wrong partner, or they've targeted the wrong consumer. Excellent entrepreneurs are obsessed with achieving Product/ Market fit, and pore over every detail of data on their product and the market until they get pulled into it.
So if stage 3 is the rocket hurtling through the atmosphere of the market, then as it settles into its natural orbit (Product / Market fit – check; CEO understands his/her operating model – check), this is the right time to scale and put more money behind the firm. In my experience, start-ups who secure major funding to scale before stage 4 happens have problems. It's like giving your 17 year old daughter a credit card to go shopping at Harrods, nothing good is going to happen.
Teads, co-founded by Andrea Febbraio, former VP of Sales there, acquired 9 start-ups en route to becoming a $100 million revenue business in video advertising. Their peer group, Brightroll, was acquired by Yahoo for a cool $640 million recently. Teads is safely in their orbit in stage 4, and the key question will be whether they go public, or get taken out in the next 12 to 18 months.
Stage 5 in Start-up Land is either getting acquired, or being cash flow positive and sustainably growing. Those start-ups who make it through as stand-alone entities either because they have given their shareholders an exit (Criteo), or they take a long-term view of the opportunity (like the Mittlestadt who don't want to sell) have the opportunity to build an ecosystem. SAP certainly has, as has ARM, and others.
This is where Europe is weak, and arguably making money for America. We are not systematically building ecosystems, but supernova exits. Everytime a start-up exits, more of the early stage execs flow back into the market with massive learning of how to build successful ventures. These supernovas are critical for building a deep bench of talent. Silicon Valley is Silicon Valley though because it has created anchor tenants, platform firms, which have an ecosystem, and then exercise their position to organise the economics for that ecosystem.
This is 'Ecosystem Economics' and I have written about this extensively for 8 years – most recently here.
None of this takes away from the fun of talking about setting up your next venture on a Saturday night with friends. I always encourage people to 'get it out of their system' as this entrepreneurship stuff is not for the faint hearted.