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The Who, What, When, Why and How of Consumerization of the Enterprise

Users of enterprise software marvel at the ease of use of facebook, twitter and gmail on their mobiles, tablet computers and desktops! Then they wonder why their enterprise software should not be as easy to use or at least be available from their own devices. The CEO wonders why she cannot see the company graphs and charts in vibrant colors on her iPad at home on her sofa, while watching TV! This is where the consumerization of the enterprise sets up expectations of mobility, flexibility, ease of use and at a minimum, just being able to access enterprise applications from these other devices!

Consumerization of the enterprise is exciting from an end user point of view, but brings with it a number of new issues of security, availability, and application responsiveness that need to be addressed by the enterprise software maker or the IT department. Enterprise software product start-ups need to take this trend very seriously since mobiles and tablets are getting only more powerful, less expensive, and ubiquitous. By the time they mature and emerge from a start-up stage, this may not be a nice to have but a must have. So, here’s a Who, What, When, Why and How of Consumerization of Enterprise Software. This is a rather involved subject to be covered in a single article. I will cover the basics and provide links to additional material as appropriate.

The Why

Users of enterprise applications like the mobility that comes with smartphones and tablet computers. They see fairly sophisticated things done with these devices in their personal lives and are wondering why the same should not be true of their enterprise applications! They see that these devices are powerful computers in their own right and are wondering why they should not be using them for work.

The What

Consumerization results in a number of new expectations of enterprise software – use of inexpensive commodity servers for hosting the application if on-premises or a Software As a Service (SaaS) model, browser based interfaces, access from mobile devices and ease of use that matches consumer applications like Google, Twitter and Facebook. Consumerization involves the design and implementation of Bring Your Own Device (BYOD) policies where employees use their own devices to access enterprise applications and data. What happens to the enterprise data that may be stored on them,  if they lose this device or it gets stolen? What happens when this employee leaves the company? How do you make sure that the company data or the applications are no longer accessible?

The When

In many developed countries, smartphones and tablet computer penetration are near saturation already with many individuals and households having many of these devices, each. In India, the annual penetration and total market saturation may be lesser but it is only a matter of time. Even in India,  at the C-Suite level usage of these devices may be pretty much near saturation. So it’s not a question of if, but only a matter of when. This is especially important to enterprise start-ups that will face all of these issues by the time they have their products ready and achieve market fit.

The Who

Consumerization involves a host of policy and technology issues. Not all of them could be resolved only with the software product maker or the IT department. Access to applications and data may be policy issues to be determined by management and implemented by the IT security folks within the company. Software designers may need to address the ease of use issues that bring the enterprise applications closer in user experience to popular consumer applications like Google, Twitter and facebook.

The How

Consumerization involves making the user interface of the enterprise application on mobile devices, easy-to-use like those of consumer applications, native or HTML5 based. Bring Your Own Device policy implementation may involve the use of Mobile Device Management (MDM)  software which allows organizations to register and allow only authorized devices to access enterprise applications. In case employees need to be allowed access only to certain applications and not to others selectively, Mobile Application Management (MAM) software may need to be used. Chris Swan presents these issues in a very organized and understandable fashion in a video here and a presentation here, in case someone wants to dive deeper into the technology issues.

Consumerization of the Enterprise is about managing the expectations of the users of enterprise applications properly; answering questions such as – why can’t I use my smartphone or tablet to access the company’s application? Why shouldn’t their interfaces be as easy-to-use as my Gmail, Twitter or facebook? The technology and the design approaches for making this happen are already there. It’s only through careful analysis and addressing of issues that these objectives can be met, while at the same time balancing other issues such as security of data and applications!

Water cooler chatter 15 years ago used to be about what happened on Seinfeld. Now it’s ‘Look at what I’m doing on the enterprise network with my mobile device. – Bob Egan, vice president of mobile strategy at Mobiquity

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Choice Overload prevents a Sale. The 4C approach may overcome this!

Too many choices make your customers just stop with browsing. They don’t buy and move on! So if you have too many looky-loos and not enough purchasers, you may be giving them Choice Overload!  Too many Free Trial users and not enough conversions? Choice Overload may be one of the problems in that case also. Whether you are an e-commerce business or designing a user interface, you may be overwhelming your intended audience with too many choices! Luckily there is a 4C approach, proven with social research, that may help you overcome this problem.

Here is a terrific TED talk by Social Researcher, Sheena Iyengar:

Sheena talks about experiments they did with handing out free samples of 6 different kinds of jam vs handing out 24 different kinds of jam. They found out that more people bought the jam when they were shown fewer choices, only 6 kinds of jam!

More people put money in retirement savings accounts when they were shown only a handful of retirement finds than when they were shown hundreds of options!

That’s the Choice Overload problem! Too many choices, people don’t choose and move on! Nice insights! But how do you overcome Choice Overload? Sheena recommends the 4C approach.

1. CUT – Cut the number of choices you are presenting. Whether it’s your e-commerce site or your user interface design, too many choices frustrate people. You need some choice, but too many choices may hurt your objective!

2. CONCRETIZE – Make your choices vivid! Don’t describe something. Show pictures of what happens when someone chooses something. Show the consequences of making a choice, not just more about the features of that choice. Talk about benefits of a choice!

3. CATEGORIZE – Chunk your choices into Categories that make it simple for your customers to narrow down what their choices are. Don’t overwhelm them with too many choices upfront! Make pre-defined combinations of packages where you could. In User Interface design, Wizards are a great example of making choices on behalf of the user, making it easier for them to start quickly.

4. CONDITION – Condition for Complexity! – Make simple choices easy to make and hide complex choices for later, once they have some experience with you.

Great research whose applicability can extend beyond just social research! Can help a lot in product start-up companies in designing and presenting choices or in designing user interfaces.

When you have to make a choice and don’t make it, that is in itself a choice – William James

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What’s my next Product Going to be? A Product Ideation/Extension Toolkit

You have your first product and it’s a success. Success only brings more demand from prospects, clients and customers for features that are not yet in your product. Some of them are not interested in all the features you have in your product but seem to use only some odd features. Or they have found a totally new use for your product that you have not yet thought of, as yet! As an entrepreneur you are sitting there thinking “Why don’t they just use what I have provided them in the way I think they ought to use it?”. These kinds of reactions from prospects and clients are not only normal but indicates that you are on the right path!. All of these can be confusing for a small product start-up. However it need not be. Here’s a toolkit put together with examples seen with various start-ups and mature product companies. Think of it as a set of dimensions along which your own products can be extended or new products ideated. Depending upon the nature of your software product – SaaS or On-Premise, different dimensions for product variations, price points or delivery methods could be applicable. The advantage of this kind of approach is that it makes it a systematic process and makes sure that what you do has exemplars elsewhere, preferably ones that have been successful!

1. Product Variants based on Number of Users 

This model may be  familiar with SaaS product companies. There may be a Free Version, say upto 10 users, Small Business version for  11 to 25 users and an Enterprise Edition for 26 to 400 users, for example. Before you choose this model it is always good to put yourselves in your clients’ shoes and make sure that it makes economic sense. Beyond a certain number of users, clients always prefer a very flat discounted pricing. I speak from personal experience! We once evaluated a SaaS product for a 25 person start-up company.  Beyond 15 users, a per user model did not make any sense for us since the discounts for more users was not steep enough. On-premise software was much less expensive than the SaaS alternative. An on-premise software with an initial steep cost and annual maintenance of 16 to 20% worked out to be much better. Like us, many clients and prospects may have unused server capacity, technical people on the payroll that have extra capacity. So hosting our own software did not add any additional hardware/software/people costs for us. This is a cautionary tale for SaaS product companies that go after large enterprises or elephants. Make sure your flat pricing makes it is still profitable for you with huge numbers of enterprise users after paying for servers, hosting, bandwidth, specialized support, etc. What if this client grew phenomenally?

2. Product Variants based on Additional Features

Most are familiar with Microsoft’s Home, Professional and Enterprise editions of software products. Basic features that made sense for home use would be in component products like Microsoft Word, and Excel. Professional editions added additional features in individual products and they added additional products that made sense in an office setting. Enterprise editions were capable of a lot more and some included server editions where the product is hosted centrally. One caveat is not to leave money on the table when you have a single product and you start adding features. At some point in time, your product needs to split into basic and advanced editions and you need to make sure you get paid additionally for added features. This is a problem you face after you add features. In product management, one of the big conundrums product start-ups face is knowing when to add a feature. If one prospect or client asks for a feature, put it on a running wish list. If two of them ask for a feature, put it in the next release. If three of them ask for it put it in the appropriate product variant and in the next build! When you do a demo and a presentation of your current product, always have Upcoming Features and Upcoming Products slides and solicit feedback.

3. Product Variants on Adjacent and Associated Technologies

In software product companies, there are always adjacent and associated technologies where your next products need to be. If your consumer facing product works in a browser, it may need a mobile version and sometimes,  vice-versa. Document management products may need workflow products to go along with them. An enterprise financial management product needs sales management, manufacturing, people management products to go along with them. This is one of those areas where paying close attention to what other software are used by your users may give you ideas about your next product stops. Clients will readily tell you what other products they need to go along with the one your sold them, if you have not already found them out when they implement your product. Integration services always go along with products, especially in enterprise facing ones.

4. Products based on different characteristics/preferences of users

Not all of your clients or users will use the product the same way. Some may re-purpose features you meant for something for something completely different. As I write this, our client is using an open-source CRM system for internal workflow handling. The reason is not that the workflow features of this CRM system are very strong but because the attachments and document version handling is very strong and 90% of their workflow depends on users submitting documents for verification, validation and formal certification. User Interface skins are based completely on preferences of users and personalization. For inspiration, consumer product companies like Unilever and Proctor and Gamble are great. You can be sure that there are one or two Dove Soap products, White and Pink, that contribute 80% of their sales. They still have Dove Sensitive Skin, Dove soap without any perfume, etc. Software product variants may not be that simple but paying attention to what different types of users or usages can lead to variants that make sense.

5. Products meant for different types of markets

Different markets may have use for some common features but sometimes may need to be completely tailored for a new market. Tax preparation software for the US market may not be of much use in Europe or Australia. Or by architecting the software a certain way, a lot of the software could be reused by including a business rules component and writing different business rules for different markets. Oracle Financials has an Oracle Government Financials parallel, which may have very little in common with it!. Adjacent markets are always good to go after. What are those markets for your product company?

6. Free Trial/Free-Paid Versions

Free Trial versions may be necessary for scaling your user base initially and converting them later on. Free Trials may have expiry dates but free versions without any expiry dates can provide data lock-in. Once a client or a consumer’s data is in your software, inertia may prevent them from switching and you can convert them to a paid one at some point in time. In some cases like LinkedIn, free and paid versions can co-exist and you can still have a profitable company. The free version may have some limits and if the limits are too onerous for intensive users, they may convert to a paid version. However, it is always better to provide as many of the features you can in the free version and not make it too much of cripple-ware! The free version should be fully functional for most of the simple stuff all of your users. If minimum functionality is not there for accomplishing something meaningful, free versions will only put users off. I hated free versions that don’t tell me after I have put in a lot of data in and then I cannot print anything or do something meaningful with it.

7. Service -Product Spin Outs

Tax preparation software companies also provide tax preparation services for consumers that cannot use the software, for whatever reason. This is a good example of spinning out a service from a product. If you are offering a service you may catch yourselves doing the same kinds of activities for your customers. If it can be automated or provided as a self-service online option for a fee, may be there is a product idea in there. That can be a service to product spin out.

When your product starts to take off, it may be time to streamline your offerings and create a road map of product variants and new products. It is better to have a process and some systematic thought put into this activity. Analysis of existing users, careful attention to what they are saying and which features of your product they are using; what they want new in your product or what new products they want,  can all help guide you in creating a product family and a road map. Having a set of dimensions in a tool kit helps  a software product company mix and match whatever is applicable to them to creating and rolling out this roadmap!

If you don’t know where you are going, any road will take you there! – Lewis Carroll in Alice in Wonderland

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How Much is your Company Worth? – A Valuation Toolkit for Software Product Startups

When you see Yahoo offer $1.1B in cash for Tumblr or it pays $30M for Summly, the reactions around the world range from kudos to the founders and initial investors, to “I’ll have some of what they are smoking”! But most of the time, there is some sanity behind all that madness but there have been times when it has been more of insanity as at the peak of the Dot.com boom, in the early 2000’s. The question is a confounding, personal one, whether it’s your start-up company that you are trying to value, or considering investing in one. Company valuations are usually a science when it is a mature company with products already in the market, with revenues and profits. It moves more to the Art side of the continuum, the more early stage, the start-up is. It is different if you are consumer or enterprise focused, pre-revenue or post, traditional software model or SaaS based.  It is better to be armed with a toolkit of various valuation approaches, picking and choosing what may apply in a specific situation. Typically valuations could be arrived at as a cumulative of various components all added up together as appropriate. Some of the approaches that make up this toolkit, when and where they may be applicable, are:

a. Asset Valuation: If the company has a product and is making revenues already, the current contracts, and those close to signing, may have their own value and these need to be added up to the revenues and hence, the value of the company.  The cost to replace existing assets can also be used to add to the valuation, especially in acqui-hire kinds of situations – where a company buys another company for its engineers and talent, rather than the products themselves. This may be of special interest in start-ups based in India. How much time and effort would it take for another company to assemble the talent and experiences the employees of your company may represent? In the simplest case you can add up all the recruitment expenses for assembling the talent you have over the years adding a premium for the time-value of the whole thing!

b. Similar Company Comparisons: There is nothing like comparables with recent valuations of companies similar to yours, in business model and stage of development. Other companies that have received funding recently may be good justifications for your own valuations. This is why networking not just with VCs and Angels but also fellow startup company founders and chief executives is important. They should feel comfortable enough with you to share this kind of highly confidential information with you! Think about it!

c. Market Size and Growth Potential:  For those that think “why should Tumblr be valued at $1.1B”, have you looked at the first year revenues of Google and Facebook? In no other industry would you see companies go from $0 to $1B in as short a time as some of these companies with just ad revenues! Traditional brick and mortar companies would take decades to reach this level of revenues! According to Yahoo!’s May 20 letter to shareholders, Tumblr site has 300 million active monthly users, meaning, Yahoo! is paying around $3 per user, while Facebook paid around $30 per Instagram user; apparently Yahoo! is doing a good deal. So as this article on The Motley Fool says, it’s all about traffic, stupid!  Eyeballs may not be dead if you can make it work still, although it will be harder these days! This is where we may want to think about the advantages of going global vs going for the Indian market alone! The Indian Smartphone Market has grown from 4% growth to 6% growth from 2012  to 2013! So it may may still make sense to focus on the Global consumer smartphone market instead of the Indian market alone if you want to grow fast! But the SMB market in India seems to be large already and growing at a reasonable rate! So if your startup is focusing on the Indian SMB market, market, more power to you!

d. Intellectual Property, Barriers to Entry and Ecosystem Building Potential:   Think about Microsoft SQL server or The Oracle Database Management system.  Think about the millions of people around the globe that make a living out of these ecosystems – providing skills in these products, skills in the applications built around these products, having jobs around the globe with companies that use these products and applications built around them. Those are ecosystems! These are worth trillions of dollars just around the ecosystem building potential of these! Google and facebook are in the process of building their own ecosystems now. If your Intellectual Property is anything like this, you may want to increase your valuations proportionately. What barriers to entry have you built around your technology? What prevents any tom, dick and harry from replicating what you do? If that’s solid, it’s worth a lot of money and you can confidently reflect that in your valuation and articulate the same to your investors. Here’s a link that explains different kinds of ecosystems you can build!

e. Income Valuation Approaches: If your start-up already has revenues and profits, the Income Valuation approach may be used  to arrive at the income component of the valuation. The usual methods used are Discounted Cash Flow (DCF) methods. At their essential simplicity, they are estimating future revenues and profits and arriving at the Discounted Present Value of those profits given an interest rate. For example, if you are projecting profits of $100, $150 and $300 at the end of years 3, 4 and 5, what are their current values? What amounts today if invested at say 8% would  yield incomes of $100, $150 and $300 in years 3,4 and 5?, You add those profit values as of today and calculate valuations based on those! Usually Earnings Before Interest, Depreciation and Taxes (EBITDA) are used instead of Net Profits since EBITDA reflects much more accurately the exact earnings potential of your startup! You can also use some rough rules of thumb for valuations based on sales –  Horizontal Software between 1.35x and 2.1x. Vertical Software from 1.4x to 2.1x.  Consumer Software a bit lower, 0.5x to a just under 1x sales.  Infrastructure  – 1.5x to 2.5x sales.  Internet and Software is 2.19x to 2.7x.  IT Services, which is people intensive, is lower, 0.6x to 0.74x.  The actual numbers don’t matter as much as the difference in how different kinds of startup companies are valued, in relation to each other and why.

f. Scarcity Premiums: The basic principles of Economics – Demand and Supply may apply to startup company valuations, just as well. If too many investors are chasing after a limited number of  shares available in a start-up company, the valuation goes up! This is the reason you need to create an imbalance between investors interested in your company and the number of investors and the money you are willing to take in – creating a scarcity! This is also the reason you need to start build as big a network of investors way before you need them to invest in you! You expand your demand way ahead of time! However, Scarcity Premiums can come back to bite you in your next round of investments if you have oversold your value and cannot meet your revenue, profit or product development goals before the next round. Down rounds are no fun! If you raise this round at a high valuation and the next round is a down round, your company may be perceived as a failure. That’s why you need to be careful about taking money at higher valuations, even if you could!

h. Insanity Premiums:  There have been times like the Dot.Com boom when insane valuations prevailed and entrepreneurs took full advantage of them. Mark Cuban sold Broadcast.com to Yahoo.com for $5.7B . This is acknowledged as one of the worst acquisitions in history! Mark Cuban was not the worse off from this deal since he cashed out and moved on to other investments on his own. If it’s not a total exit, the same caveat about subsequent down rounds still may apply!

As a start up company, you owe it to yourself to take a systematic approach to valuing your own company and conveying your logic to your investors if they ask for it. In the worst case, experienced investors may choose the methodology that gives you the worst valuation and you can be ready with your own bargaining position with careful, considered logic and a better valuation!

 Price is what you pay. Value is what you get. – Warren Buffett

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Redbox – A Fine Example of Integrated Physical and Virtual User Experience Design!

Redbox rents DVDs, Blu-Ray Discs and family video games in US and Canada. Redbox kiosks are found in 34,600 locations and are fully automated video rental kiosks! More than anything else I love using them because they carry the latest titles, are affordable and make me happy every time I do business with them! In my experience I have not seen a better example of INTEGRATED user experience design between their physical kiosks, their online presence, email, their mobile interactions and their social media activities. It seems to work as one single entity, seamless, with the same ease of use and brand identity throughout! Everything is so simple and easy to use, from the Kiosk interface to their website to their mobile apps! Let me explain!

First thing about Redbox is the name of the company and the color of the kiosk – a red box and you can locate them anywhere. They are mostly everywhere in all major towns! Great branding start! Win#1!

Next to the box is a display showing all the latest titles that can be borrowed from the Redbox. You don’t need to wade through screens and screens of titles on the display. Many of these are outdoors and in the glare of the sun – hard to see the display clearly with that. At the top of the box are pictures of the 6 latest titles for your quick glance. Look to the right and you get an idea of other recent titles! DVDs and Blu Ray discs usually get released on Tuesdays and so I am guessing that the person who comes to load up these titles into every kiosk updates these pictures also in addition to servicing these machines. Love the way they have used physical simple displays to augment their electronic one! Win#2!

You don’t need to go all the way to a kiosk to make sure a movie is reserved for you. You can do it online and go pick it up from a kiosk. It will be held for exactly one day and then released if you don’t  and charged a day’s rental since they are holding it for you. Plus you can return a DVD in any red box, even 1000 miles away!  Win#3!

I love the way the same Brand Identity persists through the website. I can browse through what is available on kiosks near me without logging in! No need for them to have me log in till I find something and then you have a transaction to complete and you can log in! I love the way they postpone identifying the customer in a kiosk or online till there is a need to. I don’t feel rushed and i browse through movies without having to identify myself first, They make it easy for me and I love it! Win#4!

Based on your address and zip code, or just zip code it shows you locations by address and on a map next to it! Win#5!

 

While browsing by location of the kiosk, they show movies that are available in the Kiosk, new movies first, older movies next, DVD and Blu-Ray versions of the same movie next to each other. If you select a Blu Ray movie, an helpful window pops up to confirm that you do have a Blu-ray player. Many people may not have upgraded from a DVD player to a Blu Ray player and this is thoughtful! If a movie is available but not at that kiosk a label “Nearby” pops up and allows you to search other nearby kiosks and reserve them . Helpful to me and clever cross-selling! Win#6!

Whatever you can do online you can also do on a SmartPhone interface except now it can know your current location and show you the nearest kiosks. In addition, you can do everything you did online from a smartphone also. Here are some screen shots from their iPhone interface! Same look and feel, all the same functionality! Win#7!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

They have also integrated their SMS promotions very well. You could sign up to get promocodes for discounts on rentals they send out, mostly on Fridays. The thing I like about them is their including a way to get off these messages in every message they send out! Also, unlike most other businesses, they are flexible and not rigid about the conditions under which they redeem these promocodes. I once got a promocode good for two rentals. Just to see how they have set it up I tried to redeem it on one rental. It still worked! I loved the thinking behind this – as long as I am interested in only one rental, allow the same discount for two on just one rental! Win#8!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Kiosk, Online and SmartPhone presences are incredibly integrated with email! If I make a reservation, check out a movie from a kiosk or return a movie resulting in a charge on my credit card and a receipt,  they send out email confirmations every time! And again I love the way they send emails for all stages of a transaction and maintain the same brand identity in the emails they send! Win#9!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Now a little bit about some little things they thought about. The DVDs and Blu Ray Discs have an identifying barcode printed in the small circle around the center of the disc. How does the Kiosk know that you have returned a copy of Ironman 2 and not some other random disc? This is how they do it – the kiosk reads the barcode and confirms that it is the Ironman 2 disc you have returned. That means that you can insert the disc in its sleeve only one way facing the reader inside! No problem! They have a large ARROW on one side of the sleeve and that matches a similar large ARROW in the kiosk! Win#10!

 

 

 

 

 


 

 

 

 

 

Now on to their activities on Social Media – Their way of engaging people on social media is also impressive. Here are some examples of interesting ways they engage people who like their page!  I like the way they call their community activities “Outside the Box” keeping with the Box theme! Win#11! 

 

 

 

 

 

 

 

 

 

 

 

 

 

There are many more little things that Redbox does well. Very recently, they are also getting to streaming movies  online and that seems to be nicely integrated with their Kiosk/DVD business as well as you can see from their free trial page from this RedboxInstant page! DVDs and Blu Rays will go the way of the do-do sometime in the next few years and Redbox seems to be getting ready to cannibalize their own physical business transitioning into a purely electronic one! Great strategy! Win#12!

 

There are a hundred other small things that Redbox does well for the user! They seem to have tested these things from a users’ perspective and fixed many things in the process. They are a great example of thinking about things from a user’s perspective and designing things backwards from it! I  am also positive that they would have tested these extensively! This kind of dog food is not possible without redbox employees or designers eating it themselves at some point in time!

Fine example of integrating physical and virtual user experiences with very well thought out approaches to call to action, marketing and respect for the customer!

Well played, Redbox, Well played!

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5 Essentials of SaaS Revenue Models for Product Companies!

Enterprise as well as Consumer Software is moving fast towards a Software As A Service (SaaS) model. Who would not like paying a per user, per month charge as opposed to doling out huge amounts of money for licenses upfront and paying 16 to 20% Annual Maintenance Charges year after year! But the short history of SaaS companies is already full of companies that grew too quickly, or chose the wrong pricing or customer acquisition strategies, ran out of money and had to go out of business! The same revenue model for a SaaS product business can also become its Achilles Heel if it is not understood and managed properly!

Understanding SaaS Revenue Models in all their glory is key to building a sane, reliable and successful way to build a product company. There are a few venture capital companies that have had lots of practical experience building successful SaaS companies and can share with you a lot more detail. Like Matrix Partners’ David Skok who has written almost a thesis on SaaS economics – here is a sample –  The Saas Business Model – Drivers and Metrics. David has partnered with HubSpot and NetSuite for all of this exploration and they must know what they are talking about! Other good references are  Doubling SaaS Revenue by Changing the Pricing Model and SaaS Revenue Modeling: Details of the 7 Revenue Streams.

But for a start, here are 5 essentials of SaaS revenue and pricing models a product startup needs to remember for success:

1. Monthly Recurring Revenues Vs. Getting them to pay Annually:  Get your customers to pay annually if you could (depending on the nature of your product – enterprise or consumer facing). It’s a hassle for them and you to process these invoices every month and follow up on late payments, etc. It has a clear effect on the cash flow. Plus you may not have to worry about churn that much since they are not making that decision to pay you month after month where they could pause and decide to churn! If Annual billling does not work, try at least a quarter at a time. It may not be worth all the processing time doing it month after month.

2. Churn and Negative Churn:  Churn is the periodic turnover of your customers. Companies mentioned above have found that about 2.5% to 3% churn is OK. You need to be concerned if it goes beyond that. However with Up-selling and Cross-selling, you can actually make it positive churn too! This is when the marketing funnel that becomes narrow from the top becomes broader again with upselling and cross-selling. Which brings us to discussing more of the shape of the Marketing Funnel when it comes to SaaS Vs. non-SaaS product companies!

 

 

 

 

 

 

 

 

 

3. Marketing Funnel Economics: 

The marketing funnel on the left shows a typical one for non-SaaS product companies. The one on the right shows the one for SaaS product companies. The main difference is the top of the funnel is much wider and uses organic traffic, in-bound marketing, search engine marketing and optimization and prospects from other paid sources.

 

 

 

 

 

 

 

 

 

The relative sizes of the tops of the funnels also show the difference between how wide the top of the funnel needs to be for SaaS product companies!

3. Balancing Customer Acquisition Cost (CAC) vs. Customer Long Term Value (LTV):  There are only 8 hours in a day for selling. Traditional licensing models offer an initial large amount in a sale and annual maintenance fees of about 16 to 20% every year after that. SaaS models may offer a smaller initial set up fee and uniform cash flow month after month, year after year after that if you keep the customer. So you need to line up more clients in a SaaS model for reaching the same level of sales as when closing traditional licensing sales deals. So you need to necessarily reduce Customer Acquisition Costs (see the widened top of the marketing funnel in the figure above – that’s what that represents).  Some rules of thumb regarding CAC and LTV are that the Long Term Value of the customer needs to be greater than 3 times the Customer Acquisition Cost and the months to recover the Customer Acquisition Cost should be less than 12 months! This also makes a compelling case for designing and developing related products and do some effective cross-selling and up-selling enabling you to realize that Long Term Value even if your CAC is high! Also making sure that you get the Customer Acquisition Cost in less than a year takes care of the problem of churn and if they continue after a year, you have already made your money!

4. Repeatable Sales Model:   SaaS product companies rarely can afford the same direct sales model that non-SaaS models do. This is just given the smaller initial sales numbers even though the revenues are recurring rather than an initial large amount and 20% every year after that in maintenance fees in the non-SaaS traditional model. This makes it imperative that the SaaS sales model is easier, quicker and repeatable.

5. Scaling Pricing with Customer Value:  Many SaaS product companies shortchange themselves by improving their product so much that they provide much more customer value than they are charging them for. Scaling pricing by clustering value adding features together and packaging them and offering them as upgrade packages is key in ensuring that your pricing keeps up with the value your are providing.

These are only some basics. I highly recommend checking out the references I have earlier in this article. There is a treasure trove of experience and knowledge about how to make it work, all online and free!

In sales, a referral is the key to the door of resistance – Bo Bennett. 

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10 Rules for Effective Product Company Advisory Boards!

Advisory boards are rarely meant for fixing fundamental flaws with business plans. Having big names on the advisory boards, purely for their name value, rarely works. It might help a little in raising venture money, if at all. However, when composed and used wisely, advisory boards can help your product company choose the right corporate, product, market and sales strategies. Simply put, your advisors should be people whose expertise or experience you respect highly, and feel sincerely that their advice will benefit your business. And if giving advice is an art, asking for, receiving and using advice is also an art!

Here are 10 rules that can help you make effective use of advisory boards:

1. Friends and Family may not be good candidates:   A natural instinct with some entrepreneurs is to appoint some of their friends and family members to the advisory board. They usually may not turn out to be good advisors unless they are otherwise qualified to be there.

2. Get advisors with fully complementary skills: Have three or four advisors, maximum. Find people with strong engineering and product development skills,sales experience or marketing experience in products related to yours or subject matter expertise.

3. Find the right people for your advisory board:  With LinkedIn and search engines like Google and Bing available, you can always find the right people for your advisory board and reach out to them. Their experiences need to be related to your product company. You may need to do the research to make sure that your company and products may be of interest to them currently. With internet connectivity linking people all over the globe easily, a company need not limit itself to any particular city or even the same country. You can even reach out to people in the US or Europe if you think they may be interested.

4. Clearly outline the time commitments to advisors:  Typical time commitments for advisors are one face to face meeting for a few hours every quarter (if everybody is in the same city or online, if not) and one full-day meeting and discussion once a year.  This may work out to be about 40 to 50 hours per year including their time for reading your materials and preparing answers and discussing them in your meeting.

5. Prepare a list of questions or topics you want advice on and send it ahead of time as an agenda:  Prepare an agenda of topics or list of questions in different areas like technology or science involved, product strategy, product management, engineering, marketing or sales. Sending it ahead of time to advisors will help them prepare properly for the meeting, quarterly or the annual one.

6. Arrange for convenient ways to participate:  With web conferencing services and tools like Skype and Google Hangouts, it has never been easier to arrange online advisory board meetings when advisors are geographically dispersed.

7. Compensate them for their time, expertise and advice:   Product companies rarely can compensate advisors with cash but the customary way to compensate them is with stock options. Usually it is around 1% or less of the company vested over 4 years or so. You can vest the first year’s options  (1/4th) at the time an advisory board agreement is signed and 1/4th the total number of shares every year after that.

8. Hold the right to fire them:  Advisors may sign on with the best of intentions in the beginning and for many reasons, it may not work out well for you subsequently. They may not find the time or may not be interested any more. The agreement should have a clause that lets you remove them from the advisory board if it is not working out for any reason.

9. Don’t confuse the advisory board with your board of directors:  Keep a clear separation and distinction between your advisory board and your board of directors. Your board of directors can introduce you to potential clients or customers, and they can help you with thorny issues with your management team, stock options or compensation issues. Advisory board members are there for a different reason and may not be compensated enough on the same scale for such activities.

10. Don’t confuse your advisory board with an extended sales team: Some companies sign up advisors for the board and also provide them with a small commission percentage for prospect introductions and such. This rarely works out in practice and confuses issues and may cause problems down the road. It is better to keep advisory services separate from sales activities.

All of us, at certain moments of our lives, need to take advice and to receive help from other people graciously- Alexis Carrel.

 

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7 Ways to Avoid Your Product Company Becoming a Services Company!

Product companies (especially those focused on the Enterprise) always face pressures, primarily that of cash flow in the earlier years, forcing them to take on more services components. This is especially true in countries like India where angel and venture investments are not as plentiful as in Silicon Valley. This is a trap that product companies will find it difficult to emerge from once they get into it.

Just to be clear – there is nothing wrong in being a services company! In many ways, it has better cash flow profiles in the earlier years enabling companies to ramp up with additional people and “projects”. But, you may not be able to make progress on your product vision, unfortunately!

How do you avoid this situation? Here are 7 ways you can avoid this trap:

1. Stick to your Vision, Test and Pivot: As we learn more about Lean Startups, one of the best ways to avoid becoming a services company is to make sure that your product is needed, clients will pay for it and you can build a company on it! You talk to potential clients before you build the product. Even then, you build only a Minimum Viable Product (MVP), roll it out and test your hypotheses by getting to revenues. If revenues are minimal or non-existent, you pivot and build something that someone will pay money for, and soon!

2. Build Features Based on How many Users Ask For Them:  In one of our enterprise product companies, we had a simple rule – If one client asks for it, it goes into the backlog list. If two clients ask for it, it goes into the next major release. If three clients ask for it, it goes into the next sprint!

3. Turn Custom Components into Product Features if you can: Try not to build components for any one client. Parameterize the client’s requirement into a more general idea and make what they are asking for, a specific case of that! For example, if they require your product to work with a certain brand of a reporting tool, think of how you can generalize it so that it can work with most reporting tools. You may need to build additional components but it will be worth it when the next client needs your product to work with another brand of a reporting tool!

4. Line up Services Partners Early:  Large product companies deliberately price their professional services much higher than their service partner ecosystem does. For example, if you were to source Oracle product expertise from Oracle, it will be an order of magnitude more expensive than obtaining it from a service partner of theirs. That’s how they prevent themselves from being sucked into spending too much time on services and away from their products. For small product companies this may be difficult to do, but if you find service partners who are also service partners for related products, they may be interested. It will involve sharing your revenues but that’s the tradeoff!

5. Line up Product Partners Early:  Products have natural boundaries and it’s good to recognize them early on and bring in product partners that do those things better. For example, if your product addresses a specific vertical with a core solution, line up product partners for related needs like reporting, social media integration, telephony integration, etc. You cannot be everything to your clients and identifying related product partners early on will help you avoid the trap of reinventing all related wheels all over again! Of course, you need to architect your product in such a way that it can easily integrate with other solutions!

6. Refuse Non-Core Competency Opportunities:  This is easy to say but tough to follow in real-life if you are a product startup. If a client offers you money to do a related thing but not quite what you were hoping to sell, you may need to refuse it! But that’s exactly what a product startup needs to do to stay true to its vision. If three clients ask for this other thing, that’s a Pivot! Take it and go forward!

7. Plan ahead for Cash Flow Pressures: Product companies are not for the faint hearted! Do not embark on even writing one line of code before you talk to potential prospects about your ideas, show them sketches of what you were thinking about, and finding out what they are willing to spend for such a solution. If you are already well into having two or three clients and it is a case of scaling, you may need to pivot to products that could scale up better, faster.

It pays well to remember that with product companies the goal is to write code once, get paid many times. With services companies, you write code once, you get paid once! Very rarely do you get to write code and retain the Intellectual Property that is general, and can quickly be sold to other clients, unless you subsidize the initial development substantially!

Again, there is nothing wrong with being a services company. It has its plusses and minuses, but without paying attention to strategy, proper architecture and partners, you could end up becoming a services company when you want to go the other way!

I already am a product – Lady Gaga
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Guerilla Marketing 2.0 for Product Startups!

Jay Conrad Levinson, father of Guerilla Marketing defines it very simply as going after conventional goals with unconventional means! When you are a product startup, trying to build a business on little to zero money, you need plenty of unconventional means. With the rise of social media, viral word-of-mouth options with web and mobile global connectivity, it has never been easier to do guerilla marketing! As you will see in  the rest of this article, social media can be a part of guerilla marketing and that makes it 2.0!

However, guerilla marketing requires lots of time, energy, imagination and information on your part rather than money (in Jay Conrad Levinson’s words again!)

First, it is worth watching him describe guerilla marketing in his own words! It is worthwhile to remember that he invented this way before we had social media but since then they have made what he was trying to do a lot easier!

Time, energy, imagination and information are not easy to muster or master easily when you are short of money, trying to get to the next level of getting angel funding or venture funding or just trying to keep your business afloat! But that’s when guerilla marketing could provide the big breaks you may be looking for in terms of customer adoption!

Here’s a video of the Unidesk CEO talking about how they performed guerilla marketing and the tools they used throughout the lifecycle of their product. Right from inception, when they did not have a product to when they had a product and trying to get repeat customers!  They used different tools, some of them social media, at various stages of the product development lifecycle and for different purposes. For example, their use of SurveyMonkey to survey potential users of their product BEFORE they had a product is remarkable. Unidesk is in the business of desktop virtualization. All they had to do was ask potential users what they needed using a survey and seems like they got MORE than what they needed by way of inputs on what was needed in their product. This ties in with the Lean Startup movement where you get out of the office and talk to potential prospects before implementing anything.

Very interesting to see the variety of tools used during different stages of the lifecycle of their product (inception to repeat customers). Most importantly, their use of measurement of everything is key in seeing what works and changing tools or approaches quickly! After all, time, energy, imagination and information is not easy to come by, and cannot be wasted even if you can do many things for free these days!

Here’s another YouTube video about understanding the Chain of Conversion. Software product founders may also know this as the Funnel. This video makes a very important point about understanding the way your own funnel works, pinpointing the weaknesses in your funnel, working backwards from any point in the funnel, and fixing these weaknesses systematically. This is where you may need to employ different guerilla marketing approaches depending upon what is suitable at the different stages of the funnel.

Finally, here’s a stunning YouTube video. I don’t want to say anything more since that anything would be a spoiler!  Watch it for yourself! All I want to say is that this one has 43 million views as of this writing! Rest assured that this Guerilla Marketing effort was highly successful!

Many users on twitter, facebook and instagram believe they are the star of their very own reality show when they are stalked by a mellow mushroom! – Entrepreneur Magazine talking about Mellow Mushroom’s (restaurant) guerilla marketing effort.

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Lessons on Pricing for Product Startups – Consumer and Enterprise!

Since the time Philip Kotler wrote his valuable tome on Marketing, technology has evolved so much that new pricing models like Freemium pricing are possible for both Consumer-oriented and Enterprise-oriented product startups. In addition, Free Trial pricing models and conversion to paid ones are common in both. In a price-conscious society like India, pricing can mean all the difference between a successful company and one that is not!

What have been some valuable lessons learned by companies in the recent past using all of these pricing models? If you were a product startup, what would be some of the pitfalls to watch out for?

Main lessons from using a Freemium Pricing Model for Consumer Internet Businesses

First, here are a few YouTube videos of Drew Houston presenting DropBox’s use of Freemium pricing with consumers, the lessons they have learned, and the pitfalls they encountered.

  • Use of SEO for lining up free users is very expensive
  • Affiliate Marketing is also expensive and does not work very well
  • Make sure that there are enough Paid Users that can support Free Users and you can still make money! Make sure that the Long Term Value (LTV) of Paid Users > Customer Acquisition Costs (CAC) of all users. Otherwise, the more users you line up, the more you lose!
  • Build as many tools that help your free and paid users do viral and word of mouth marketing for you as you are building features!
  • Once you have given something for free, it is very difficult to take it back! But it can be done, as the videos show!

Drew Houston : Freemium for Consumer Internet Businesses, Part 1

Drew Houston: Freemium for Consumer Internet Businesses, Part 2

Drew Houston: Freemium for Consumer Internet Businesses, Part 3

Main lessons from using a Freemium Pricing Model for Enterrprise Businesses

First here are a couple of YouTube videos of Aaron Levie presenting Box.Net’s use of Freemium pricing with an enterprise product, the lessons they have learned, and the pitfalls they encountered. Their product is an enterprise collaborative portal that competes with Microsoft Sharepoint Portal but is hosted by Box.Net.

  • Tomorrow’s Enterprise decisions are made by today’s free users. So keep them happy! They are your marketers inside the company.
  • Sell enterprise freemium models to end users, not IT.
  • Unlike other models, Inside Sales will be taking calls from already existing free users – no need to prospect them. They come already qualified!
  • Conversion is key and is harder in enterprise freemium. This is purely because of the sheer larger numbers in the consumer space as compared to enterprises.
  • Understanding the difference between a “Free Trial” customer and a “Freemium” customer! Freemium customers stay on long after Free Trial customers are gone because their trial period ran out!

Aaron Levie: Freemium and the Enterprise, Part 1

Aaron Levie: Freemium and the Enterprise, Part 2

Dumb Pricing Mistakes

Here is an interesting video on dumb mistakes that people make in pricing, especially multiple tiers with different sets of features. And how to fix them!

Pricing Strategies: The dumb pricing mistake people make (and how to fix it)

Price is what you pay. Value is what you get – Warren Buffett

 

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How to come up with a great company or product name? – A few YouTube videos can teach you that!

Who said YouTube is a waste of time? It can even teach you on how to come up with a great company or product name!

Naming a company or a product is so crucial in a product start-up. You can call your services company – “The Great Maharashtra IT Services and Systems Company”  and your clients may not care too much! Product startups, especially in the consumer space, need to think a lot before naming their company or their product. This is only because it needs to be simple to  pronounce and spell, may not mean something bad in another language, and most importantly, domain names need to be available and make for good branding and trademark protection!

Rather than me making this a lecture, I thought this time around I will have YouTube videos tell you the story of why Company and Product naming is important and more importantly, how to go about doing it in a systematic way. And how not to do it!

Here is a five minute video that gives you a quick overview of why names are important and a systematic way of going about it! This company’s own name CatchWord is a great name for a consulting company that specializes in providing naming services! They seem to have come up with that name following their own process.

The main takeaway from the video above is that it is an involved process and worth taking the time to do it carefully and painstakingly!

If you think that some very successful companies have not made mistakes in their own names, watch this clip from the movie The Social Network. Facebook was once The Facebook until Sean Parker, Co-Founder of Napster advises Mark Zuckerberg to take the “the” out!

 

If you are wondering where the name Apple came from, here’s a video that explains that! The Macintosh was almost called The Bicycle and the iMac was about to be called MacMan! And those were Steve Jobs’ ideas!

If you want to be rolling on the floor laughing, here’s a presentation of failed product names! Good lesson in checking what your company or product name means in other languages and your own!

 

What’s in a name? That which we call a rose by any other name would smell as sweet – William Shakespeare.

Well…..May be Not!!

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5 Lean Essentials for Product Startups!

Lean startups are not about saving money and getting development done on the cheap. They are not about saving money by doing work at home rather than a rented office. That’s not what the word lean means here!

Lean is about elimination of waste in development, marketing, selling,  and growing a company. And making course corrections quickly and efficiently so that you are precisely pointed to success. And believe me , there is a lot of wasted time, effort, money before startups start making profits and grow because of mistakes.

So where is waste when you are building a product and a startup company, you ask? Products built that users don’t buy and use, product features that are built but are not used, effort going after a market that does not pan out, partnerships that are built that do not generate business for you are all waste!

These days, there is no excuse for any startup, consumer facing or enterprise-oriented, to not know about lean startups, educate their entire founding and initial teams on this way of doing things, and practicing what they learned here in everything they do. After all, when your time, money and effort is so limited at a startup stage, who wants to waste any of it?

There are a few good places to start and that too for free! Here is a free online course – How to Build a Startup ? taught by Steve Blank. He knows what he is talking about. He has built 8 startups, a couple of them being sold for a billion dollar plus (like e.phiphany) but more importantly, has failed a number of times also!  He teaches entrepreneurship at Stanford University and a number of other top 10 universities. You can view the entire course in a few hours but it is worth taking it lesson by lesson and completing the assignments relating to your startup thoroughly before going on to the next lesson.

Did I mention that it was free? Now, there is really no excuse!

The book, The Lean Startup by Erik Ries is another good resource to start with. The nice thing about Steve Blank’s course above is that it expands on concepts put forth by Erik Ries on product development to other areas a startup needs to pay attention to, such as business models, pricing vs. revenues, marketing, selling, and partnerships.

To really understand the details of what the waste is and how lean startups avoid them, you need to spend some time with the above resources.

However, here are some of my observations presented in the form of 5 Essentials!

1. Your Idea Vs. What’s Really Needed – In my over a quarter century of programming and then, management experience, if there is one thing I have learned is that the hardest thing to manage in services is Requirements Gathering. What people actually need and what they think and say they need, may be two entirely different things. This may not show up in the beginning but at some point in time, we have all had users say “Yes… But….” when asked how useful the system is for them. On top of this, product companies are responsible for coming up with their own requirements as to what their potential users need.  This is even tougher! On top of this, you have the fast pace of technology change – hardware (from Mainframes to Minis to PCs to mobile devices now), software languages, styles of computing (centralized to distributed to mobile distributed) and delivery devices (PCs to mobile devices of various form factors). By the time your idea bears fruit, conditions have changed and your users need something different. Lean Startups provide an elegant way of addressing this – your idea or requirements you have gathered are only hypotheses and they need to be validated with a minimum viable product before you waste time, effort and money implementing the whole thing! In other words, they help you iterate towards the right product-market fit!

2. Pivoting – Failing Early and Changing Direction Quickly – When your startup grows from a startup to an on-going successful company, your product’s growth (and your business, revenue models) may be something like this:

The only problem is that you don’t have precise idea of which one of the above represents your product.  Or your pricing or your business model, revenue model, partnerships, etc. Lean methodologies require you to commit minimally at first to any of the approaches towards any of these things, test your hypotheses and then proceed. Fail early and often when you have not spent too much time, effort and resources to experiment with different approaches before settling on the right ones!

3. Startup teams need to be different from traditional management teams:  As Steve Blank emphasizes in his course, a startup is not a smaller version of a larger company. So you need to set aside the traditional larger company management team  or MBA approach and focus only on those people necessary for the startup stage. You may not need a VP-Sales as yet. You may not need a VP-Marketing as yet. Many startup companies I have been with had a technical and business founder (complementary skills) iterating the product initially, then adding a junior product management person to coordinate between what is needed in the market and the ordering of features that need to go into the product. Then they hired sales people that can actually do the selling, then a director of sales. They hired a junior marketing and social media person that actually did the work before hiring a  VP of Marketing! So what needed to be done initially drove who was hired. I have seen this happen even when some of the startups I was at had raised even a Series A round.

4. Measuring the Right Metrics:   Measuring the right metrics is important if you are a consumer facing startup or an enterprise one. If you are a mobile consumer-facing startup your metrics need to be one set, while if you are a SaaS enterprise play with a Freemium business model, your metrics may need to be another set. They may or may not be in terms of money (like facebook was for a long long time – they were just measuring members and member engagement!). Not measuring the right metrics have a lot of consequences in a startup company – being able to raise additional investor money, planning ahead in terms of people, timing, facilities and other things that go into a startup.

5.  Appropriate Product Management:   There is the story of GroupOn being born as a consumer feedback portal. When they featured the Pizza Shop’s offers, downstairs from their offices, they found takers! They pivoted and created a whole new product  and eventually a product category by themselves! Iterating product functionality helps startups discover completely new uses for the product and spin out different products with variations or address a related market with a modified product, etc. Product Management  is helped a lot by listening carefully to the people who look at your product. Especially those that need a different version of the product, a higher priced one with additional features, a lower priced one with lesser features or may be a free one since they want to try it out before making a committment. Most importantly, out of the norm features can be identified and spun off into a separate services component (consulting). We had a golden rule in one of our product companies – if 5 prospects asked for a feature it is in the next agile sprint. If 3 prospects ask for it, it goes into the next major release. If only one prospect asks for it, we make a note of it. If they would buy today if it is available, we separate it out architecturally and offer it as an additional, expensive, services component!

These are some of the Lean Essentials. Lean Startups are processes in themselves.

If there is one thing that the Lean Startup methodology does not address it is that it does not teach you how to create those hypotheses about what your prospects need. For those, you still need to build a creative culture! Here my other article in this forum – Think Big! Build a Creative Culture or Transform Into It!

Why do we exist and why should anyone care? (key question every startup should ask) – Bill Gross

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Mindmaps for Product Startups!

In a product startup you may need to deal with lots of information about your own product features, your market, your competition, your competition’s product features, results of internal brainstorming sessions you may conduct or information about who you can partner with for various aspects of your business.

Mind-maps provide a great way of organizing all the information you gather or generate internally, and create documents or pictures that capture the relationships between them precisely. Most importantly, it can help convey the same concepts to your investors, co-founders, colleagues, employees and partners. It can help you organize mentally for your own use or convey a large amount of information to others in a short amount of time.

Wikipedia’s definition:

A mind map is a diagram used to visually outline information. A mind map is often created around a single word or text, placed in the center, to which associated ideas, words and concepts are added. Major categories radiate from a central node, and lesser categories are sub-branches of larger branches. Categories can represent words, ideas, tasks, or other items related to a central key word or idea.

Typical ways you can use MindMaps in Product Startups:

  • Analysis of the Market: How does the market you are looking at addressing organized? Mobile devices could be tablets, smartphones and feature phones. Tablets could be smaller or larger. Within each you could have iOS and Android Devices. Within Android devices you could have different versions supported by different devices, and so on. All of these branches could be captured effectively in a mind map.
  • Product Ideas Generation – What are all the different product ideas you could consider initially and in an on-going basis. How are they organized with respect to the various products and versions that you are already producing or planning to produce?
  • Generation and Organization of Product Feature Groups and Ideas – Very useful for product managers modeling existing feature groups and features, new features generated and where they might fit in.
  •  Analysis of the Competition: Competition in the market is not always straightforward. Competitors may offer products and services that may be in a related market, overlapping markets or completely unrelated markets. Competitors may be offering a service that may compete with your product. All these nuances can be captured effectively in branches off branches.
  • Analysis of Pricing Models:  If you considering different pricing models – One-time licensing vs Subscriptions, Annual or Monthly, etc., you could capture all the different variations in mind maps.

There might be plenty more uses for mindmaps once you get comfortable with what it does and how it can be used. Some of the Mind Mapping tools come up with ways of annotating each node with additional notes that can pop up once you hover over a node in the mind map with the mouse or a pointer. This can come in handy in naming each node with a short name and including more descriptions in the additional notes.

Mind mapping can come in very handy at the start-up stage even before you have a plan for your business. When you are doing your preliminary research or putting together your business plan later on. Or when you are already operating and your product management takes on a formal function!

There is a huge selection of Open Source and Commercial Mind Mapping Software that you can use – more details here in Wikipedia.

I have had very good luck with the Open Source version of FreeMind. It allows me to create mindmaps in their proprietary format and send them to others who have the same software (.mm format). For others who may not have FreeMind, I export the mind maps to PDF formats and send them along.  You can check out downloading FreeMind available for various Operating Systems and playing with it here.

Here are a few examples of Mind Maps I created using Free Mind. These are PDF versions of two mind maps I created when I read two interesting books sometime ago:

Jennifer Aaker’s Book The DragonFly Effect

Designing Brand Identity – Alina Wheeler

 A Picture is worth a Thousand Words! – Anonymous

 

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7 Critical Things to Understand about Venture Capital for Product Start-ups

If I had a Rupee every time I heard the words “If only Venture Capitalists were more active in building the Indian Product Eco-system….”, I would be a rich man!

I am guessing that this is because of a lot of mis-conceptions about Venture Capital and how they play in the product space, in India as well as elsewhere. As a Software Product entrepreneur, you owe it to yourself to understand VC money in all its complexity to make wise decisions about whether it is even suitable for you, and if it is,  how to get it, and if you get it, what are you in for?

It is impossible to capture all of the complexity of Venture Capital in a single article but here are seven basics every software product company in India should be aware of:

  1. Understanding exactly what business Venture Capitalists are in – They are not in the technology advancement business, not in the entrepreneur eco-system business but in the money multiplying business! They have bosses too – people who have given them money to invest expecting at least 10 to 20 times back! Unlike a bank that loans money to low-risk, low-reward businesses, VCs are expected to invest in high risk, high reward businesses. They can afford to take losses on 5 to 10 startups to make a 100 times return on that one big block buster – an Instagram, a facebook or Google!. Many startups return them 5 to 10 times the money and across all startups with other failures, they will be successful if they return 20% per annum over 10 years.  After the Dot com bust, many VC firms returned less money than was invested and Of course, they are out of business also! You get an idea of why VCs are looking for that big block buster company! So you will be wasting your time and theirs, if your startup does not promise that kind of growth quickly!
  2. Understanding Exit Strategies for you and them –  If you are planning to build a software product company, grow slowly over 10 to 20 years and have a leisurely IPO, Venture Capital may not be suitable for you. VCs need to return the money their investors have given them – usually in a 10 year time frame. So they really have a clock they are working against. Exits through acquisition by a larger company or through an Initial Public Offering (IPO) is how they get the money they have invested out. So if this does not suit your plans, VC money is not for you.
  3. Understanding what can increase your valuation periodically– VCs like to bring on other VCs to share the risks in the companies they invest in. They also would like to see the valuation of their investments rise rapidly so that the acquisition price or the IPO price is justified when that event is reached. Valuation is a notional concept (just what someone else is willing to invest their money for) till it hits the acquisition event or IPO when it becomes validated by the general marketplace (till then it is done by the private VC marketplace). Growth metrics usually provide the justification for the increase in valuations.
  4. Understanding how Market Adoption Rates and Penetration Help you get there – If your startup is dependent upon the 4% smartphone adoption rate in India as opposed to the 56% adoption rate in the US, you can get an idea of how fast your key metrics will grow to make your case for the first or the next round of VC money. It does not mean you are in a bad business. It just means that your business may not be a good candidate for VC money! If your business is already making money, then that needs to reflect this rapid growth or at least the promise. If you are following a freemium model or you are postponing the question of monetization for a later date but are focused on building membership, visitors and engagement, your metrics need to show this hockey stick growth. It is not because VCs have an illogical liking for hockey stick growth rates – those are the ones they can show the next group of VCs or others that want to invest in subsequent rounds and ask for a higher valuation! I wrote about this topic in my previous article – Develop and Pray is Bad Planning in Product Startups!
  5. Understanding what Riding the Tiger means –  When you watch Flipkart raise more money and doing all kinds of acquisitions, what you are seeing is catching the tiger by the tail, getting on it, and riding it! You don’t have an option of getting off, since the tiger will eat you if you do! Once you raise venture money, you need to plan for rapid growth and riding the tiger. Don’t even look for venture money if this kind of company building is not for you.
  6. Understanding that Venture Money is not the only way to build a Software Product Company – If you have a secret sauce in your product that no one else can copy in their product easily and you have a five to ten year advantage, you can afford to build your company at a slower pace, taking one or two rounds of angel investor money, keeping expenses low and ploughing back initial profits into building the company organically! Unfortunately it is less likely in the consumer space that you have Intellectual Property that cannot be copied easily than in the enterprise space. Also if you are successful in the consumer space, just for building out your infrastructure you may need to raise large amounts of money – usually that’s venture capital. You might have seen this portrayed in the movie The Social Network with what happened to facebook in its initial years.
  7. Go Big or Go Home if you plan on taking Venture Money – Unlike Services Companies, software product companies depend upon rapidly establishing a large market share in an emerging space. In almost every market, consumer or enterprise, you will see one or two large players splitting almost 70% of the market between them and a couple of other players splitting the rest.  The bright side of this is that there is so much innovation possible in the software product space that you can always define a new marketplace and become a leader in it! But for that you need to show rapid growth in revenue, members, visitors and active engagement. So it’s Go Big or Go Home!

Venture Capital is a vast subject with nuanced differences with every VC company, country or company they typically invest in. For the software product entrepreneur there are some common basics that can help them understand how they all operate in general, whether you are a good candidate for VC money and if you are, what is expected once you take it! At worst, if VC money is not for you, it will force you to do better planning. How will you sustain your company and grow, even if it is at a slower place that you are comfortable with? Have you thought about all of this?

An Investment in knowledge pays the best interest – Benjamin Franklin
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Develop and Pray is Bad Planning in Product Startups!

Total Addressable Market, Technology and Market Adoption Rates are crucial for Product Startups! Ignoring them early on will only cause immense heart ache down the road for you, your family, your company, your employees and their families!

It’s all well and good to follow your “passion” and do your startup purely for your passion. It will be a great hobby and extracurricular activity. You can still build a lifestyle product startup, with revenues and profits growing slowly, addressing the global marketplace or the Indian marketplace at a pace you like as long as you are NOT trying to raise investor money, angel or VC!

But if you are a product startup that believes in rapid growth, would be in the market for Angel or VC money, this is very important! I will write in a follow-on blog entry about that connection in more detail. In this one, more about the basics!

With the popularity of FlipKart and other e-commerce sites, you may be thinking that Indian e-commerce sites make for great e-commerce startups. After all, you see Indians signing on to the web in droves, right? You think that it will be easy for you to raise money for your e-commerce startup, correct?

You may want to read this recent report , Analysis of VC Funding in the Indian E-Commerce Space.  This report predicts that the funding scene for e-commerce sites in India will be drying up soon and it will be very difficult to raise money for such ventures!

I have personal experience chasing the Indian Enterprise marketplace with our software products and services some time ago and it wasn’t very good. We might have been a bit early for the Indian enterprise market but with the recent weaknesses in the Indian economy, IT companies in the doldrums, I don’t think that the situation has changed too much.

When you have invested years and years of your time, effort, passion and money in a startup company, you tend to put on rose colored glasses and look at only information that seems to confirm your hypothesis that your company will be successful no matter what is happening in the market you are addressing!

You tend to discount facts that don’t fit with your ideas and dismiss them offhand. Bad Idea!

Total addressable markets and adoption rates are absolutely crucial in predicting your own success in the market you are addressing.

For example, take a look at this latest analysis of global mobile and web trends by the famous venture capital firm, KPCB.

Whether your product addresses the global or the Indian market place, statistics like the ones provided in the above presentation will help you get a dispassionate, realistic, and useful handle on what’s really happening in the marketplace, in spite of what you think is happening or wish were happening!

Even with these kinds of statistics, you may need to adjust for personal knowledge you have of the marketplace. For example, if you think that 900 million mobile connections are reported for the Indian market, does it mean 900 million people? How about people who have multiple SIM cards and connections? How about people who obtained prepaid connections from multiple service providers, using some and not using others?

That gives you an idea of  how to arrive at the Total Addressable Market. If your product addresses the Indian Small and Medium sized businesses, do you have statistics on how many of these are there? SMBs of various sizes?

Technology Adoption rates are a very crucial thing you want to pay attention to. Just seeing all of your friends buying smartphones in your urban area in India is not a good indication of Indian Smartphone adoption rates! The Mary Meeker presentation above shows that the Chinese smartphone adoption rate is 24%, Canada’s is even higher than the US and the Indian one is a paltry 4%.  Let’s assume that even if this statistics is wrong by a factor of 4, 16% instead of 4%. Is it still enough for you to address the Indian smartphone market with your product? It is hard enough to sell apps for smartphones. Is your plan for revenues realistic when your app is addressing a slower growing market and may be competing for attention in app stores with more than half a million apps?  Now does the picture change for you when you tweak your product to address markets other than the Indian one? Is that large enough for comfort? Of course, you also need to plan for how to get to the other markets (sales and marketing efforts)  if you are targeting them also?

Last, but not least, you may all be familiar with the Market Adoption Lifecycle and Gartner’s Hype Cycle, Geoffrey Moore’s Crossing the Chasm problem.

Briefly back in 1962, a group of researchers proposed the Market Adoption Lifecycle with any new technology being dependent upon Innovators and Early Adopters being the earliest to try some new technology or product followed by early majority. Late majority and laggards will complete the adoption and by the time they come on board, the next wave of innovation is on.

Geoffrey Moore proposed that unless the product or technology is very useful and the price is right, a chasm will prevent the early majority users from adopting it.

Gartner’s Hype Cycle extends this with further modifications and extensions.

The implication here is that of the total addressable market, you are going to have a smaller percentage adopting and using your product. Consumers or enterprises, is that large enough for you to grow as you predict in your business plan?

The bottom line is if your individual beliefs are based on anecdotal evidence (All my friends have an iPhone or all my friends shop on Flipkart), as product startups, you owe it to yourself to collect statistics, facts and combine them with your own intuition about where things are going!

If you wait till all facts are known with certainty, it may be too late. There may be many competitors in the market and market may be mature already.

The key is taking Informed Bets with your startups. It is never too late to do this analysis. You can pivot from your existing products to ones that actually make sense with a larger addressable market and observable technology and market adoption rates!

I would not underestimate the battle between the heart and the head when it comes to your product startup. The head will always intuit you with the real picture. Your heart will mislead you, simply because you have invested your ego, time, money and passion in something that you know is not in a fast growing market!

How do i know this? Been there, done that! Made mistakes that were very painful!

You owe it to yourself, your family, your employees and their families to combine facts with your own gut instinct about where a market is headed and how your product line up can ride that wave!

Is your plan realistic? After all, you will be spending your next 2 to 5 years with your product startup.

Forget the hype! For your own sake, you need to have a clear idea of the addressable market, a good sense of  your early adopters, what they are looking for, and whether the adoption rates are going in the right direction, even if they are currently small!  Are they accelerating? These are the facts you need to check out and be comfortable with, for your own set of products.

The hype machine would have moved on to the next big one. You will left holding your own bucket.

Develop and Pray is a bad plan!

Reality is merely an illusion, albeit a very persistent one – Albert Einstein.