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A Venture Partner's Advice to Startup Executives
By Raj Atluru, Director, Draper Fisher Jurvetson
Let’s turn the clock back 8 years. The US economy was just beginning a massive technology investment wave. Large enterprises were driven to upgrade their existing IT applications and infrastructure. Y2K, the emerging Internet platform, increasing competition from entrenched players and new entrants and regulatory initiatives (telecom deregulation), all led to significantly higher investment in technology. Both small and big companies were able to build their technology products in a near vacuum from customer requirements or feedback. Selling new technology in the expanding economy was almost too easy. OK, so I am exaggerating on the last point, but not much! One of my biggest frustrations over the past couple of years is that everyone seems to have forgotten how to “Hug Thy Customer”.
So what do I mean by Hug Thy Customer?
Is this really insightful? No, it really isn’t. Many early stage companies do a great job understanding high-level pain points facing potential customers and they come up with product requirements that map generically to those pain points. However, they fail over and over again in assuming that they have “nailed it” from a product requirements perspective. As importantly, they assume that company messaging and positioning, and ROIs are solid enough to beginning investing in sales and integration capacity to ramp the business. This mistake is costly.
What I would like to see is companies find one customer to truly Hug. OK, maybe two. Either way, I truly believe that early stage software companies would be wise to learn from their early customers in a “partnership” model. Ideally, management would be able to keep the burn rate low and work hand in hand with the customer to define new product requirements and to build valuable ROI analysis tools and case studies. In this market, companies have time to do it right, and should focus on proving real value to one customer, making that customer the primary reference and champion for the company.
Partnership Models – i2 Technologies
Here are a couple of good examples. i2 Technologies took several years to begin ramping revenue, and spent the better part of three years learning from its customers through consulting engagements. In my portfolio, Par3 Communications, a real time event-based messaging company, focused its resources heavily into making Northwest Airlines hugely successful in launching a cancelled flight messaging application. Northwest has been championing the value of the Par3 solution ever since, including publishing hard dollar savings and ROIs. I have another company building its first application directly with one marquee customer. There is no question in my mind that the richness of the features and functions imbedded in the jointly-developed application will be the best in the market. The company’s understanding of its target customers and business problems will be much better than its competitors.
So does this apply only to early stage companies?
Definitely not. Even established companies in this market should spend the time to enhance their technologies alongside of their key customers. Growing the business through existing customers requires changes in the compensation structure of sales and client managers, and some premium should be given to signing up joint development partners. In either case, management needs to drive this. For early stage companies, CEOs might consider targeting only 1-3 customers in the first year and utilize deal structures including NRE (non-recurring engineering) and customization services as a way of building value into the application. Caveats to look out for include rigidity in the application based on very customer-specific requirements. However, my belief is that software veterans can walk this minefield and still not be buried by this tight relationship through development.
Tactics for Early Stage Companies
While conceptually this sounds simple, Hugging Thy Customer is not easy to ingrain in a company’s mentality. Here are some tactics to consider for early stage companies that are just launching:
Generalizations aside, the takeaway is straightforward. Stay focused on your initial customer and make sure that your internal resources are tightly coupled with the first deployment across almost all internal groups. Hug Thy Customer, every day and in every way.
- Hire only one dedicated sales resource in addition to the CEO and tie compensation to both license and joint development revenue.
- Focus on product development and make sure that this function is deeply tied to the first customer.
- Make NO plans to hire additional sales resources until the product has been fully integrated and referenced with the first customer.
- Keep the company headcount below 20 employees.
Raj Atluru is a Director at venture capital fund Draper Fisher Jurvetson and focuses on software investments.