I had the pleasure attending the MassTLC CXO forum last week which featured Geoffrey Moore, Michael Skok of Matrix Partners, Alan Ory of Acme Packet, and Susan Hunt Stevens of Practically Green. Geoffrey Moore provided a update on how the theories he presented in his 1993 book Crossing the Chasm have withstood the test of time. As he talked through some of the new dynamics affecting businesses, he clicked to a slide that showed two large humps on horizontal scale arranged by powers of ten. Moore’s key point is that technology achieve a position of power fall into one side of the scale or the other — they either sell highly complex systems with high price points to a small number of customers or they sell low-priced products at high volumes typically extending into the consumer market. He further explained that companies tend to develop cultures and systems tuned to one approach or another. Trying to serve the full spectrum impossible for early companies because they don’t have the resources and nearly impossible for larger companies because they don’t have the skill-set and culture.
The following day I visited with a start-up working on their first first release and refining their business plan. They’re developing a SaaS application that they plan to sell for $30 per month to small business. To get the service launched they plan on using an in-person sales force to call on prospects and come back with order forms in hand.
Thinking about Moore’s point, we ran through the math together. To fund their business, they’re hoping to raise $1M. The investors they pitch will be compelled to provide funding if they have some level of confidence that their investment could grow by 10x. Let’s say that they provide $1M for 25% of the company which implies a post-money valuation of $4 million. This, in turn, implies that they believe the company will be worth $40M at some point in the not too distant future (five to ten years).
$30 per month per customer. $40 million valuation. That’s a big spread. Let’s be generous and suggest that their future growth may justify a 4x valuation on trailing revenue. So they need to reach $10 million in annual sales with a sustained rapid growth rate for the math to make sense. $30 per month is $360 per year. $10 million in annual sales divided by $360 is 27,777 customers. Yikes. And that’s just the base. They’ll need to growing from that point with momentum.
It doesn’t take too much analysis to see how Geoffrey Moore’s point applies to this company. In order to meet their projections they need to find an incredibly efficient and scalable process for attracting and establishing a business relationship with thousands of new customers. They need to be addressing a market extremely large to hope for this type of adoption. That’s not going to happen with in-person sales. It may be useful to have an in-person sales team at the start to learn exactly what customers want. And then after they get their first sales they can use a telesales team to help answer questions and close deals but eventually, to scale the company, it will need to be 100% self-serve.
This is a great illustration why the go-to-market plan for new companies is so important. If the price point is low, your market needs to be large and your method of reaching that market has to be automated. If want sell a product at a higher price point it will require in-person sales and a complex solution that’s dependable and differentiated from the competition.
I should note that Moore’s comments were directed to managers intent on building dominant companies that will most likely to require growth capital from investors. There are business opportunities in the middle that are niche businesses. In fact most small businesses sell a modest amount of products to a fairly small market. Restaurants, dry cleaners, plumbers, carpenters, taxi drivers, all charge relatively small fees for relatively low volume. The result can be a healthy business that makes a profit, but they are very difficult to scale.
One other nugget that came out of the conference was Michael Skok’s comment that some of the most successful companies have been able to innovate new approaches to serving a market rather than developing new technology. As an example he cited Dell. In its early days Dell grew much faster than competitors by providing mass customization where every order could be different, but within parameters. By maintaining these constraints, they were able to reduce the the amount of supplies that that kept in stock. Their just-in-time inventory ordering gave them lower cost and higher margins than competitors, and they become the largest seller of personal computers — eventually pushing HP, Compaq, and IBM out of that business.
The key point: the right go-to-market plan is essential for success.
For related info see “Self-Served, Configured or Customized” from the archives.
If you really want to get freaked out by how dramatic the powers of ten can be, take a look at this video created by IBM. Aside from the funky 70s soundtrack, it’s a great illustration of scale.