Milestone Group Quarterly: January 2004
Articles
Milestone Group PoV:
Chris Kocher on Building Better Products
Recent studies show that about 25% of all commercial software projects are cancelled which resulted in a staggering $60B in losses in the US in 2000 alone. (MIT Technology Review, November 2003 “Everyone's a Programmer” by Claire Tristram) As damaging as these failures are to established companies, they can be catastrophic to smaller ones.
Building products cheaper and faster through outsourcing only solves tactical and execution issues faced by tech companies - albeit very important ones. However, the biggest challenge still remains building products that provide real customer value, which are competitively differentiated and can be sold profitably in identified markets with paying customers.
Over the last 10 years, I’ve had the opportunity to advise many small and medium sized, entrepreneurial companies on how to increase revenues and accelerate company valuations. Not infrequently, I come across founders and CEOs with great technology vision and product concepts that may be working with 10-20 engineers and an admin. Not surprisingly, many of these companies are focused way ahead of the curve on the technology and have turned a blind eye to customers. Unfortunately, this frequently results in being blind-sided by those seemingly obvious customer needs that often determine a product or company’s success.
The outcome is only too predictable - an overwhelming technology story that wows an analyst or two, appeals to a few techno-luminaries, attracts a couple of beta customers, and perhaps even secures a round of early funding. But these early indicators can often provide a misleading beacon. Many of these companies are lulled into a false sense of success and often never really find a market – or at least not one that can sustain a profitable company.
What we need in many of our creative engineering organizations is to strive for a better balance between customer needs and technical innovation. Perhaps we should consider a customer needs oriented ‘governor’ to ensure that development doesn’t rev the technology engine and speed down a winding road that leads to nowhere. Or as a good friend of mine and industry veteran, Demetris Paraskevopoulos, eloquently characterized the problem, “We have too many uninhibited products in search of uninhabitable markets.”
When you step back and dissect the problems of failed startups and even many later stage technology companies, the biggest problems tend not be the efficiency of writing code as much as building the right products that customers are willing to pay for. Many of these bad habits were exacerbated in the late 90s when people thought you could just throw up a website and customers would come. This was the bubble version of “build a better mouse trap and the world will beat a path to your door.”
The problem only gets worse when companies that are failing think their salvation lies purely in their technology. They tend to cut everything else and put all resources into development. Sometimes this may be the right approach. At other times, throwing more money at un-validated technology is like the proverbial rearranging of deck chairs on the Titanic.
Here are a few lessons we should all strive to remember:
- an exciting technology does not a business make
- a few betas do not validate a product concept
- a handful of early adopters do not a market make
Digital Rights Management is a good example of a sector littered with technology, but few if any successful companies. Pieces of this technology have been around for almost 20 years. Over the last eight years, there have been several dozen companies that have popped up and then disappeared like ‘whack-a-moles’ looking for a market.
Unfortunately most failed, not for a lack of technology, but for lack of a compelling value proposition targeted at a set of customers willing to pay money for it. In fact, these companies had an overabundance of technology, that if anything, was more confusing for customers and deterred adoption. It was clear from talking to many potential users in this sector that what they wanted was a simpler, less intrusive solution, that could help their business - not more technology innovation.
So, as we all start to implement our 2004 New Years resolutions, here are seven items I’d recommend adding to the list:
- Get focused and drive for business clarity in setting technology directions
- Provide better customer analysis before unleashing the code warriors
- Go beyond customer needs and identify what they’re willing to pay for – now
- Strive to infuse your engineering organization with frequent customer interaction so developers understand customer pain points, viscerally
- Consider early intervention in product development to make customer oriented adjustments – don’t wait for major course corrections that will delay releases
- Support a customer champion in your organization or bring one in from the outside who doesn’t drink the KoolAid and ensures you have a “whole solution”
- Simplify – most customers want easier solutions they can implement quickly that solve a specific, real problem - not excessive functionality
Hopefully, putting these suggestions into practice can give our creative engineers and entrepreneurs a better chance at building successful products and companies - a chance to avoid any future stampedes to the technology scrap heap.
Chris Kocher is a Partner at Milestone Group. Chris has over 20 years of experience at HP and Symantec. He has also helped numerous companies accelerate revenues and increase valuations. He can be contacted at: chris@milestone-group.com.
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