Loving the Underdog! PART1: The 800lb gorilla

I recently helped organise a startup competition in our City. There were five startups pitching.  Several of them are attempting to take on much, much larger entrenched competitors. It seems like madness! They’re competitors are stronger, have more resources and many more customers. But, sooner or later, a startup has no choice. They have to fight the 800 pound gorilla!! Despite the odds, startups can and do beat their massive competitors.

You’ve gotta Love the startup underdog’s sheer audaciousness and courage against the odds!

If a startup is lucky enough to find a gap in the market, they will attract copy-cats. Initially most of them will be other startups. Mostly there’s little point in startups competing with startups, as they both have nothing to loose. Startups are quick to change, nimble and have a low-cost base. It’s almost best to ignore other startups playing in the same field.

With traction and time other copy-cats will be big powerful competitors. With customers and revenue streams, larger companies have the luxury of time. They have power. Startups don’t! If startups persistently compete against big players they will either be acquired or squeezed out of the market. Of course, if funded, the VC’s love the ‘acquire now’ option.

Just today I see startup Slideshare is taking dominant Cisco and Citrix head in the on-line meetings market. At our startup competition the winner Go-Dine is competing against the very well established Opentable. And Annot8, one of the finalists,  is completing against Google!! My website performance monitoring startup is also increasing competing against our much larger competitors.

It seems like a no win situation!!

So how on earth can a startup win against the 800lb gorilla..?

1. Find their weak points – Often large dominate market leaders become bloated with the fat of large profits. They have not explored new channels or markets. This is when a nimble startup can attack!
2. Go niche – Much large competitors can be avoided by going deep into a niche market where the play is too small for a large company.
3. Attack their profits – There is probably a product or service where the 800lb gorilla is making their fattest profits. Attack this treasure chest and weaken their position.
4. Forget them – It’s easy to get obsessed by the competition. Focus on the customers and their needs, not what the competitors are doing.
5. Out innovate them – This is making the most of their weak points. Re-define the market! It’s a challenge without significant resources i.e. major funding but it can be done. And when it is, the profit are huge. VC’s love this approach.

Startups have little choice but to stand and flight using their limited resources.  The founders can’t just tuck tail and run when they they’re up against a large competitor. Startups can and do win against the 8o0lb gorilla’s. Just look at Mint v’s Intuit or Dyson v’s Hoover, the list goes on and on. This is the way of our evolutionary economics system. Startups change everything!!

Next post in ‘Loving the Underdog’ series: PART2 – City of creation

Here’s a few good posts on startups v’s bigger competitors:

• The big company vs a bootstrap – Bijan Sabet
• Startups play poker, big companies play chess – Don Dodge
• Understanding How The Innovator’s Dilemma Affects You – Mark Suste
• Telling the 800-lb Gorilla to Shove it up his Ass – Jason Cohen

 

Geek ‘n Rolla: Love & Money?

Love was defiantly in the air at this years Techcrunch Geek ‘n Rolla. The tech event, on its second year, had a strong focus on Venture Capital and real world startup experiences. The talks highlighted VC’s love of huge exits and startup entrepreneurs love of making great things. Unfortunately, these two paths to love don’t always meet. But often they both need each other to survive and grow. If you want a full debrief of the event Inma Martinez , Joao Belo and of course Mike Butcher at TechCrunch, have great detailed writeups.

In Tommy Ahlers‘s talk he compared a startup exit  to finding love and Eden Ventures described engaging with VC’s as romance. Tommy went on to say “don’t build a startup to sell out.” I’ve heard this before – if you just focus on the money you won’t get anywhere. In the subsequent panel discussion Saul Klein of Index Ventures went onto say “Most entrepreneurs are not looking for an exit, they’re looking to create a great product and change the world in some way”.

Jason Trost reminded us how much startups are “rollacoaster of a ride” and “to be ready for the hard knocks”. He also quoted the cold fact “that 7 out of 10 startups fail”. So why are startup founders willing to throw life savings, time and a personal life at an idea. It’s because Entrepreneurs love doing what they want to do! They love the freedom to create

The startup new product pitches of the day were: Cortexica; Cutefund.com; Decibel; DriveK; GameCreds.com; Gigaboxx; Graph.me; iGlue; LinkCloud.org; Musiio; Pownum; SongHi; and Stripped Finance. Well done guys for have the passion to follow your dreams. And congratulations to Cortexica for winning over the judges and Graph.me for the audience vote. Tamlin Magee has a great write up all the pitches.

Most of these startups have spent many months, or years,  and much money building their  products. Love of startups is why the speakers,  the pitchers and several of the audience were willing to drive across Europe for this event when all the planes had stopped. Well done Mike Butcher for making it these events such a focal point for European tech startups!

In Ewan McLeod’s talk on “The disruptive opportunities for startups in mobile, and getting traction fast” he pleaded with mobile phone app startups to stop their love affair with iPhone app development and look at the market measures.   “But love is blind and lovers cannot see, the pretty follies that themselves commit; For if they could, Cupid himself would blush” (William Shakespeare, “The Merchant of Venice”). This is where the VC’s kicks in!! They have to see the reality of money or at least the potential of it. “We’re looking for exit values of $300-400million dollars” Katie Turner, Eden Ventures.

However software startups are not about the money at the beginning. They can’t be – There is no money.. only an idea, a massive loss and very few customers, if any! Employees tend to focus on monthly paychecks but startup founders have to draw their strength and measures from elsewhere. Ultimately you have to do what you really love to do. Startup founders really have to enjoy and relish the startup challenge.  “I love sales” said the charismatic and slightly wacky  Morten Lund in his entertaining talk.

Without a rush of customers throwing money at a product startup founders have to deal with the VC devil to grow  their startup and continue to create. They then have to dance to the pipers tune and move towards a liquidity event. The good news is that once a VC is onboard they’re on the entrepreneurs side, just as long as the founders are moving towards that big exit 😉

Are the best startup founders young or old?

I recently heard a University lecturer say “entrepreneurship is a young mans game”. Investors do prefer younger founders.  The well-respected startup investor Yossi Vardi: “I generally invests in young entrepreneurs”. The average Y-combinator or Seedcamp winner tends to be in their 20’s.  However there is no best age to be an entrepreneur.  There are benefits and draw-backs to both young and older founders. Being  a successful entrepreneur is derived from the ability to  learn, having  an inner driver and maintaining the right attitude.

Our web app startup operates from a student/post grad startup incubator. I see alot of young startup entrepreneurs coming through. Most startup founders at the incubator are either young or middle-aged.  A recent US report showed that the average age of startup founders is 39! There are benefits and draw backs to both young and old founders:

1. Energy – Youth brings an abundance of energy. Startups require alot of energy. You have to work hard, often and late. However startups are more of a marathon than a sprint. They  require long-term mental and physical stamina to succeed.
2. Enthusiasm – The danger with enthusiasm is it does not always last  in the young and inexperienced. Startup projects can be dropped as enthusiasm wanes and reality kicks-in. It is important to be committed on a path whether young or older.
3. Experience –  A younger entrepreneur is often eager to learn and has fresh ideas untainted by working as an employee. Whereas an older founder often has great industry knowledge. Research shows that companies are more likely to survive if the entrepreneur is older, and has previous business experience.
4. Money – Older startup founders tend to have more capital to invest than younger entrepreneurs. However older founders outgoing’s tend to be much higher with kids, houses, etc..
5. Risk – Younger entrepreneurs are often less risk averse than older founders because they haven’t got so much on the line i.e. outgoings and responsibilities.
6. Time – Without responsibilities a young founder can focus just one  thing – working hard on the startup. Sequoia Venture’s Michael Moritz.:  “distractions like families and children…that get in the way of business” . They also have time to make mistakes that can be learnt from and then try again.
7. Innocents – The young tend to be more naive on how hard startups can be. Whereas the older tend to be more worldly-wise.

VC’s prefer more youthful startup founders because they have  fresh ideas and can more easily be managed. The best founders are probably older serial entrepreneurs with both startup know-how and market experience.  However they can suffer from destructive excessive egos at times.

There is no best age to start a company. Age plays both ways. It can be a strength or a weakness in either age group. Attitude and an inner driver, with a sprinkling of luck, is more crucial than age. An entrepreneur is  made by building upon an individuals fundamental personal qualities, including determination, and not age.

I’m calling a ‘time of opportunity’ for London/UK internet startup industry

I’m getting very bored of being told we’re no good at Tech startup’s in the UK. I’ve calmed down since reading Paul Carr’s “I’m calling a ‘time of death’ for London’s internet startup industry” Guardian article, so this post won’t be a rant.  Admittedly Paul’s post is amusing , however he paints a very negative and bleak picture. If Paul is to be believed there’s no future for London/UK Internet startups. However, I believe there is hope and the UK Tech startup industry has great strengths.

Paul’s a journalist who once lived in London and is now housed in Silicon Valley. He believes “The London internet industry is increasingly, and terminally, screwed”. If Paul is to be believed shouldn’t we just give up! Why bother if  there’s no hope. While we are here lets cancel the 2012 London Olympics because the Beijing games were exceptional. There’s no way London could be the same. Just as we’re not Beijing, we are not Silicon Valley.

The Awesome Beijing Olympic opening ceremony drummers!! (Image source)

The investment funds sloshing around The Valley are huge compared to UK/European funds. The VC’s and Angel’s in the UK/Europe also tend to be much more risk adverse. Although these factors are changing  in the US with the credit bubble bursting. The UK’s limitations doesn’t mean we can’t produce a wonderful Olympics or make world class profitable web apps, we can. Huddle is a great example. Their ranked as one of the globe’s top 50 startups. Bebo is an excellent example of a very healthy trade sale. Sage a global leader was once a UK startup. The list of great UK startup goes on. Mike Butcher of Techcrunch Europe did a splendid job of correcting Paul on London’s startup profitability.

I and  many others agree that the Web 2.0 bubble is coming to an end. But the end is not death, it’s change. The Internet continues to deconstruct entire industries: advertising, music, newspapers etc. This change brings new potential innovation opportunities for existing and aspiring entrepreneurs alike. The Tech community has always been about and embraced radical change.  We are more adept at change than many other industries including Paul Carr’s Newspaper sector which Mike Butcher also pointed out.

The underlying Internet market continues to grow strongly. Ecommerce sales growth remains healthy even in the recession and the use of web applications are forecast to increase massively. The future of software is going to come from Internet based SaaS services and Open source. Again we have world leaders in the opensource sector with UK companies like Canonical and Alfresco. As entrepreneurs shouldn’t we take advantage of change to bring new opportunities. Or as Paul suggests should we give up hope and all the strengths that we have in the UK.

To Freemium or not to Freemium?

Call me old fashioned but shouldn’t a business make money? Seems obvious, but many Tech startups have been giving away Free services for years e.g  Twitter, etc. And they don’t have a fall back monetisation business model. Number of eyeballs first before a business model.. Times are changing with this downturn. VC funding is drying up with a US 61.5% drop. It’s back to bootstrapping startup basics and survival with a Freemium model. But not everyone agrees. There is much debate around the Freemium model.

“The best things in life are free, But you can keep ’em for the birds and bees, Now give me money, (that’s what I want) that’s what I want.” (1959)

The difficulty is “For the Google Generation, the Internet is the land of the free.” Some more mature web based businesses such as Salesforce.com don’t do free, offering only time limited trials. New startups like our Website Monitoring web app have to make a choice: Free; Freemium (the idea from VC Fred Wilson in ’06); or trials/premium. A free version is now almost expected in many markets to keep up with competition. Marketer Sean Ellis has gone as far to say Freemium will outcompete premium only offerings.

Its not easy to get the Freemium balance right. Give too much away for Free and you’ll have little/no revenues OR give too little away and the Freemium marketing model is ineffective. Dharmesh Shah of Onstartups believes the Freemium Model is challenging, (plus some of my own thoughts):

1. Functionality Mix – Its difficult to decide the functionality that you give away on the Free version and hold back on premium version.
   
2. Cost of Free users – Supporting a ton of free customers costs and there maybe not enough money coming in from paying customers to subsidize the free version. Support can also be a problem as ‘In the land of the Free’ users still expect a high level of support.
3. Premium version pricing – Premium versions need to have multi-tiered pricing with a very low cost starting plan to tempt users off the Free versions.
   
4. Poor conversion rates – From free to paid can be as low as 3% or at best 10% we’ve heard. Also users may try and work the system and share the free version between company users. Unfortunately many users will never pay for an app.
5. Higher attrition rates – Freemium attrition can be unpredictable and higher than traditionally priced products with premium users switching back to free versions.
   

TechCrunch is still endorsing Free: “Rather than launching a service with a freemium model, I think it’s important to gain a large and passionate user-base first.” Some startups say: “don’t offer a free plan!” Andrew Chen of YouSendIt.com has blogged about his positive experiences of moving from Free to Freemium with his 5 lessons learnt.

Its not an easy decision. Free means lots of users but no revenues (or a little from Ad’s) but the potential of something much bigger if you hit on that killer app. A 30-day free trial only option will result in real users who demand a high value proposition. At least then you will know if your app can be monetised. The Freemium model offers a half way house to gain traction and the opportunity to convert some users, which is particularly helpful during the early startup days. However Freemium is full of pitfalls if executed poorly.

With any of the price plans marketing an app take alot of investment/money. Even with Free plans sooner or later money will have to come in to pay the bills. There is no escaping it – monetise!