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Archive for July, 2014
I make a distinction between wanting to move beyond running a services business where you bill by the hour to either selling results or selling a product and entrepreneurs attracted to the passive income fantasies of the “Four Hour Work Week.” When an entrepreneur tells me that the “Four Hour Work Week” has been a strong influence on their thinking I worry that they are unfamiliar with what’s required to build a successful business.
You Can’t Stay Ahead of Competition Passively
I found Michael Ellsberg‘s critique “Four Reasons Why Passive Income is a Dangerous Fantasy” to be on point.
1. You Can’t Stay Ahead of Competition Passively: If your research really does determine that there is some amazing market niche that until now has miraculously gone unnoticed and unserved—dog owners who wish to help their dogs lose weight naturally, for example—sooner or later, word is going to get out that there’s money to be made there, and someone is going to create a better ebook or info course or product that serves that market’s needs better than yours does, and who markets it better to them than you do. You can’t manage this competition while sipping margaritas all day from your paradise restaurant on Fiji. You’ll soon see your market share go down the drain—just like all those Açai cleanses…
I had a conversation with an entrepreneur who had been bootstrapping for three years successfully who said, “I keep waiting for it to get easier. When in your experience does it get easier?” I said that I don’t think it ever does. We brainstormed two lists:
- Why it stays hard
- Why it gets easier (at least in some ways)
Why It Stays Hard
- Established technical expertise has to be renewed, this takes time away from sales/marketing, product development,
- Competitors react to your success, either copying it or acting to nullify it if you have been winning business from them.
- Customer needs change over time, in response to changes in environment and earlier success in satisfying them.
- Growth requires you to place larger bets; not growing or staying small for the sake of staying small risks stagnation in other ways.
- The business environment can change rapidly and unpredictably
- New technologies can obsolete existing products and services, and put categories of expertise at risk
- New competitors and new business models emerge
- Markets you operate in become commoditized, sometimes without warning.
Why It Gets Easier (At Least In Some Ways)
- Soft skills accumulate
- Paying customers come back and buy again — assuming you have happy customers
- There is also an opportunity or referrals from happy customers.
- Partner relationships that are well established allow you take action more quickly
- Reputation accumulates (this can also work against you).
You Cannot Maintain Customer Relationships Passively
2. You Can’t Maintain a Loyal Tribe of Customers Passively: As soon as your customers realize that you don’t care about them (which you don’t, if you’re trying to get away from them as fast as possible), they will eventually go elsewhere, to someone else who actually does care about them and their needs.
If you don’t engage with your customers, if you want to little to no contact with them, then it’s unlikely you are gong to be able to detect and anticipate emerging requirements, rectify shortcomings with your current offering, or respond to what competitors are telling them.
You Cannot Lead a Great Team Passively
3. You Can’t Lead Great Teams Passively: If you’re going to be building a large, scalable business, sooner or later you’re going to need employees and/or freelancers. You’re not going to attract great talent for the long run by indicating to them that you have no interest in being involved in the business whatsoever. Some people obsessed with “passive income” say, in response, “No problem, I’ll just hire a leader to do all that managing, motivating, and creating stuff!” What you’re essentially saying, then, is that you’re adding zero value to the equation. You’re not coming up with the ideas, you’re not implementing/executing the ideas, and your not leading anyone to implement or execute them.
Buying stock in a company is a great way to create passive income, but that cannot be confused with entrepreneurship. If you are not going to be able to contribute to one or more of technical insights, product leadership, customer intimacy, operational excellence, or revenue generation then you are not really adding value to the business. You should be a passive investor.
You Cannot Discover or Pursue Your Life Purpose Passively
4. You Can’t Create Meaning, Passion, or Purpose in Your Life Passively: I’ve had several conversations recently with people in their twenties who have built up some semblance of moderate passive income. These people are (for now) living the dream–they get to travel to Fiji or some other exotic location on a shoestring and hang out on the beach, funded by their little niche ebook or whatever. Yet none of these people I’ve talked to who have this temporarily successful lifestyle seem very happy. They actually seem kind of restless and lost. I’ve had conversations with several of them to help them determine “what the purpose of their life is” now that they have some amount of money coming in from some little passive venture they don’t even care about that much. It all feels empty to them.
This lines up with Arthur Brooks’ “A Formula for Happiness” where he recounts research that identifies the key drivers for happiness
- Big life events
The bad news is that first two account for about 88% of baseline happiness and are not under your control. So, what choices can you make that influence the remaining 12%? Brooks suggests:
- Faith: thinking about the transcendental, the things that are not of this world, and incorporating them into your life.
- Family: having solid family relationships; the things that cannot and should not go away.
- Community: cultivating important friendships and being charitable toward others in your community.
- Work: marrying our passions to our skills, empowering us to create value in our lives and in the lives of others.
Rewarding Work is Essential
Brooks’ key take-away is that rewarding work is essential:
“I learned that rewarding work is unbelievably important, and this is emphatically not about money. That’s what research suggests as well. Economists find that money makes truly poor people happier insofar as it relieves pressure from everyday life — getting enough to eat, having a place to live, taking your kid to the doctor. But scholars like the Nobel Prize winner Daniel Kahneman have found that once people reach a little beyond the average middle-class income level, even big financial gains don’t yield much, if any, increases in happiness.
So relieving poverty brings big happiness, but income, per se, does not. Even after accounting for government transfers that support personal finances, unemployment proves catastrophic for happiness. Abstracted from money, joblessness seems to increase the rates of divorce and suicide, and the severity of disease.”
Arthur Brooks in “A Formula for Happiness“
Ellsberg concludes with an interview with Bryan Franklin who recommends a focus on leverage in a business you care about:
“Every time I’ve seen someone create a business, with the ultimate intention of getting away from that business and its customers as quickly as possible, instead of moving towards that business and its customers, it fails.”
“What makes business work is creating value. If you’re going into the business with the intention of not creating value, but of having it magically provide money for you, then you often make really bad choices. The business that you’re investing in or creating doesn’t tend to be creating value for its customers or for anyone. So it doesn’t tend to spit off the cash you’re hoping it will.
“If you make your choices based on, not ‘how can I get money for free?’ but on, ‘What challenge can I put in front of my face that’s going to have me step up to be the kind of person I’d rather be?’ you’re going to start to forget about wanting passive income, and you’re going to start to focus on what purpose you truly want to create the world.”
- The Intelligent Pursuit of Happiness
- Christopher Moore’s “Coyote Blue”
- The Heart that Holds On
- Your Prospects and Your Customers Are Real People
- David Foster Wallace: The Only Choice We Get is What to Worship
Update Aug 2-2-14: When I selected my “Ten Quotes for Bootstrappers from July 2014” I added this postscript to the Bryan Franklin quote that I thought I would append here as well:
I think the Four Hour Work Week has offered a mirage that has lured more bootstrappers onto the rocks than “build a better mousetrap and the world will beat a path to your door.” The belief that you don’t need to care about your customers and manage your business to succeed is at least as productive as “my product is so good I don’t need to learn how to market and sell it.”
In the last eight years I have moderated several hundred Bootstrappers Breakfasts. After doing a hundred or so and working with many clients who were bootstrapping I came up with a checklist for common mistakes bootstrappers and bootstrapping teams make in their first year or so.
Cultivating mindfulness requires you to maintain situational awareness and realize when your reflexes may trigger a reaction that is not as thoughtful as the situation requires.
Things I have learned from my children: “fall down seven times, stand up eight”, athletic ability flows from practice, and patience.
Tytus Michalski advises, “Survive first. Explore second. Build third.” Rob Saric suggests: “Solvency First, Consistency Second, Growth Third.” We agree with both approaches and blend them in the SKMurphy startup stages model.
Matt Wensing On Making the Transition to Growth
Stormpulse has gone from an idea bootstrapped on founder savings and credit cards, to a project funded by friends and family rounds, to a small business strengthened by angel money, to a company that’s raised “meaningful” capital (our last round was just over $2 million). Here’s what I’ve learned since I’ve been able to leave the ‘drowning and can’t work on the important things’ mode.
Matt Wensing in “What I’ve Learned Since Raising Capital“
Manage interruptions by writing down enough context to continue later: organized notes must detail status and next steps.
Brad Pierce: Preserve Context in Writing to Manage Interruptions
On longer time scales, when you must drop something for a while, it’s important, before doing so, to leave behind enough context for yourself to swap it back in. Write down some organized notes about where you were, what still needed to be done, etc. Keeping a log can be a big help, too, but it’s not a substitute for a high-level summary before suspending the task.
A good mental model for suspending a task is to leave behind the sort of information that you would need to hand it off to another person to finish.
Pretend that you are handing off the task to another person and you will be going away on a long vacation and unavailable to answer further questions, because when you come back to the task you will effectively be that other person.
Swapping in a new context is very expensive. Saving your state well when you suspend is actually much, much cheaper overall, assuming that you’ll need to come back to the task eventually.
Brad Pierce in Making the best of a bad interruption
I really like Brad’s advice and think it’s particularly useful for entrepreneurs in a couple of different situations:
At The End of a Meeting
Be clear on issues, risks, and action items before you adjourn. Don’t defer on getting agreement on critical risks, key concerns, and key tasks assignments. Rough notes that everyone agrees to means that the team is more likely to make forward progress instead of rehashing the key points of the last conversation (“I thought we agreed to…”) or arguing about things in email.
When Launching a Probe or Experiment
When you are launching a probe or experiment that may fail: plan your “time out” points and best alternatives in advance. Some examples:
- You are sending an e-mail request for a meeting or asking for action. Decide before you send it what you will do if you get no response: e.g. leave a voicemail, escalate, try alternatives, etc.. This is a variation on a premortem where you anticipate failure and what you will do to address it. But your state of information won’t substantially change with silence. While you still have the full context, plan out you next two or three steps so that you can also put them on the calendar without having to revisit the situation.
- You are trying to fix a problem or defect. Decide on two or three options you can try that may fix the problem so that you can either shift to the next one or start two or three efforts in parallel. Obviously if the failure of your first attempt provides new information you may change your follow up, but it’s worth trying to anticipate now what are the most likely failure modes and writing that into your plan so that you don’t have to recover your full context to continue to take action.
Schedule Time to Document Your Context
Schedule time for documenting context in advance of predictable interruptions: allocate time to write down the key aspects of where you are before anything that will trigger a context shift such as scheduled conversations with other people, the end of the day, end of the week, the start of a parallel or overlapping project commitment etc…
Create “Buffer Days” To Clear Administrivia Backlog
Group Low Context Activities Into Clusters: I am borrowing this from Dan Sulivan’s “The Great Crossover.”
- Focus Days: you work with undivided concentration on key business activities.
- Free Days: time you spend to relax and recharge with family and friends, no business activity.
- Buffer Days: time you spend cleaning up, preparing, running errands, and otherwise make your focus days more effective.
Buffer days and free days are filled with tasks that don’t require you to store context. See also
A collection of humorous tools that generate buzzword compliant business models.
Web Economy Bullshit Generators
Then Stavros the WonderChicken (@wonderchicken)–no I cannot find his real name–did the “Web 2.0 Bullshit Generator™” noting that “Profits for your Web 2.0 company are not guaranteed.” It’s funny how that has not changed with firms like Box and Dropbox competing in some oddly configured on-line potlatch designed to provided services at a loss in exchange for new investment at ever increasing valuations.
Parodies of Web 2.0 Business Models
Stavros later lamented in “Lomans not Shamans” at what the Web had become: “My god, it’s full of ads!” Here I think his anxiety was misplaced: most new media is advertising supported; the original newspapers were simply classified ads that gradually added news items to differentiate themselves. Stavros references “What Puts the ‘2’ in Web 2.0” by Brandon Schauer who was inspired by “Design Patterns and Business Models for the Next Generation of Software(2005)” by Tim O’Reilly and John Batelle. They followed up in 2009 at the Web 2.0 Summit with “Web Squared: Web 2.0 Five Years On” (see also the white paper: “Web Squared: Web 2.0 Five Years On” [PDF]).
“Plan Cruncher creates a standard one-page summary of a business plan for a start-up company that is looking for external investment. You do this by choosing icons that represent some of the standard answers that a business plan must provide.
Why investors want entrepreneurs to use Plan Cruncher: Plan Cruncher saves investors’ time. To investors, business plans all look more or less the same, which is not necessarily a bad thing, and they are always too long, which is. Before an investor decides to wade into your ten or twenty-page document, he wants straight answers to a few basic questions about your plan.
Plan Cruncher generates a standard one-page summary that investors can use to screen business plans and compare them to each other.”
I don’t believe Plan Cruncher is a parody site, I listed in in my roundup of Business Model Canvas tools.
And in 2012 Norman Clarke (@compay) has launched Bullshit 3.0: Bleeding Edge Bullshit Generation in the Cloud which embeds the ability to launch a Google search for your tagline to see if it’s already real.
Strategy Statement MadLibs
Alexander Fiore offers what may be either high value strategic consulting or unintentional parody in his HBR blog post “How To Execute a 15 Word Strategy” [Registration Required]
Once upon a time there was (insert a name who exemplifies your target customer/consumer) …. . Every day he/she (insert here his/her frustration or job to be done) …. . One day we developed (insert here the product/solution and what are actually the 2-3 things we offer or not) … . Until finally (insert here the end result for the customer/consumer compared to competition) … .
The most recent example is Simon Wardley’s “A Quick Route to Building a Strategy” which is purely a parody.
Our strategy is [..]. We will lead a [..] effort of the market through our use of [..] and [..] to build a [..]. By being both [..] and [..], our [..] approach will drive [..] throughout the organisation. Synergies between our [..] and [..] will enable us to capture the upside by becoming [..] in a [..] world. These transformations combined with [..] due to our [..] will create a [..] through [..] and [..].
Wardley’s template has been implemented by Bill West as a web tool at http://strategy-madlibs.herokuapp.com/ Reload the page to get a new strategy. West might be able to charge for a version of Fiore’s.
Clue Train is Not Bullshit
I still find the 1999 Clue Train Manifesto a useful guide to marketing: it’s argument for real conversation between individuals is as compelling now as it was 15 years ago. Business models have changed with the advent of new technologies and many of these sites are parodying two real needs that every entrepreneur must satisfy: a succinct and comprehensible explanation of their product benefits to customers and a compelling description of their business model to investors.
If you have demonstrated domain knowledge and expertise, a plan for having a significant impact on a customer problem, and are in the process of exploring the early market for your offering or trying to build on a handful of early customers, we can help find leads and close deals.
The majority of our clients are teams of two to five engineers or scientists who are bootstrapping, but we have also helped larger firms–even some in the Fortune 500 as well as large non-profits–where they wanted help exploring a new market.
We are very comfortable helping teams refine their product concept with discovery conversations, probes, and experiments. We help you make sense of the information you have, build models, and craft a plan of action for next steps. In particular we help you lead generation and negotiation to close of early reference accounts for new products. If your goal is to sell to businesses in a subscription or long term relationship model where the three year value of their new customer is at least $25K then you are a typical client–obviously your initial deal sizes may be less but your goal is still to provide enough value to justify that price point or higher.
Startup Stages Model
The model we follow is our “Startup Stages” which spans from the pre-incorporation idea stage to scaling. We have helped a number of teams come together and assisted them from idea stage to open for business stage to finding and focusing on a niche.
To get acquainted join us at a Bootstrappers Breakfast in Silicon Valley or sign up for Office Hours. We offer public and private workshops and Mastermind groups in addition to consulting support. If you are bootstrapping and can identify a monthly budget we can find a way to work with you.
Three interesting answers from Tristan Kromer’s interview with the folks at Startup Commons
Startup Commons: What’s the best way to get started?
Tristan Kromer: Find someone you really want to help. Someone in pain. That’s your vision. Helping someone and solving a real problem. Find team members with complementary skill sets who are able to challenge your perspective and add their own. Go talk to customers.
I think this is the best anchor for starting a new firm: focus on a need or a pain experienced by a particular customer. Pick a problem you are willing to work on for a while because nothing new ever works and it’s going to take a while to figure out all of the elements of a successful business. A few firms with a serious problem are a better start than many firms with a small problem, although the latter may be easier to find, the former are far more likely to take action.
Startup Commons: How to find a good mentor for your startup?
Tristan Kromer: Look for someone who doesn’t give you their opinion but instead challenges you with questions that makes you think.
I agree with Tristan it’s in the questions but like Conor Neill’s formulation: it’s “80% Diagnosis and 20% Prescription.” A good mentor will suggest some courses of action to consider after they have helped you to explore the constraints and implications of the situation–or insurmountable opportunity–you are wrestling with.
Startup Commons: Who are your mentors?
Tristan Kromer: My team is my mentor. The customer is my mentor. My friends are my mentors. I rely on other people to challenge my perspective. People like Sean Murphy, Spike Morelli, Laura Klein, Nick Noreña, Zac Halbert, Janice Fraser. People who are willing to question me or tell me I’m wrong.
I think this is the next step in the evolution of the Lean Startup movement, it has to become a community of practice where entrepreneurs at differing skill levels can compare notes , challenge each other and hold each other account. It’s a mistake to look at the early writing by Eric Ries and Steve Blank as scripture, it’s a good start that we will be refining and extending for decades. There is also earlier work by Peter Drucker, Edward McQuarrie, Rita McGrath, Saras Sarasvathy, Mark Leslie, Clayton Christensen, Russell Ackoff, Dave Snowden, and Gary Klein–just to name a few–that for the most part is not as well appreciated by entrepreneurs as it should be.
“A prudent question is one-half of wisdom.”
- Entrepreneurs Need a Community of Practice, Not a Movement
- Other Customer Development Models
- Saras Sarasvathy’s Effectual Reasoning Model for Expert Entrepreneurs
- Discovery Kanban Allows Firms to Balance Delivery and Discovery
- Articles, Ideas, and Books That Have Changed My Life As an Entrepreneur
Here are four checklists we often take entrepreneurs through
- First Seven Questions Any New Product Plan Should Address
- Startup Maturity Checklist
- Tom Van Vleck’s Three Questions Complement Root Cause Analysis (5 Whys)
- 21 Great Questions for Developing New Products
More useful for second products or once you are established in a niche
I have started to reserve Sundays to write on spirituality, charity, and a higher moral purpose to our life as entrepreneurs. I was struck by the quote that Stephenson puts in Juanita’s mouth in Snow Crash and have concluded that he is performing a similar ministry in his science fiction writing. There is a sense of wonder and meditation on “some power like grace, like the Force, or Providence, or what-have-you, that had been at work in the world today” (from Zula’s reflection on the events of Reamde)
Product-market fit is not a ratchet: competitive response, new entrants, changes in technology and customer preference require ongoing customer development. You will need to continue to do customer development–and customer discovery for that matter–even after you have a first prototype, an MVP, early customers, and an established niche. Markets and competitors don’t stand still, no product-market fit is permanent.
There is such a thing as the “visible future.” The seedlings of [future] life are sprouting all around us if we have the wit to identify them. Most significant changes are preceded by a long train of premonitory events. Sometimes the events are readily observable.”
John W. Gardner “On Leadership”
Marcelo Rinesi advised “the future is an illusion, all change is happening now” and Peter Drucker told us to “systematically identify changes that have already occurred.” From an entrepreneurial perspective you can often transplant a solution from one industry to attack a similar problem in another: as William Gibson suggests, “the future is already here, it’s just unevenly distributed.” This model for innovation brokerage requires that you be open to new solutions to old but pressing problems and that you scan more broadly to find them. Gardner offers his own explanation for why opportunities are overlooked:
“…the future announces itself from afar. But most people are not listening. The noisy clatter of the present drowns out the tentative sound of things to come. The sound of the new does not fit old perceptual patterns and goes unnoticed by most people. And of the few who do perceive something coming, most lack the energy, initiative, courage or will to do anything about it. Leaders who have the wit to perceive and the courage to act will be credited with a gift of prophecy that they do not necessarily have.”
John W. Gardner “On Leadership”
There is always a value in closing the deals that are in front of you and making this month’s payroll. But there is a risk in getting caught in the treadmill of the urgent. Gardner offers a prescription for leaders and leader/managers to differentiate themselves from managers trapped in the immediate crisis.
- They think longer term—beyond the day’s crises, beyond the quarterly report, beyond the horizon.
- In thinking about the unit they are heading, they grasp its relationship to larger realities—the larger organization of which they are a part, conditions external to the organization, global trends.
- They reach and influence constituents beyond their jurisdictions, beyond boundaries. In an organization, leaders extend their reach across bureaucratic boundaries—often a distinct advantage in a world too complex and tumultuous to be handled “through channels.” Leaders’ capacity to rise above jurisdictions may enable them to bind together the fragmented constituencies that must work together to solve a problem
- They put heavy emphasis on the intangibles of vision, values, and motivation and understand intuitively the non-rational and unconscious elements in leader-constituent interaction.
- They have the political skill to cope with the conflicting requirements of multiple constituencies.
- They think in terms of renewal.
John W. Gardner “On Leadership”
I think this is a good list, even for bootstrappers who are worried about keeping the lights on this month. You have to devote 10-20% of your time to problems in the longer term, and connections and initiatives that may not bear fruit next week but perhaps in three months or a year or two. The last suggestion, to consider how to renew skills, relationships, and shared values, is also a critical one for the long term.
More on Drucker’s suggestion for sources for innovation:
“Innovation requires us to systematically identify changes that have already occurred in a business — in demographics, in values, in technology or science — and then to look at them as opportunities. It also requires something that is most difficult for existing companies to do: to abandon rather than defend yesterday. ”
Peter Drucker in “Flashes of Genius“
Related Blog Posts
Tony Schwartz wrote a great post on “Turning 60: The Twelve Most Important Lessons I’ve Learned So Far.” Here are my top four from his list (original numbering preserved).
Steve DiBartolomeo is co-founder of Artwork Conversion Software, Inc., an EDA software firm headquartered in Santa Cruz CA with a development office in Manhattan Beach, CA. Founded in 1989, the company develops CAD translation programs, CAD viewers, plotting software and IC packaging software. Artwork has over 5000 customers worldwide including Alcatel, AMD, Applied Materials, Agere, Bosch, KLA Tencor, Motorola, Ericsson, General Electric, Hewlett Packard, Hitachi, Lockheed Martin, Siemens, Seagate, Sony, TRW..
Q: Can you talk a little about your background and how you came to found Artwork Conversion Services?
I have a BS/MS in Electrical Engineering from UCLA (1978). My founding partner, Antonio Morawski, has a BS from Loyola and a MS from UCLA from around the same time period. I cut my teeth at TRW Semiconductor in Southern Calif starting in 1976 as a student. When I graduated I continued on there until 1980 as an RF design engineer, as did Antonio–we met at TRW.
I took a year and a half off of work and went back to college (UCSB) until I ran out of money and then in 1982 joined Avantek in Santa Clara as an international sales engineer. In 1984 my boss asked me to join a startup, Step Electronics, that would specialize in high tech import/export selling microwave and RF components and subassemblies. One of our first clients was a small software start up, EEsof, which pioneered microwave EDA on PCs. (Prior to that microwave design software ran on a $250K VAX and cost $50K – EEsof’s ran on a $5K PC and cost $7500.) I spent much of the next years selling EEsof tools in Europe (where I lived for a year in 1986) and then later in Asia.
In 1986 I needed a translator for a pattern generator in order to close a large EEsof sale in Germany. EEsof could not do it. I mentioned this to Antonio and he said he knew how to write such a translator. We took the order and delivered it 6 months later.
In 1987 I returned back to the US and tried to sell more pattern generator translators in Silicon Valley. The companies that I contacted were not interested in our translator but had lots of suggestions as to what they did need — so we slowly developed new products (on a part time basis) based on their feedback. At that time (between 87 and 89) Antonio was employed as a consultant at TRW and as a professor at Loyola. He did the programming out of a corner of his small garage.
Finally in 1989 we decided to do this full time. I left Step (which had really been an excellent apprenticeship for learning how to run a small, lean operation) and Antonio left Loyola after completing his teaching contract.
Our primary reason for starting the company was to be “masters of our own destiny” and to work on stuff that was interesting. We really only wanted to make enough money to cover our mortgages and live a reasonably comfortable life.
Q: So what were the early days like?
Between us we put up $10K each and started with that (and two years of experience and a few customers and orders in the pipeline). As mentioned, our largest initial purchase was two fax machines (at $1500 each) and a copy machine ($3000). I worked out of a 500 sq foot office in Santa Cruz and Antonio continued to work out of his garage in Manhattan Beach. We broke even from day one even if the monthly salary was small. Eventually we added a secretary and a programmer and Antonio moved from his one car garage to his father’s two car garage.
I handled all the sales which were almost 100% from Silicon Valley. I basically drove into the valley several times a week and installed and demonstrated the software. I also did tech support, marketing, technical writing … basically everything except programming.
We added employees one at a time and grew slowly but surely.
At the time we started (end of 89), the business we knew best — RF and Microwave components and design — was taking a tremendous hit; the giant build up of the early and mid 80’s (due to Reagan’s military budget) was over and an enormous consolidation was occurring. I’d call an engineer on a Monday to make an appointment and by Friday he’d be gone.
There was not yet any Internet and even cell phones were a tiny market. Things looked especially grim because no one could envision what was going to drive new designs. But somehow we ground through the first couple of years — not making much money but not losing any either and slowly adding a few products every year.
By 1995 we grew to a peak of 14 people – 8 programmers, 1 sales guy, 1 boss (me) and 3 office people. Our maximum revenues peaked at about $3 million dollars in the late 90’s.
Business took a major downturn in 2001 what with the dot-com crash which killed a whole bunch of network and chip startups that were buying our tools as well as hurting just about everybody in the tech business. I recall our shipments dropped 40% one month and stayed down for 18 months before slowly building back up again. By 2004 business was excellent again. Things stayed pretty buoyant until 2007; from that point on it seemed to drift down gradually and, of course, at the end of 2008 the downward drift became disturbingly steep. Most of 2009 was pretty awful and it was not until early 2010 that we saw the green shoots of a recovery.
Q: Where are you today?
Today we are 10 people (7 programmers, 1 sales guy, 1 boss and 1 office person – the internet nature of business no longer requires production of software other than a click). Our goals are not high growth but rather a good profit margin. As a software company we have zero cost-of-goods and the great majority of our expenses is salary. So once you are past “break even” everything after that is profit.
Q: When you look back over the last two decades or so what are the accomplishments that you are most proud of ?
We are very proud of having kept the company going for over 20 years completely on our own. We didn’t borrow a penny and every quarter we showed an operating profit.
We made several major market and technology shifts during those 20 years that kept us going:
- We started by building software for RF and Microwave designers.
- We branched into software directed at PCB designers.
- We branched into software directed at IC designers (back end).
- We moved from translators to display software (viewers).
- We moved from direct sales to end users to OEM sales to other EDA companies.
We have seen many other EDA and technology firms try to change direction, usually in response to major changes in technology or the market that either died or were badly injured in the process.
We were early Internet and web adopters and this enabled us to expand our market from just Silicon Valley to worldwide without a large sales force.
Q: What’s been the biggest surprise?
I think it was more of a gradual realization: most EDA entrepreneurs start as EDA users, run into problems doing their job, come up with a clever solution and are suddenly find themselves an EDA supplier. The surprise comes some years after you are an EDA supplier–you have stopped designing stuff and find that you no longer really understand the “problem” side of the equation and have to pester people to tell you about what problems they need solving. However this reliance on others for your critical input is never as reliable as your own (past) understanding of the problems that need solving.
Q: What were the significant changes in the environment you have had to respond to?
The internet changed everything. We jumped on it early and have benefited from our ability to be everywhere in the world from our desks in Santa Cruz. Nowadays I think WEBEX (and the other screen sharing apps) is one of the seven wonders of the modern world.
We realized that we needed to change from direct sales to OEM partnerships in the late 90’s because the big kahunas–Cadence, Mentor and Synopsys–started sucking the air out of the EDA markets. They each wanted to be all things to the customer and cut the kind of deals (we call them all-you-can-eat) that would cut off any other vendor. So we changed our focus to selling into the big EDA companies with small modules that enhanced their products.
Q: What’s the current challenge you are wrestling with?
Design is following manufacturing offshore. We’ve seen this accelerate since after the dot-com crash. It’s a lot harder for a small US based company to cover Taiwan, China, India and Singapore. The big guys set up design and application center’s in these countries.
Q: Any suggestions for other entrepreneurs who want to bootstrap a software business?
If you want to run a company you can make a living from–in other words you are not writing a business plan where the exit strategy is on the first page–then I think I can make a couple of suggestions.
- Start with a small team with common values and complementing skills – in our case Antonio was the programming guy and I was the sales/applications guy.
- Don’t take any more money–none if possible–from outsiders than absolutely required.
- Create something small and simple and quickly get it out there. You’ll get much better and faster feedback than if you try to go around asking people what they want.
- Refine it based on feedback. Document it. Do it again.
- Grow slowly. Fast growth is very inefficient since you will then have a lot of people on board that have not figured out their job.
- Staff or employee turnover has a high hidden cost since the replacements have to start over.
- Cash is king. Save some of your profits as a cushion against a rainy day.
- Spend a lot of time listening to your customer’s problems. Not every problem is one you can or should solve, but the aggregation of their issues gives you a solid base for making seat-of-the-pants decisions. You’ll never have enough information to make a MBA-style decision on new products or directions. But if you’ve listened to enough customers you’ll have a good “feel” and make better decisions.
- Beware of business plans. Have a look at some business plans that are 3-5 years old of both successful and unsuccessful companies. You’ll have a good laugh at both. The main difference between the successful companies and the dead/dying ones is how they reacted when their assumptions blew up.
Finally and most importantly: people can say one thing and do another. Only act on what people tell you if you see that their behavior is consistent with their talk. People are much better at telling you what they don’t like than at what they want. When we are developing a new product we try to get something into their hands quickly and then listen to them criticize it. The criticisms are usually much more specific and useful to defining a product.
Q: Steve thanks very much for your time.
Q: I am starting a service business that will help clients with advertising and search engine marketing but I am not sure how to price my services. Do you have any suggestions for how to look at pricing professional services?
I believe that Patrick Steyaert’s Discovery Kanban offers a critical perspective on how large organizations can foster the proliferation of lean innovation methods beyond isolated spike efforts or innovation colonies.
I think Patrick Steyaert has come up with an approach that builds on what we have learned from customer development and Lean Startup and offers an orchestration mechanism for fostering innovation and operational excellence. I think this will prove to be a dynamic approach to managing innovation that will be as significant as:
- Saras Sarasvathy’s Effectual Entrepreneurship Model
- Clayton Christensen Innovator’s Dilemma and Innovator’s DNA
- Ron Adner’s Wide Lens
I believe it’s going to become part of the canon of accepted principles of innovation because it offers not only a way to frame the challenge of balancing discovery and delivery, but a mechanism for planning and managing them in parallel.
Discovery Kanban is a synthesis of a number of distinct threads of entrepreneurial thinking–Lean Startup, Kanban, OODA, PCDA, and Optionality–into an approach that helps firms address the challenge of executing and refining proven business models in parallel with exploring options for novel business opportunities. The reality is that you have to manage both current execution and the exploration of future options whether you are in a startup that is gaining traction and needs to develop operational excellence (or an innovation colony that now wants to influence the existing enterprise) or and enterprise that needs to avoid the “Monkey Trap” of escalating investment in a business model that is reaching the end of life instead of parallel exploration of a number of options for new business units.
At the extremes startups are viewed as scout vehicles–suitable for exploration to find sustainable business models–and established enterprises are viewed railroads, very good at moving a lot of cargo or passengers along predetermined paths. The reality is that almost all businesses need to manage both excellence in execution while not only keeping a weather eye on new entrants fueled by emerging technologies and disruptive business models but also exploring for adjacent markets that can leverage their established competencies and new competencies required by current customers.The Lean Startup and Customer Development models have fostered a broad understanding of the need for iteration and hypothesis driven product probes. Kanban models have shown the value of making work visible to enable the shared understanding that makes cultural change possible.
Some excerpts from Kurt Vonnegut‘s commencement speech at Agnes Scott College, Decatur, Georgia, May 5, 1999 as recounted in “If this isn’t nice, what is?” He offers a critical insight for business as well as life.
Everybody asks during and after our wars, and the continuing terrorist attacks all over the globe, “What’s gone wrong?”
What has gone wrong is that too many people, including high school kids and heads of state, are obeying the Code of Hammurabi, a King of Babylonia who lived nearly four thousand years ago. And you can find his code echoed in the Old Testament, too. Are you ready for this?
A categorical imperative for all who live in obedience to the Code of Hammurabi, which includes heroes of every cowboy show or gangster show you ever saw is this: every injury, real or imagined, shall be avenged. Somebody’s going to be really sorry.
When Jesus Christ was nailed to a cross, he said, “Forgive them, Father, they know what they do.” Any real man, obeying the Code of Hammurabi, would have said, “Kill them, Dad, and all of their friends and relatives, and make their deaths slow and painful.”
His greatest legacy to us, in my humble opinion, consists of only twelve words. They are the antidote to the Code of Hammurabi.
“Forgive us our trespasses as we forgive those who trespass against us.”
The full video of Vonnegut’s Anges Scott College commencement is available on CSPAN. I learned of Vonnegut’s speech from Maria Popova’s “If This Isn’t Nice, What Is? Kurt Vonnegut’s Advice to the Young on Kindness, Computers, Community, and the Power of Great Teachers” but she doesn’t include the “twelve words” in her summary.
“An eye for an eye and soon the entire world is blind.”
- Don’t Waste Time Painting Tom Sawyer’s Fence: Proving Someone Wrong is a Poor Motivator
- Jerome K. Jerome’s View on Groundhog Day (Replaying Your Life)
- Byron Wien’s Lessons Learned in 80 Years: Seven for Entrepreneurs
Update Sun-Jul-27-2014: Kevin Williamson makes a great point about the benefits of Hammurabi’s code:
The Hammurabic Code, along with its presumptive predecessors, represented something radical and new in human history. With the law written down — with the law fixed — a man who had committed no transgression no longer had reason to tremble before princes and potentates. If the driver of oxen had been paid his statutory wage, if a man’s contractual obligations had been satisfied, and if his life was unsullied by violations of the law, handily carved upon slabs of igneous rock for all to see and ingest, then that man was, within the limits of his law, free.
Kevin Williamson “Hammurabi’s code“
- Be compatible with the status quo if at all possible
- Collaboration or workflow applications that require at least two people to adopt in order to realize productivity benefits are very challenging to introduce.
- It’s certainly been done: fax, email, CRM systems. But the list of failures is much longer.
- Find a way to provide a single individual with a productivity bonus that is backward compatible with existing workflow (e.g. email, CRM, wiki, website, …).
Use your team as a case study
- Is your startup using the tool for collaboration? If not, why not?
- What no longer happens that used to happen before you started relying on the application?
- What can you now do using your application that you could not do (or only do with great difficulty) before?
Have conversations before putting up a landing page
- What have you learned from your conversations with prospects?
- What problems or needs do you probe for?
Use your team as an earlyvangelist
- What problems or need or recurring situation led your team to develop your application?
- What alternatives did you try to do before you developed your application?
- Why were they unsatisfactory? What was missing or still too difficult?
Listen carefully to your early adopters
- What do your early adopters tell you that they like about using the service?
- What benefits does it provide them?
- What do they still see as missing?
- Ask what three features they would demo either to other similar teams or to others in their company.
Understand why some teams failed to adopt your application
- Teams that don’t try it may give you reasons, and these are worth listening to.
- Pay close attention to teams that gave it a fair trial and decided not to go forward. Their rationale is absolutely worth addressing.
If you are working on a collaboration application for business and are having difficulty getting traction, please free to schedule office hours and we can design some experiments to explore your situation, see “We help you design experiments that move your business forward.”