I constantly find myself trying to convince entrepreneurs of pre-revenue software and Internet start-ups to scale back their development plans and accelerate the introduction of their product. This has only intensified in the current economic environment, where hundreds of start-ups, caught fundraising during the R&D phase, look pretty unattractive to venture capitalists right now. My advice is met with an emotional reluctance, because invariably this means curtailing ambitious development and product goals, which were the basis of the original business plan. And in pushing companies to develop only the minimum necessary to engage a customer with a real product, a second piece of advice emerges with regard to narrowing the market focus. I encourage companies to tighten their market focus through cuts in development, but to do so in way that does not completely forsake the larger billion dollar market dream.
We in Israel have been spoiled and even misled by multiple, high profile technology acquisitions over the past two years. These companies were purchased by large US companies at prices that had no relationship to revenues. Contrast this with the most successful US start-ups over the past few years, where technology took a backseat to superior business, sales and customer acquisition models. I have long felt that Israeli entrepreneurs rest too heavily on technology superiority as the core of the business plan. Such emphasis on technology creates protracted development plans, and delays the critical stage of ascending the “sales learning curve.” My colleague, David Cowan, has written better blog posts on this “sales learning curve,” but my angle on this is to implore Israeli start-ups to move as fast as possible to this stage. This stage of selling and learning from customers is actually a lengthier process for most Israeli companies due to distance and culture.
Needless to say, a company enters a new stage of its life when it brings a product to market. On the sales side, the start-up is able to better understand the sales cycle, the viability of the go-to-market strategy, the priorities facing the key decisions in the customer’s organization, and strength of the marketing message. On the product side, the company gains insight into the competition and pricing, and receives valuable feedback to refine the product roadmap and feature set. On the technology side, the start-up also learns valuable lessons regarding integration and implementation, interoperability with the other products in the customer’s environment, and support requirements. All of the above also serves my interest as an investor; as we become more educated about the opportunity, a company’s sales assumptions and cash needs. But ultimately, this is about making a plan more attractive for outside investment, which should be in everyone’s interest.
By doing only the minimum, a start-up actually lessens its reliance on technology, and is forced to hone its customer acquisition and support skills, which is a very healthy test of viability. In the current environment especially, I believe we all need to tone down the technology goals in pre-revenue companies precisely in order to focus on building a business much earlier than we have seen in the past.