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what constitutes an attractive market?
sizing & validating market opportunities
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Q: My name is Tom Hasler with a startup called Intelligence Resources. We had a great first customer in the European side of McKinsey & Co., but, post-9/11, that died with the global recession. We turned around to address the needs of the US intelligence community and developed a system with a major software company targeted at the CIA that lets you search any newspaper or electronic media in any language and get a translation within 24 hours. Weíve also learned about other government security applications for it, but part of getting money from In-Q-Tel is that you have to show a corporate market. We are speculating about two areas, business intelligence and corporate intranets for global companies that have content in different languages. We face the need to do a quick business plan and project out 18 months to three years. We need proof that they need it. What do we do?

Mr. Silver: I was at McKinsey for four or five years, so I would suggest you go tell them to do it. By definition youíll have no proof, although business intelligence at large is a well-traveled space. There is a lot of software development now in the area of business intelligence. CRM is one aspect of business intelligence, so is data mining. The question is not so much how you reposition your product, but what kinds of business intelligence are companies like McKinsey looking for. McKinsey is a perfect example of a referenceable client, but perhaps insufficient in that regard unless they intend to roll the product out to their own customers. Like Paulís earlier comment, the customerís customers may be one thing you might want to talk to the firm about.

Q: Good morning. Iím Daniel Odio with DVLABS. Speaking of naked, we are the company that hosts the video for NakedNews.com. My question is, as the market size pertains to sales, what thoughts do you have on setting and enforcing quotas for a sales force? How should the company compensate a salesperson fairly according to market standards when the company doesnít necessarily have the resources to do so?

Ms. Conti: That is one of our big issues right now. It depends upon what stage your company is in. Weíre at the very beginning of launching a product. We are working with pilot customers right now, and we are hoping to turn very big growth in the next two or three quarters. The fact of the matter is that you canít compensate them the way they were compensated in the past. That is the reality of the situation for where the company is right now, so you do other things for them. There are stock options and things like that. How you compensate your sales people is going to change as you move further out, such as when you start developing new territories and when you have different products in addition to your original one. Consider where you are in the life cycle of your company right now, but itís going to change.

Q: Isnít the difference between better, faster, cheaper versus newer sometimes just marketing? If it is marketing, isnít it better to steer your product into the newer category?

Mr. Meyers: The ROI argument is what we always fall back on. Newer, better, faster has to be defined by a user, and the ROI is compared to their alternatives. One alternative is always to do nothing. Their existing product or solution or business process may be fine, and the better, faster, cheaper product may be a new market, or it may be reworking something that has been in place before. The answer is no, itís not just marketing. You have to define the particular problem you are trying to solve for that customer in an ROI model.

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Q: Good morning. My name is Keith Bickel. Having been a programmer in a former life and having spent 15 years doing market research and strategy, I continuously find an absence of a discussion of substitutability between new and better. There is a parallel product the customers have been using that is easier to keep on using. How do you make companies more aware of this?

Ms. Conti: One of the things we did with ObjectVideo was to make a very clear decision early to position ourselves as a drop-in solution. We didnít want to compete with the camera companies and DVR manufacturers, so we specifically architected this product to work with any DVR and any camera. We donít call it a substitute for what theyíve already invested their money in, we call it an enhancement.

Audience Member: So, a semantic workaround?

Ms. Conti: A lot of organizations are spending a lot of money putting in video surveillance systems now. You canít ask them to rip everything out. Weíre telling them we can enhance the value of what theyíve already purchased by providing a tool that will help analyze their video surveillance. When we architected it as a drop-in solution it was a no-brainer because a lot of our customers had already said up front, ďIím not ripping anything out, so tell me how this is going to work with everything Iíve got.Ē

Mr. Silver: It is an interesting question because buried in it is a price point discussion. As a product becomes more expensive, the decision-making authority goes higher. Who has to make the decision as to whether or not to acquire what it is youíre selling. Companies are built to say no, not yes. If youíve ever walked into a store at closing time, the guard will keep you out and the CEO will let you in. Right? That is because corporations are built to say no. What youíre trying to do in the question of substitutability, which is really the question of decision-making, is to figure out who in the organization is the decision maker. That is the first point. The second is the extent to which you can architect or re-architect your product to fit a price point where a decision maker is likely to say something positive.

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Q: If an entrepreneur has been in business for a few years, doing pretty well and facing certain market dynamics changes, what is the approach or reasons for re-evaluating the market? In other words, if it ainít broke, do I need to fix it relative to market opportunities?

Mr. Finke: I would fall back and ask, ďWhat is the end goal?Ē As Jonathan said, is it a lifestyle business or growth company? Let that lead you.

Ms. Conti: Prior to ObjectVideo, I had a software firm in Reston that I started in 1994 called Aurora Enterprise Solutions. It started off as a government contracting company, something to pay the rent. For a couple years it was a lifestyle company, then we started winning projects and SBIR programs and research programs, and we built a product that people wanted. The whole focus of the company changed once that happened, and all of our decision making changed with it. The end game changed. My advice would be to decide what you want, and whether youíre willing to go through what you need to go through to get to that end game.

Mr. Sherman: In addition to those comments, there is a certain risk of complacency in this market. Weíre not talking about minor changes that have taken place in the last nine to 10 months; weíre talking about major sea change. You want to make sure that if you are going to plod along that path, that there isnít a risk of complacency that will sweep you up. That is the downside risk. The upside risk, of course, is lost opportunity, which is what Clara was touching on.

Mr. Silver: This lifestyle versus growth company issue may sound like a soft, qualitative area, but itís not. Itís important. The reason is because you can find yourself at cross-purposes with investors on this topic very, very quickly. I urge you to look inside yourself, as Clara did with Aurora, and figure out which of those two you want. If you really want a lifestyle company, and if you donít articulate that to yourself and your potential investors, then somewhere down the road you are headed towards problems with the investors who are not interested in investing in lifestyle companies. We can only solve our problem in that equation one way, and none of us wants to go there.

Mr. Meyers: Iíll just add one thought. I donít think there is a great company that has been created that has the original business plan it started with. Every great company has morphed at least once or twice a year in one major element of its business. I would argue that if you are going to be a venture-backed business, you have to go into this knowing that you are going to change almost yearly.

Q: My name is Jay Bartlett. I am a product development guy with Demand ID Systems, a music industry information startup. How much validation of a market opportunity is enough for a potential investor, and what kind of validation is preferred? For a startup with very limited resources, information gathering has a cost, so it is a resource allocation question for us. We can develop very good information about a very small sample of customers. We can go out and talk to people and get a fairly precise definition of their needs. Itís also relatively easy to get a general market information from standard statistical source that can tell us things about the overall size of a market. Linking those two kinds of information is expensive and time consuming, however. How far down that road do we need to go?

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Mr. Meyers: It depends on the stage you are in the process. If you are trying to get an investor interested, itís the vision and the passion that the management team can show, as well as some market proof that what you have will sell, that the people are willing to buy, and that the market is growing. As you get further down the path, there is never enough market validation, so we will continue alongside the companies weíre looking to invest in to define that market, potentially add to it, and expand the vision if at all possible. In our opinion, a company needs to have a grand vision but a really focused execution strategy. You sell the vision, but you plan to the execution strategy. In that regard, make sure that what you are planning to do over the next 12-24 months is doable and that youíve done the research to get there. Know who your customers are going to be in the near term and how to get to them.

Mr. Sherman: With the advent of the Net you have so much more data available than you did five years ago. Itís a dilemma. Do we go out and do an expensive market research study to get these guys interested? Now, at least, a lot of that data is available to you with a few mouse clicks.

Mr. Meyers: We will usually do that for you. We usually donít rely on what comes in the business plans. We see too many of them that say, ďWe are going from $5 million in revenue next year to $100 million the following year.Ē That usually doesnít sell.

Q: Iím Richard Adler with Arius Internet Solutions. Iíd like to ask Paul, with value propositions, when you strip away the rhetoric, doesnít it come down to three interrelated points that the business driver wants to know about your product or service: How you are going to grow my incremental revenue, cut my costs, or help me bond better with customers?

Mr. Finke: I think fundamentally you are right. You have to do a value proposition that you believe the CFO of your customer will accept as a no-brainer. You have to do it in such a way that the CFO can say, ďI believe you.Ē Whatever level of detail you can get to make that happen is the right thing. You mentioned two distinct things, cost reduction and revenue generation. Theyíre really two separate issues in the way you sell, but it boils down to ROI. For the amount they can grow their revenue, how much does your product cost, or, for the amount they can reduce their costs, how much does your product cost? You summarized my thoughts better than I did.

Mr. Sherman: Any quick words of wisdom from any of the panelists as we wrap up?

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Mr. Silver: Commencement is not an end, but a beginning.

        I always like to say the same thing to entrepreneurs when they come into our offices, which is that what you are embarking on is frightening and terrifying, but incredibly exciting. It is the engine that drives this country, and itís part of what makes my job exciting. However, I urge you not to start a company, irrespective of its value proposition or anything else weíve talked about today, if you donít have a passion for it. You are going to spend 24 hours a day, including the time youíre asleep, thinking about this company. If you donít, we are going to spend 24 hours a day keeping you awake thinking about the company. If you donít have a passion for it, donít do it, but if you have the passion, what could be a greater thing to do in the whole world?

Mr. Finke: As I said, I have been involved in six different startups. Itís fundamentally got to be fun. If you donít like what youíre doing, or if itís not fun to you, then stick with your day job because it is 24x7, but it can be exciting and rewarding. Itís got to be fun.

Ms. Conti: My business advice today has to do with talking to your customers. Once we made the decision to go out and start talking to folks about what they needed for physical security, it changed the entire direction of the company. We have champions and people who are rooting for us out there, customers we are working with, and that can make all the difference in terms of passion, what you believe in, where you think the company should go, and how your investors feel about your company.

Mr. Meyers: I would re-emphasize that passion is a great thing, and so is the ability to turn on a dime and morph into something else, but always keep it within the core of your knowledge. Be the smartest in whatever space youíre going into. Know it better than your competitors, know it better than your customers, and you will be in a much better position to be a leader.

Mr. Sherman: Iíll reinforce that. Passion and ability are important things. They were very important in 1999 and 2000. In fact, in those years they were enough to get you through. Donít be blinded by your own passion, however. You have to have more than passion and commitment. You have to be able to show people that there is a real business.

        I want to thank Mary and the Netpreneur team for a great job in pulling this together, and I want to thank the panel for a fantastic job. You donít have to clap for this one, but thank yourselves for great insight and for showing up. Okay, you can clap if you want.

        Finally, I have stepped down from this podium a couple of times as your moderator and brought Mario up. I mentioned at the beginning that people like Tim and Jonathan have been mainstays in this entrepreneurial community, and they have put a lot of time into supporting it. If theyíre mainstays, then Mario is the backbone. Iíve known him for five years, I have tremendous respect for him, and I want all of us to thank him in an appropriate fashion for the time, support, resources, passion, and commitment heís brought to this community. Mario, thank you very much.

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