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what constitutes an attractive market?
sizing & validating market opportunities
page four of four | previous page

mario morino: wrap up

Thank you, and thanks to the panel. We got great advice today, which I’ll try to summarize, but I have to warn you that I have a tremendous aversion to traditional market research. I think it has confused more people than it’s ever helped. Let me tell you why. It’s not that market research isn’t good; it’s fundamentally very good, but we tend not to collect or interpret it well. We sometimes tend to abdicate our responsibility in favor of it, and we too often do not interpret and integrate it with the proper thinking. That is what I want to talk to you about and, actually, if you heard all the comments from the panel, you heard instances of what I’m suggesting. For example, John’s comment that it’s not about sector, it’s about space, that it’s not about sizing, it’s about execution.  He’s exactly right.

        It’s really about how you do things. Let me start with three stories germane to that. If you’ve heard them before, my apologies. Poor Tim has probably heard them 50 times.

        First, I want to go all the way back to 1962. I was coming out of a course in systems management from someone who happened to be a leading thinker in the country, Stan Alekna, the father of then something called modular programming, an old, old concept. He came to our class when we were finishing and said, “I really feel good about this class. It’s going to be wonderful, but there is a good and bad to it. The good part is that half of you are going to go out and be remarkable successes. The bad part is that so will the other half.”

        Remember, we were in the technology field in 1962. The point is that if you’re in the right space, the chance of success is high. In the wrong space, your chances of success are much less. It is that simple. Picking that space becomes crucial to success. It’s not about brilliance; it starts with picking the right space to be in.

        The second story is very recent. Just two weeks ago I was at a partners meeting of a major IT investor, and we were going through a two-day analysis of our investment process. We looked at every investment since the early 1980s. We went through every investment to see why they succeeded or why they hadn’t and where the focus was. It all came down to the fact that success or failure was tied to two things: strong management and markets. The Managing Partner stopped the analysis and said, “No, remove markets as a reason. Good management avoids bad markets.” It goes back to my first point: Where do you start?  Be in the right space and be blessed with good management and your chances start out pretty good.

        The third story involves a pleasure I’ve had in my life, that of several times meeting a remarkable individual that will go unnamed. He owned one of the largest retail distribution firms in the world and is probably one of the quietest and most effective philanthropists in the world today. A remarkable person, a trader at heart, he was the second largest retailer in the Hawaiian Islands, a major distributor in Japan, and, fundamentally, his life was retailing. I was sitting with him once and he told me a story about market research that warmed my heart. He was the distributor of a top brand of clothing for the Japanese marketplace. He and the firm’s CEO were talking, and the CEO said, “We want you to push these products in the market today.”

        He replied, “I’ll do it, but you are giving me the wrong merchandise.”

        The CEO said, “Well, all of the research says this is what they’ll buy.”

        He said okay, took the inventory, and had very low sales. Months later, he called the CEO back and said, “I did it your way, now do it my way. I need jeans, jean jackets, and I need jean shirts.”

        They sent him the inventory and everything sold. The CEO was totally baffled. He called to ask, “What did you know that my market research guys didn’t?”

        “The trouble is that your market research folks are young people,” he said, “MBA kids with pencils and pads and calculators. They’re trying to do everything statistically. Every Saturday I go to the park, sit there, observe and talk to the kids. It was clear as glass what they wanted—they told me.”

        This is the head of one of the biggest retailers in the world. He goes into the park on Saturday and talks to the client. 


        The moral of all this is that it is incredibly important to be in the right space, have good management, and be driven by common sense and the power of observation. Sometimes you don’t pick it because your heart is going to tell you where you’ll end up. You have to come to the decision whether you believe you are in the right spot, which is the point Jonathan was making. Then you have to have compelling knowledge of your space. That is the key. It’s not market research, although that’s a part. It is: Do you know the competition? Do you know the short-term and long-term trends? Do you know the technology hits that are coming at you? Do you know where the clients are, who they are, and why they buy? If you find a person with compelling knowledge, you don’t need all the research behind a business plan because its already in their head. An investor will line up behind you in a minute if you have compelling knowledge of your space. Back at our Angels & Revolutionaries event, Guy Kawasaki said that you must know every single thing about your space. That is market intelligence, because you are integrating it all to determine what happens to your business.

        When do you do this market analysis? You do it all the time. You never stop doing it. If you forget about where your markets are, you are toast. There is no such thing as comfort, unless you are going to be a lifestyle company. You purposely create paranoia because the market is about to change on you—you just never know when or how. Ask all the vendors who have lived through a market twist and wondered why it changed on them. The signals were all over the place; it’s a question whether you listened or not.

        I want to share with you an email exchange I had recently. I get a lot of emails, and this one came from a student, an MBA candidate who is going to graduate in June. He sends an email that says, “So and so said to contact you.” We had an intense email exchange for two months. The student wanted to know how he was going to decide whether to join a VC or start his own business. The trouble is, he was living in the 1996-2000 bubble. I said, “It isn’t going to happen.” He’s arguing back with me “No, no, no.”

        I wrote to him, “You don’t understand something. You have to go back to pre‑1995 days. What the heck do you know about a business today? What do you know about your product? What do you know about the marketplace? You don’t want to go to a VC and you don’t want to start a new business, at least not in the situation you now find yourself. You want to get into a business today that will give you the chance to learn a market, to learn a space. Then, if you’re good, after five or six years minimum in that space, things will begin to unfold and you’ll start to see patterns and issues. You’ll see opportunity, but you have to live it firsthand, you have to be out there in the field.”

        You don’t do it vicariously. That was the misperception of the last six years. That is the investment banking theory. Success for investment bankers is not that good in the venture field because they underestimate the value of management at the end of the day, as well as knowledge of space.

        Now, just a few points about market research. Once again, I caution you. It’s very valuable, but I want to give you qualifications for it. What you are really trying to get at when you are talking about market sizing and validation -- forget those fancy words for a minute -- the real question is: Who is your buyer and are there enough of them? Don’t be generic about that. Specifically, who is your buyer? Why do they buy? What does it take for them to buy? Get down to specific details. Do you really sell to a CIO, or do you sell to the Vice President of Marketing? Are you really selling at that level, or are you selling two levels beneath? Do you need to reach the CEO, or is the CEO even a factor in a sale? Those are germane questions because, if you don’t pinpoint that buyer, all your research information will be wrong or misleading. Knowing who your buyer is and who gets involved in the decision is essential.

        A huge complicating factor for a solution sale is when you cross boundaries in an organization. All of a sudden, there is no single decision maker, there are three, four or more. You have changed the whole sales cycle. You have to know those things because that is going to dictate how you sell and how you create your marketing positions.

        As Jonathan mentioned, what are the impediments when you are coming into a space? Is there a large-scale competitor that blocks you in distribution, such as Computer Associates, IBM, Microsoft, or Oracle? If you are carrying a new software product, you are going to face one or more of those companies at some point in time, guaranteed, because the channel dominance of those firms is so intense. They have thousands of salespeople in the street. Yes, you know much more than their salespeople do, but that salesperson is there all the time giving the customer “white noise” with the relationship. No matter how much you know, it is tough to penetrate that.

        Are you selling a solutions suite? Do you have a product that you think is phenomenal, but the competition has seven or eight products tied together into a package? Unless you are absolutely compelling, you are toast. Suites sell and integrated suites of services and products sell. If you are trying to sell against that with a point product or solution, unless your offering is remarkably compelling, you are not going to cut through it.

        Does the product or solution you sell require vision by the client? That’s a huge issue. Candidly, most customers don’t have the time to have vision. This is the fallacy of selling between the early adopter and the mass marketplace. The reality today is that we have only scratched the surface of how Web technology will be applied in corporate America. How many real help sites do you think exist today? Ones that have truly cut down the cost of customer service? I bet you can count them on four hands. How many really effective supply chains systems have been successfully implemented? There are probably SAP systems still sitting on the shelves that have yet to be implemented out there. After the bubble, the vision went by the wayside because the enthusiasm flagged. Now you’re back to pragmatics. If the customer can’t see the vision of your solution or product, you aren’t going to sell it. It changes your marketing strategies.

        Don’t be fooled by early adopters. We had Geoffrey Moore here to talk about Living On The Fault Line. The early adopters are tremendous clients, but they are very misleading because they are so visionary. They see this stuff and understand it. You sell it to them and you think you’re doing good, but, as Moore said, there is a chasm. When you are with an early adopter, you don’t know if you are going to cross the chasm to the mass market. Every investor has to look at that, and you have to look at in that context.

        Displacement. Don’t think you’re going to displace a competitor unless you have absolutely compelling economics. I’ll give you a story. Our firm, Legent Corporation, used to go tooth and nail against Computer Associates (CA). On our board was Larry Wilson, the chairman and CEO of Policy Management Systems in Columbia, South Carolina. He had just gotten hit with a massive change in maintenance costs from CA. The net effect was that we had an opportunity to go into a major complex with a friendly CEO with high motivation and we could now displace the entire CA product line. At the end of the day, we couldn’t do it. Think about that. The displacement cost was simply too heavy for them to take on. All of the things we had in our favor, and we couldn’t do it. Don’t ever underestimate, Jonathan’s point, that corporations are designed to say no. One reason is that displacement costs can be enormous.

        Another aspect of much of market research information is that it focuses you on the short term. There is an element of market research called analytics, using this information and your own market intuition to infer where those markets are going or how they’re changing. For example, in General Atlantic today, we are seriously questioning the future of application software at the enterprise level, questioning whether or not there will be a marketplace in the next 10 years. We believe that there is a significant movement in business process outsourcing because the task for Global 300 organizations to install and maintain major software applications is so enormously difficult that some are simply ready to say, “We give up.” One of our investment partners, Exult, outsources the entire HR process. You’re outsourcing everything in HR globally because you can benefit from an economy of scale. The client can’t easily deal with application software anymore. I’m not saying that this idea is right or wrong, but that is an analytic that would be very hard to infer from traditional market research. It is coming at a market with an intense understanding of long-term patterns in high-level dialogue with CEOs and CIOs asking, “What are you facing?” Then reading into it and making inferences.

        How do you deal with the problem? Everybody said this, so I’ll just emphasize it: You spend a lot of time with your customers. There is no substitution for it. How much time are you in the field, away from the desk? Are you talking first-hand with the client? When Joe Henson came to Legent as CEO, I loved it because for his first 90 days he was out in every sales office. He took our top 20 accounts, and you could see immediately how much this man knew. He came back and shocked a lot of people with how quickly he absorbed what we did as a business.

        Another important point that was raised by Paul is not to get into trouble by talking with just one contact at a corporation, because you will get misleading data. There are multiple views in an organization. Back in 1990, we were in the systems management space and talking to a high-level executive at IBM about computing platforms. His priority list was not synching with ours and I asked, “Who have you been speaking with?”


        He said, “We went out and talked with all of our clients.”

        I said, “Time out. Who did you talk to?”

        He said, “We went to all of the heads of IT.”

        I said, “I want you to think about something for a second. Wonder if they’re out of touch with their own corporations today?”

        In 1990, they were. While he was seeing one set of platforms, we were seeing Novell and Microsoft coming up the channel all around the data center. They didn’t see it, and IBM paid a huge price in the late 1980s and 1990s for missing that platform change. They were relying on that single contact, as opposed to being disbursed through the organization.

        Visit the accounts where you lose sales, and you will win all kind of points. As a CEO or head of marketing or head of technology, if you lose a big sale, go out and talk to that person. Don’t try to win back the order because you will be wasting your time, but I’ll guarantee that you will do two things. One, they will be so shocked that you took the time to do it that you’ll gain all kind of long-term points. Two, you will hear firsthand why they made the choice against your technology, or maybe it was more against your people. It’s a great intelligence point.

        Get somebody on your board who represents your marketplace. At Proxicom, where I was on the board, we were lucky to have John McKinley on our board as well. John is head of IT for Merrill Lynch and recently was promoted to run all of Merrill Lynch’s operations worldwide. He has a remarkable background. At one point early last year, we were worried about where Proxicom’s markets and buyers were going. John was very pessimistic. He said, “Capital expenditure is diving down.” He called 11 or 12 CIOs around the country, and we got such a compelling picture of how expenditures were falling. This was probably way ahead of the analysts and others, because we had people from the inner sanctum saying, “I am already cutting my budgets. I see the pressure coming.” This was not public info yet, and we had to factor it into our decision-making process.

        Additionally, when you can, create an advisory board. Go to people you can really trust, who are going to be open with you. In the end, they will be invaluable because they represent your marketplace.

        Be careful with and suspect of surveys. Let me explain why. Jonathan hit it on the head. Anybody will tell you anything about what they want to do until they have to sign the check. The commitment is not in saying, “I am interested in your product,” or even “I’ll buy your product.” They’re not going to buy anything until they have a signed contract and a signed check. That is what counts. If you are out there and the person says, “I love your technology and I’ll think about it,” that’s fine. Ask, “Are you willing to buy in advance? Are you willing to come in and give me some R&D money to put it together? Are you willing to commit time to me for the next six months?” If they are actually putting some skin in the game for you, that qualifies their interest. Otherwise, in my view, you have dabbling.

        The other danger, and I fall prey to this all of the time, is that the customer will sometimes confuse the message with the messenger. We had this fellow who was great at selling in the field. He’d get a tremendous read on something and came back with all this great intelligence, but we found that the clients were often responding to his enthusiasm and articulation, not simply the message he was going out with. We brought out a product based on some of that intelligence, and it failed because the interest wasn’t real.


        I am a big believer that you validate concepts by clients—alpha clients, beta clients, early discount clients—but you have to demonstrate something to them. As Paul indicated, it’s a value proposition. Is it worth enough for them to play ball with you? As an investor I like nothing better than to see that you have one or two clients working with you early. It’s absolutely invaluable. Everybody used to laugh at this when we used to talk about this approach during the last four years. They’re not laughing anymore. This is the old model, and it’s back. It really works because it’s a litmus test. Sometimes those clients will tell you that you’re full of it, so don’t even bother going out the door with your product. It can be a tremendous long-term savings of money, and also of gray hair and families.

        My last recommendation is to get knowledge points. Know who you can turn to in the field who can give you a specific read on a situation. We live by this rule. If you give me a topic, chances are we can narrow it down and get to somebody in the country who can tell us about it and give us an informed read. We don’t trust the books and the reports. I don’t want to read all the research reports, I want somebody to tell me about which to read and why. I want somebody to tell me, “Go to this report, and here is why it’s valuable. Here are the three things you should take away from it.” Find that really smart client or that really good analyst. Build relationships with good reporters. There are certain reporters who are really in tune with this or that space. Create these relationships because they become your neural network that helps you infer and make good decisions over time. Every good investor should have that same network. Invest in these relationships, they’re worth it.

        To summarize: Know your customer. Know your value proposition. Know what differentiates your offering and what will sustain that offering over time. If you can’t answer those questions, you’re not going to make it. There has to be something about you that is unique in the market today, both a short-term differentiator and something that is going to last. Can Microsoft come in and just suck it all up, or is it a sustainable advantage over time?

        That sustainable advantage is something we truly lost sight of for a while. I’ll give you one more story. Over the years, a number of entrepreneurs came to us and said, “You know, we’ve developed this great technology.”

        We would ask, “How long have you been in development?”

        “Four months.”

        I’d think to myself, “Are they out of their minds?”

        Good technology often takes years to develop, although it may be years of collective intelligence and collective work. When we put out our sixth product line, it had built into it the programming and experience of the first five. All told, we probably worked at it for eight or nine years. Who can come in and quickly replace something like that? If you wrote it in four months, guess what? There is somebody just as smart who can do it in three because they have the benefit of learning from what you did. It is perishable. Where is your long-term competitive advantage?

        Bottom line: Get absolutely compelling knowledge of your space, then people will have confidence in you, you will attract the best and brightest in the field, you will get the best investors on your side, and your customers will believe you. Customers want to see that in you, because they are buying you even more than they are buying your product. Add to that passion.

        Thanks, once again, to the panel, and thanks so much to Mary and the Netpreneur team. Thank you all for coming.

Page four of four | END

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