The Difference between Number 1 and Number 2

I was talking with one of my co-investors last week. This is a person involved in venture business for nearly 20 years. He was pondering the difference between a technology company that ends up being number 2 in a space vs. number 1. There seem to be so many instances where the better technology ended up not crossing the finish line in first place.

So what is going on here? I've got two theories. One is based on the notion of perception which is a point my colleague was contemplating and the second is based on something completely out of left field but reflective (in my opinion) of the human condition.

• Theory 1 - The company that achieved the number 1 ranking figured out a way to convince its target market that it was going to be the eventual winner of that market. As a result...humans wanted to go with the winner and the overall market win sort of became a self-fulfilling prophecy. This proselytization occurred in a way as to not alienate the prospects in that target market. SAP did this very well in the energy sector. They convinced prospects that since their competitors had bought SAP...they too needed to buy SAP in order to keep up. In other words...the message was that SAP was going to be everywhere and that the prospect couldn't afford to be left behind. This implied that SAP was going to win the market...and it didn't tick people off.

• Theory 2 - The company that ended up number 2 had a better technology. Their beliefs about their technical competencies were worn on their sleeves in a way that became sort of a mark of arrogance. The arrogance was observed by sales prospects. Since buying technology is, in part, somewhat emotional...the affront of arrogance factored into the relationship DNA and killed many sales cycles. I have seen this many times...company has a big couple of quarters and then decides it knows what's what and is going to teach the customer this and that....then "pow!"...the customer says get lost. The company has then taken a step back at the most important point in its life. It must then apologetically change its ways. By then the hubris has poisoned its host.

The truth is that if I really knew the answer to the question posed above.....I would be in high enough demand that this blog would probably not exist.

Hey...I Think This Might be the Chasm..

There is a book called "Crossing the Chasm" by a guy named Geoffrey Moore. This book talks about the many issues associated with a technology company making its way out of start-up land and becoming a thriving company. It is a very very insightful read.

Mr. Moore fairly correctly identifies that the world as made up of four primary types of technology buyers (i.e. markets). A young company on its road to success will touch at least three of these types of buyers and it will occur in a very particular order (Early Adopter, Early Majority, Late Majority). The differences between the types of buyers requires that they be treated differently by technology companies hoping to sell them something.

The differences between the Early Adopter market and the Early Majority market require significant change of a young company and poses the most risk to its survival relative to other transitions it must navigate. Making it through this navigation successfully is what Moore calls...."Crossing the Chasm". The definition of Chasm is: a yawning fissure or deep cleft in the earth's surface; gorge. It does not appear to be a safe place to be. The following are some observations regarding my voyages around the Chasm.

• Likely crossers tend to pick one vision for their solution and stick to it no matter what non-customers may say.
• Likely crossers generally don't have to discount their product price to sell it.
• Likely crossers generally don't need to offer money back guarantees.
• Likely crossers suddenly have tons of competition that previously they never saw in a sales cycle.
• The back side of the Early Adopter market sometime convinces those desiring to cross that they have entered into a market where their product is pulled by demand. That they are now entering the Early Majority. What is really happening is they are having to push less and this is confused for pull. This is a danger spot.
• New sales will stagnate for a period of time while the market tries to figure out from whom it should buy.
• Sales People will argue that the new sales stagnation is caused by competitors whom have made great leaps recently in product design which will be "our ruin.."
• Likely crossers will sometimes get a call back on a project they lost to a competitor whose deployment is a disaster.
• Likely crossers will wedge themselves into they final stages of a customer buy and win (even though the competition had been selling the prospect for months).
• Sometimes panic will overwhelm the navigator in the face of stagnating sales and he will start to make changes in pricing and product that confuse the customer and slit his own throat.
• No investor has fun crossing the chasm but it is better to have loved and lost than never loved at all (maybe).

Chip Davis