Saturday, May 19, 2007

3 phases of a start-up (2)

We met with Randy Komissar from Kleiner Perkins last week. He gave us a lot of valuable advice about the 3 phases of a start-up.

Phase 1: demonstrate the value
Phase 2: demonstrate options for scaling
Phase 3: execute

Phase 2: demonstrate options for scaling

If phase 1 was all about demonstrating the value proposition for a handful of customers, phase 2 is all about demonstrating that this value proposition can scale across many, many customers (or across multiple products with the same customers).

For any company, there are 2 ways it can scale: either you scale across customers, or you scale across products. To scale across customers, you would need to demonstrate that your product can be sold to multiple customer segments (e.g. geographies, vertical industries, etc.). You would need to establish reference customers in each target segment and build a pipeline of potential deals. To scale across products, you would need to show that your existing product has line extensions that appeal to your existing customers. In either case, you're still not necessarily generating a lot of revenue yet. But you're creating the perception that customers are lined up to buy from you.

In general, what are the "pre-conditions" of an opportunity that make it likely to scale?

1. Homogeneity of customer needs: If every sale requires custom development, the business will not scale easily. On the other hand, if customer needs transcend segment differences, it means that you should be able to scale across customers.

2. No special/scarce resources required to make or sell the product: I evaluated a start-up company in the semiconductor services space for acquisition by a larger company. The start-up provided a useful and valuable service to its customers. However, the service was so complex that it could only be sold by 2 of the company's employees (the CEO and CTO). These 2 people were the only ones who understood the service well enough to convince customers to buy. Needless to say, the company did not grow very quickly.

3. Platform that will accommodate product extensions: This is Google's strategy with building the "Googleplex"--the computing infrastructure that consists of a number of custom-built, self-aware computer clusters across the world. Google believes that its Googleplex will be the platform that enables rapid, low-cost deployment of applications to customers--a significant advantage over competitors who use off-the-shelf computing equipment. Of course, first Google needs to develop another "killer app" other than the search and Adwords platform. But, once they find the other killer app, the Googleplex will be the platform that enables product extensions.

No comments: