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I heard an interesting story the other day about automotive companies. Apparently after the Model T went into production, Ford concentrated on selling cars to people who didn’t have cars. Now, as far as marketing strategies go, this seems like a really good one. After all, most people didn’t have cars. The production model meant that this kind of new-fangled transport was now available to all. And, despite some initial adoption barriers, it worked. Ford sold lots of cars. The problem came about when General Motors arrived, a bit later on.
Turns out GM couldn’t sell cars to people who didn’t have cars, because everyone already had one. So, they decided to sell the car as a ‘status symbol’ — to entrench the car as a reflection of its owner. Obviously, this too was a brilliant marketing strategy. It was at this point that GM began to surpass Ford as the number one car manufacturer. Ford, meanwhile, was still trying to figure out what to do with its profits — and still hunting for customers among people who didn’t have cars. “Look! No Horse!”
History repeats itself. Microsoft completely missed the Internet thing. They were firmly focused on the extremely profitable business they invented: selling consumer software. When they did finally engage with the Internet, they saw it as though it was consumer software. Even today, Microsoft are still talking about “Software + Services” — as though the Internet is some kind of Add-On pack to their consumer offerings. In a sense, they still seem to say, “Look! No more IBM mainframe!”
Companies seem to think that the way to beat the Idea 1 legacy thinking problem is to get crazy obsessed with finding Idea 2. Microsoft are trying to be, among other things, an advertising company. Google has gone from Internet search engine to enterprise software/hardware vendor, mobile phones and even virtual worlds. Both companies acquire startups regularly. I can’t help but be skeptical of these efforts. I think that there’s no doubt that they are possible avenues for success, but looming large over all of these is the legacy of Idea 1.
Success seems to be a fertile breeding ground for legacy thinking. In a way, it’s like we’re all striving to find a point where we don’t have to think any more. Or perhaps it’s just that every new idea has to be seen through the lens of the idea that proceeded it. People are innately more inclined to protect against loss than to seek out ways to gain. The advantage of Idea 1 is that it carried no risk of jeopardizing existing profits, unlike Idea 2 and all subsequent ideas.
Anyway, it’s an interesting paradox, but me musing on it isn’t getting this startup any closer to its Idea 1 release. Back to Vark!
Brad Feld at Feld Thoughts posted a slide by Adam Smith relating the Southpark underpants gnomes to pitching venture capitalists. The slides were meant to demonstrate how not to sell an idea to a venture capitalist. I understand the point, but I think if venture capitalists find themselves listening to gnome-like business plans they themselves are partly to blame.
Brad’s posted the clip from the Southpark episode, so I’ll just give a quick recap of the gnomes’ three phase plan:
The hardest part of any startup is figuring out Phase 2. Phase 1 is easy; it’s doing what you do best. For a software company, that means making software. For an author, it’s writing a book. For an artist, it’s creating art. Phase 3 is the goal: Making money, achieving fame, winning awards, etc. Phase 2 is the trick: finding a way to get from doing what you do best to the ultimate goal.
Often, someone starting out has only the talent and the dream. Figuring out how to make the dream a reality is a combination of hard work and dumb luck.
The idea behind venture capital is not simply to give new startups access to seed money. There are plenty of ways to raise funds. You could take out a business loan, put a second mortgage on the house, or hit up friends and family for cash. Part of the reason why startups turn to a venture capitalists is to get the benefit of their experience with other startups. In other words, it’s to get help with Phase 2.
Many of the current Web 2.0 darlings succeeded without any sort of business plan at all. YouTube was losing money hand over fist and had several copyright infringement lawsuits pending when Google rescued them. Google themselves nearly went broke before they hit upon the advertising formula that powers the attention economy. Facebook hasn’t figured out their model yet. Twitter has no means of visible support beyond VC backing. With these examples in mind, it’s hard to blame startup founders for glossing over Phase 2.
Yes, build it and they will come is the call of hopeful idealists everywhere. But boundless optimism is a necessary requirement for an entrepreneur. It goes with the territory. Venture capitalists, of all people, should appreciate that.