In a very important meeting with a notable Boston VC firm, a software startup company was pitching its business plan to the Director and colleagues. During that meeting, the marketing officer stated that in the first year, the company would be able to sell 8 software packages. In reply, the Managing Director of the firm replied that “in my 10 years of experience in this business, I only have seen companies sell no more than 3 a year.” The moment he made that remark I knew that it would be improbable that any potential deal would be made. And the Managing Director’s comment clearly demonstrated that anyone could put spreadsheets together, but are those numbers really real and have had been vetted by knowledgeable business managers? Upon returning to New York, I informed the shareholders that the management team failed to do the due diligence on the plan and had no clear idea of marketing the product. All were canned. And this is a part of the lesson on determining markets, sales, and marketing a technology product.
Most start-ups rely on the novel nature of the product, whether based on technology or not. But there are three other P’s needed for marketing: price, promotion and placement. Implied within the 4 P’s is plain old marketing: demand, PR, advertising, addressable markets, and many other elements. Indeed, the old sage from HBS, Michael Porter, has written that technology cannot disavow the classical marketing rules and standards.
First, nothing is inelastic. I attended one meeting where the Managing Director believed that the technology alone will drive sales. And that is never true. One hears how half of the world’s population does not have a phone, but given the price of a phone, how many people in Senegal can truly afford a smart phone? One has to find out whether the market has the disposable income for a marginal technology. The bottom line is that no one will buy the product if it is poorly priced.
Second, one has to determine a price through rigorous analysis. Even when the company has a rough sketch of its business plan, the entrepreneur needs to research the 4 P’s extensively. How is it done? In the case of a data storage business I was not familiar with, I met with resellers with extensive experience in the industry. I also looked at lateral competitors in the industry. I needed to find the right pricing system for a new technological product line in data storage. Finally, I met with potential clients. In the telecom industry, I traveled extensively to meet with the telecommunications carriers to gauge their interest in a new fiber optic network. There are secondary sources as well: third party studies, accounting firms, etc. You have to meet with the potential clients, experienced salesmen, and other channels of distribution.
These points reveal what the software management team failed to do described earlier. First, that team had been working together over a year. It seems that the leader never placed a priority to work with marketing, finance, and operations to draft a decent financial model with realistic projections based on well founded analysis and research. Second, that same management team assumed that a VC fund would buy into their poorly crafted business plan. If the VC firm is well established in the industry, in this case, banking, then the VC analysts have been exposed to considerable plans and research reports that give them to tools to analyze any business plan. That management team was too naïve. And failure to do the homework proved fatal in that Boston meeting.