Either You Succeed or Explain

Silent June

This is my first post for June and June is almost over. I had a lot to say, so it's not that I was out of ideas for posts. The main reason is that I'm working hard on pushing a beta version of my product out the door. I'm ironing out the final bugs and soon I'll be ready to start a private beta. I'm doing my best to start testing it publicly as fast as I can. 

I have a lot on my mind these days. For me, coding was the easy part. The road ahead is going to be the real challenge. It is suffice to say that this phase will only be complete once I'll get the first payment for my launched product. Seems like a long way to go. I'll share some of these challenges in my blog.

On a different note, we're now officially in the summer. Spring brought rejuvenation to my workspace: I upgraded to Leopard, switched to Firefox 3 and started developing using Eclipse 3.4, which is still in RC status. I have a lot to say on all of these products and I'll be blogging about it soon. However, if you're reading this using Firefox 2 than just stop right there and download Firefox 3 now. I'll just say it feels like I bought an extra gigabyte of RAM. 

P.S. If you're in Israel and interested in seeing my product in action, drop me a line and we can meet for a one-on-one demonstration. I'll be happy to get some first hand feedback. 

There's more than one way to start

I'm an Israeli and I live in Tel Aviv. Israel has a very vibrant hi-tech community and startups are a huge industry here with many success stories. Nevertheless, Israel is a very small country. Considering that most of the hi-tech is located around the center of the country, the relevant area is much smaller than, say, the San Francisco Bay Area (for comparison, the Bay Area is about 7000 sq miles and Israel is about 8000 sq miles, more than half is a desert).

When it comes to the community of entrepreneurs and investors in Israel, it actually is a very "small world". Personally, I know several people who were part of successful startups that did commendable exists. People feel that, if they had some conversations with people who made it and heard a lecture from Yossi Vardi (to whom I have the utmost respect) they know what needs to be done. It seems that we've formed some acceptable formula which one should follow in order to succeed. When people meet me and I tell them about my startup they immediately ask how much money did I raise and if I have a patent. There seem to be a consensus around the road to success.

That's why I enjoyed the presentation given by David Heinemeier Hansson (DHH) from 37Signals in the Y-Combinator 2008 Startup School.  I recommend this presentation to anyone in this business. I took some notes, which I included hereunder. It fits perfectly with the way I chose, the way of the MicroISV. Maybe I won't make hundreds of millions of dollars, but I will be working for myself and I'll enjoy what I'm doing while making more than enough money in the process, or at least having a better shot at making money.

I find the presentation very inspiring and entertaining. Highly recommended. I hope that me taking notes won't discourage you from watching it anyway. You'll probably get more insights there.

My notes:

• KISS business model - charge money for your service.
• This is still hard, but the odds are better than trying to build the next facebook/YouTube. We hear about these exits around us and think - "this can happen to me", much like the fear of a plane crash which is rare...
• Million dollars is still a lot of money. It's not that hard to make it and the odds are much better than making a billion dollars.
• For that, you don't need to solve the problems of the world, you can just "open a nice Italian restaurant". Provide a service which does one thing a little better.
• It's hard to sell services to consumers (example from Backpack). Consumers don't easily open their wallet when it comes to internet services (especially with all the freebies around).
• The  "Fortune 5,000,000":
  
  • Essentially, the market segment of small businesses, even 1-5 people. This is the large space between the consumer and the "tiny enterprises".
  • This is an untapped market - many problems waiting to be solved.
  • It's much easier to sell here - people evaluate the product, like it and buy it. No huge investment in red tape, sales reps, etc.
  • Your obligation to the customers paying small amounts is far less binding than to huge customers paying millions (it they call, you'd better answer and do what they say).
  • You can read more about it in this 37Signals post.
• The purpose is to enjoy your life...
  
  • There's a great advantage to not making your company huge (by taking VC money): you can call your own shots.
  • You can create a company which you'll enjoy working at and that's key.
  • Don't plan on working hard for two years and selling out for big bucks and leave the good life. It's not clear how good your life will be.
  • Plan to create a workplace you'd like to work in for the next 20 years.
    
• You can be a small successful business and enjoy your work, like a small Italian restaurants. Don't use Facebook as your role model.
• Crashes the term "viral marketing". Just providing a great service can create a "viral" effect, even if you charge money for it. It's just a new hype over something which has been around for ages. It also contradicts the notion that your have to launch fast to create a "viral effect".
• Having less time is a huge benefit to most people. If you had just 5 hours a day for working you'll focus your time a lot better. You cannot be productive for 14 hours a day.
• Most companies are not built over night. Don't be in a hurry.
• It's never gone get less work. The practices your choose to adopt now will stick with you.
• If you're charging money from your customers, scaling means more users. So scaling problems are a good thing.

Why should people pay when they can get it for free?

One of the most common question people ask me is: "why do you think people will pay for your software when they can get it for free?". Just to put things in context, I'm working on an Eclipse based tool. Eclipse is free and many of the Eclipse plug-ins are free. People working in the Eclipse ecosystem are used to getting stuff for free. So, for me, this question becomes extremely relevant, even though there isn't a free tool that can do exactly what I offer.

I wrote a few posts in the past about giving software for free and the added costs of using free software, including:

• When will the "free edition" work?
• Should I offer a "free edition"?
• When saving a buck actually costs you more

A great post by Bob Walsh over at 47 Hats blog explains why you can still sell, even when your competition is giving it for free. It's worth reading (and I should add it's a good blog altogether).

Bob discusses ways of making yourself more competitive by reducing the Total Cost of Ownership (TCO) and by making your software and your site more approachable. The emotional side is a strong topic. I would have to add that, plainly, making your software cool is a great factor here. Take the iPod for example. Sure, you can get a cheaper player. But the thing is so freakin' cool. This is a stronger factor when you sell to consumers (B2C), but it will also help getting end-users on your side and eventually convincing the manager he/she is making the right buying decision.

Another example: either you succeed or explain

Another example which popped into my head. Let's say you have a strong reference. Maybe an advisor that supports your product, a customer that said he/she will buy your product once it's available. Maybe you want to state your own achievements in order to show that "you know best". When you tell someone about this reference, do you need to explain? 

If it was that successful and that strong, a name of a person/customer/product would be enough. They're successful, so there's no need to explain.

Something to think about when looking for references. And, it's also something to think about when developing your own career.

When will the "free edition" work?

After writing the previous post regarding the "free edition" option, I felt there was some injustice about it. The bottom line was that it's practically impossible to get anything useful from having a "free edition" and that's not true. It does work in some cases. I wanted to explore these specific situations.

First, one of my main arguments was that it is a different product, aimed at a different market segment, so it will need it's own marketing efforts and it will not contribute to the marketing efforts of the main product. This claim is based mostly on the concepts described in Geoffrey Moore's "Crossing the Chasm". While I do think this is a great book, I also think that: (a) like most rules, there are exceptions and (b) the internet has changed the market. Especially evident is the long tail effects on the web as a consumer market.

Second, one may argue whether this is a different market segment to begin with. Well, there's no definite answer. In my opinion, it mostly depends on how you distinguish between your editions. For example, a CRM product with a free edition that handles up to 50 clients is probably targeted at a different segment. A photo site that offers extra space for subscription fee is probably targeting the same segment. If you are heading towards the same market segment, then your marketing efforts are joint, you stay focused on your market and it is more likely that you will see contribution to your overall sales.

Another point which I neglected in the previous post is web applications "free edition". Although I focused my research on classic software products, it's not very different when it comes to web applications. I think the key point to remember is that you will have much more users for the "free edition", thus, you will need more servers and bandwidth.  As with classic software, providing a poor service (e.g. slower servers) to your free edition users will have a counter effect, so plan accordingly. And, reiterating the point, if this is a different market segment, this is exactly what "diffusing your focus" means.

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Should I offer a "free edition"?

A few years back, nobody would've thought about giving software for free. It is something I work for, I expect to get paid for my efforts, so why give it away?  And then came the open source revolution and turned things around. Suddenly, giving a piece of software for free makes sense. Well, if not, why so many people are doing it?  Let's face it, almost every piece of software you use today can be replaced with a free software. Operating system, office applications, anti-virus (for those less fortunate who use a virus prone OS), graphical editing tools... everything. True, it may not be of the same quality (as I claimed in my previous post), but it will be free.

Many great articles exist on the topic of open source development. But this is not my focus today. Saying that a software is "open source" does not mean it is given for free, although this is usually the case. Going for open source development is a bigger challenge, as the business model is usually less obvious. I have enough challenges at the moment, so I'm aiming at the good old business model of selling licenses.

I will offer a Free Trial for sure. It will be fully operational, not a demo. The big question is around the free edition. The free edition will provide some functionality and "lure" users into buying the full edition. Let's start with the pros and cons and summarize with some useful points to keep in mind when considering a free edition. I collected these from various articles I read on the subject and from several interviews I conducted.

Pros for giving a "free edition"

• Instant Market - build an audience, fast. Take a look at SourceForge, possibly the biggest collections of open source projects. One of the great features of SourceForge is the ability to see download statistics for each project. In my area, for example, good tools can easily generate 5000 downloads a month with no marketing effort. I think many vendors in my area will be satisfied with these numbers (again, no marketing efforts). Especially for new projects.
• People know they can get tools for free, so they look for free alternatives. In my previous company, it was very common to favor free and open-source solutions over paid ones. Many people today prefer getting a little less and pay nothing. It's not just about money: the difference between a $50 and $70 is $20. The difference between free and $20 is a great barrier of opening your wallet. In a large corporate, opening the wallet can be a huge hassle and tons of bureaucracy.
  
• Free testing and feedback - people will test your software and report bugs. Most people expect less when they get a free edition, so you're not required to provide the same level of support.

Cons for giving a "free edition"

• Efforts - it's another edition to release and maintain. It will involve effort for building and testing. People do expect some level of support, so be prepared to provide that. A "free edition" of low quality with no support will have the counter-effect on your sales.
• Loosing potential paid customers - customers may be content with the free edition and may not see a strong reason to upgrade.
• It will require marketing. Otherwise, you'll end up slip sliding into a dark corner. True, there are tools with 5000 monthly downloads on SourceForge, but there are 100 times more projects with 10 downloads a month or less... With a very limited audience, you'll miss the goal of marketing the full version and the whole effort will be in vain. The question: if this requires marketing efforts, why not invest them in the original product?  Well, it is easier to market a free product. But then again, the free product is not the basis of your business model.
• Are you attracting the audience from your targeted market segment?  Relating to Geoffrey Moore's great book, "Crossing the Chasm", efforts should be focused on a limited market segment and penetrate the mainstream customers in this segment. However the people who download the free edition may not be of the same market segment. If it's a different segment, you'll need to struggle to reach mainstream with your free product as well. This, in turn, diffuses your focus from your main market, which is the basis of the business model.

Some key points to remember

• Carefully consider the difference between the editions. Give too much and nobody will buy your paid edition. Don't give enough and nobody will use your free edition.
• It's another product you're pushing to the market. It will require all the related efforts - development, deployment, support, marketing, etc. You're probably targeting a different market segment, so be prepared to conquer this segment.
• It's difficult to estimate how this product will help the sales of your paid products. However, if you have limited resources, you may want to consider safer and cheaper means of marketing.

To sum up, there are many cases where the free edition missed it's target. There are examples where it did help create a reputation and establish market dominance. For me, it's still a possibility. It's very reasonable for me to start with a simple edition, give it for free and proceed to develop the full edition. However, to put bluntly, I need the cash. I cannot afford burning "fuel" without any income. I may offer a free edition, but it will be later on in the process.

Proper market validation

I know that my product has market potential.

How do I know that?  For the last 4 years I was working in Amdocs on a single product called Amdocs Self Service. It's a platform for developing self service web applications which integrate to various back-end systems, specifically geared toward the Telecom industry. I designed the front-end framework of the product and some of the back-end as well. I was actively involved with at least 5 major product implementations and deployments at major Telcos, including AT&T and Vodafone. I personally trained at least 150 developers in this area and provided consulting to many more. Finally, I ended up as the chief architect (CTO) of the product and met with CTOs and architects from at least 10 major Telcos.

I've experienced the pain. I believe I know what needs to be done to fix it.

However, I will need to convince other people. Investors, potential partners and employees (not to mention customers, but let's leave that for now).
Can I do that?

In the passing months, I've pitched my idea to various people and discovered that they can be categorized into mainly 3 groups:

1. Most technical people who experienced "enterprise development" love it. It's easy to see why. Much like me, they experienced the pain and believe that something can be done about it. My explanation sounds reasonable and they see how it can improve their daily routines. It is just what they need.
2. Most development managers are skeptical. I see mainly 2 reasons: either they didn't experience enough pain or they've seen too many tools come and go with no great benefit, eventually becoming shelfware. IMHO, this is one of the main reasons that tools should be sold from the bottom: reach out to the people in the trenches and let them talk their boss into it.
3. It's very hard to pitch to non-technical people, as the idea is very technical. Especially the competitive edge, which is as technical as it can get. It's one of my most difficult challenges.

The last issue is the tough one. I'm currently targeting potential investors. The type of investment is more suitable for a private investor - it's not enough money for a VC. While VCs usually have their resident techie to evaluate potential projects, private investors mostly rely on their own instincts. You may say that the burden of proof becomes heavier. Either I find a truly technical investor (from the first group, very rare) or I should bring with me enough credit to show that my product has the market potential.

For that reason, my next step would be to perform market validation. I will do so by conducting a survey among several potential customers which I can easily reach. I will pitch my idea to people at different levels and gather their feedback using an on-line survey. This seems to be the best I can do at the moment.

I don't feel very comfortable with this way of market validation, from the following reasons:

• From the investor perspective, the interesting people in the survey will be those who will eventually make the buying decision. The managers. Group 2 above. A hard sell.
• The "nice effect" - I'm a nice person, I'll be meeting with people on my network which are also nice. We're all talking hypothetically, since there's no product yet. They want to be supportive, so why shouldn't they be?  Although this will yield "nice" answers, it may steer me away from the truth and hang a question mark over the results.

Having that said, I don't see better alternatives. It's important to be aware of the above negative effects. It may help reducing them when conducting the survey.

The story of Xoreax and the IncrediBuild

I came across Xoreax when looking for a company who does software development tools in Israel (since this is my playing field). Uri Mishol, the CEO and co-founder, and I met a few years ago, so it was only natural to look him up and meet.

Xoreax is an ISV which builds one truly great product - IncrediBuild. The tool allows distributing the load of the build procedure between several machines in a very transparent and non-intrusive way. It supports VisualStudio and mainly geared towards C++ development. Considering the size of Xoreax, it's a huge success. Recently Xoreax started offering IncrediBuild as a general-purpose framework for accelerating Windows-based processes through their distributed processing engine, and this new offering also appears to be gaining momentum.

• The beginning: At first, Uri came up with the idea. He then partnered with his friend, a gifted developer and software architect, to lead the product development. This move proved itself. After researching their idea for some time they decided to quit their day jobs and focus on their new product. Uri was doing the business side. His partner developed the initial version by himself.
  
• Market research:
  
  • He did the usual market research.
  • Look through user forums to see if users are complaining about the problem.
  • When you pitch your product - the people who can't grasp your product may help you better understand who's not your target audience.
• Beta:
  
  • He recruited about 9 Israeli companies as beta sites. It was not enough, but it did produce great feedback.
  • He suggested around 15 beta sites as the optimal number.
• Marketing:
  
  • You can say that IncrediBuild was carving out a new niche, as almost no other tool offered similar functionality.
  • SEO - Uri did it himself by researching the subject and working on his site.
  • Using AdSense.
  • Community sites - Create a list of forums where your potential users hang out. Participate in this forums and use your signature.
  • "feature articles" in famous blogs and on-line magazines sites.
  • Trade shows - it's a good tool for business development, less for actual sales.
• Creating a viral effect:
  • Discussion groups.
  • Promotions based on "invitations" - encourage the user to invite friends.
  • Coolness factor - give a sleek UI which makes users talk about it.
• Trial version:
  • It's a must. They give 30 days free.
  • They let the users extend by 15 days in exchange for registration.
• Support:
  • E-mail only. Available for users who pay maintenance fee.
  • They offer good on-line manuals. No on-site training is offered.
  • It is Uri's opinion that today's solutions like web-casts and on-line training videos are more than adequate for training. ISVs in their initial stage should try to avoid offering on-site training, and instead invest in high-quality documentation, tutorials, support and UI.
• Sales:
  • Cold calls in the early days.
  • Most of the sales are done on-line - using e-mail, conference calls, web casts, etc.

That's about it. Hope this was educational for you as it was for me. If you have some more questions, feel free to leave a comment and I'll try to get some answers from Uri.

I want to thank Uri for his time and wish him all the best in the future.

An entrepreneur mental state

I was an employee in large corporations for my entire career so far. It's very easy to dream about quiting and starting something by yourself. There's a great distance between thinking and actually doing. An important step is communicating. First, with myself (yes, say it out loud). Then to others. The mind can play tricks here. It wants to stay on the safe shores of your comfy corporate positions. So, once I communicate I put the mind in a tough spot of saying things it doesn't really mean.

When I walked to my boss's office to hand out my resignation I was past the thinking games. It was time for the mind to take down the gloves and get physical. My throat was dry and my voice was very weak... but I did it.

So now, I'm here and the game continues. Keeping my self confidence over the time can be tricky.  Especially when I'm currently the sole founder of my startup (hoping this will soon change).

Which brings me to my next question. I was planning to give the basic version of my product for free in order to gain market share. I was very confident that this is the right way to go until I got the third feedback against it and started thinking that maybe it's not such a good idea to give my software for free. I mean people must be crazy to pay for it... I'll summarize the topic of giving away a basic edition in one of the upcoming posts.

As for the self confidence... it's all about reminding yourself that it can work. Post a big sign over your head if it helps...

Cheers,

Zviki