Startups and The Vision Thing

David Crow has a thoughtful post about how startups need to think through their exit strategy in order to make smarter decisions along the way to make it happen.  He talks about how he’s surprised that almost every startup he talks to has a plan to get acquired by one of the big guys.  Here’s an excerpt:

When I talk to startups everyone seems to think that acquisitions
are a dime a dozen. That even based in Toronto, Montreal, Ottawa,
Waterloo that they are prime acquisition targets for Microsoft, Google,
Oracle, Cisco and other Valley companies. Which surprises me! Sure all
of these companies have done Canadian acquisitions, they are the
exception and they are done for very specific reasons.

While I agree that successful tech IPO’s are rare (especially right now) and that a venture-backed enterprise must have a realistic exit strategy, I also think that the focus on exits at the very early stages of a company can be an innovation-killer.  Particularly when it stops companies from thinking about the bigger picture of how they might really disrupt a market.

As a consultant, I’ve had a chance to talk to a large number of startups here in Toronto.  One of the things I find really frustrating is how few of them have a longer term vision for the company.  Most of the companies I talk to have a product idea.  While they can certainly see their product growing and getting popular, the “vision” for the company seems to end there, with the obvious ending being, “…and then we get acquired by a big company.”  This happens so often I worry that some of these companies actually started with a dialogue around “so what does Google want to buy and how can we build that?”, instead of insight into a key customer problem or an inadequately addressed hole in a market.

Setting out to build a company to be acquired, I worry, stops them from thinking bigger about how they can potentially transform the markets that they are in.  A VC said to me recently “Lots of folks come in here with ideas that make great products, and decent businesses but not great companies.”  A great company takes vision.

Are you just a “vendor” to your customers?

When you work at a big company you can clearly see how important a company’s vision is to customers, particularly larger ones making big ticket purchases.  A half-million dollar software purchase is going to get amortized across at least 5 years (if not more) and customers want to know that you aren’t just building products for today but that you understand the future of the market.  The key word here is “market”, not just the future of your own particular product.

The CMO at my last job told me a story about how shortly after leaving IBM to join a new company she had a meeting with the CIO of a key account.  At one point in the meeting the customer said “I talk to a lot of vendors like you.”  She was stunned.  She said, “He called me a vendor!? Could you ever imagine being called a “vendor” when you were at IBM?”  Indeed I could not.  Not every company loved us but at IBM we weren’t some “vendor” trying to squeeze our monthly PO out of our customers – we were working with the company at a strategic level.  Customers weren’t just betting on our products, they were betting on our view of the future of technology as it related to their businesses.  Oh and by the way, they were willing to pay a premium for that.  Vendors?  Customers negotiate hard on price with those guys because at the end of the day, vendors are replaceable.

Ability to execute

The trick for startups of course is that even if they do have a compelling vision, they need to be able to realistically map the steps that get them there.  There’s a reason those Gartner magic quadrants have vision plotted against ability to execute.  One without the other doesn’t count for much.  But just because you’re small doesn’t mean you can’t find a way to punch above your weight. Picking a starting target market where you can dominate and then use as a launchpad for other markets is key.  Finding the right partners and/or sales channels that can increase your reach is also important.

Startups get acquired when they cause pain

So coming back to the question of exit strategy.  In my experience (I’ve been at companies that have been acquired 3 times and have been on the acquiring side 4 times) the main reason companies get acquired is because they are causing the acquiring company pain.  They’re stealing customers, they’re causing customers to re-evaluate the status quo, they’re slowing down the buy cycle for the big guys.  In short, the startup is causing such pain that the larger company is willing to pay some big dollars to make it stop.  Trust me, a new product in the market doesn’t cause IBM pain.  A company with a new vision for the market that customers are interested in is another story entirely.  Get the attention of your customers and the market takes notice.

None of the companies I worked for when we were acquired started out trying to build something that the acquiring company wanted to buy.  Just the opposite – we were trying to put those guys out of business because we believed we were the better choice for customers.  Similarly, on the acquiring side we bought small companies for innovation, for a way to help us own the future in the minds of customers.  We didn’t purchase “vendors”.

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26 thoughts on “Startups and The Vision Thing”

  1. Funny to think that a successful strategy is potentially an exit. Interesting play on words.
    My thought du-jour is “no vision = no strategy”. Not ‘rocket’ science, but you are spot on that without a visual of what the end is you will get distracted.
    Being able to tie that vision to the market you serve makes it even more compelling.
    Great post!
    Stewart

  2. April,
    While some companies get acquired because they cause someone pain, I’d add that companies get acquired for a couple of other reasons…
    They relieve a pain — i.e. fill a clear gap in a company’s existing portfolio
    They complement a company’s existing portfolio. i.e. acquisition can be sold back into the existing customer base
    They open up new markets for a company i.e. whether geographically or technically or otherwise, allow the company to sell to people who they couldn’t sell to before (easily). (e.g. companies buying distributors or local technology vendors in other geographies)
    The acquirer can generate cash from “operational synergies” — i.e. think CA or even Oracle buying other companies and milking the maintenance stream.
    There may be other reasons, as well, but causing pain is only one of the reasons.

  3. Great post April. I remember the strategy we gave people along the way…
    Your objective should be to never have to:
    1) close a deal you don’t want
    2) raise money, or
    2) sell the business
    And that’s when you will be most valuable to any/all of the above.
    Be profitable, be sustainable, be a threat!
    Good luck to all startups,
    Cheers,
    Trevor

  4. Hi Saeed,
    Thanks for the comment and yes, that’s a good list of other reasons why companies (particularly larger ones) get acquired. At IBM I worked on a larger acquisition that was done to fill a gap, gain market share and sell more into our existing accounts.
    My personal experience with smaller companies though has been more that they were acquired because they were disrupting the market.
    April

  5. Excellent point! I think the mind set you describe is a product over over-all shortening of horizons which took place in our culture over last few decades. I do not recall the last time I’ve heard a founder talking about building a great company (that takes decades of learning) rather than “next Google”. I am not saying that the Google is not a great company, but has already been build, and it took 10 years in addition to decades of research preceding the application.
    It seem that many entrepreneurs see their companies as projects, that have higher probability of success than lottery tickets rather than their life works. Previous abundance of VC money has probably something to do with it as well. @piplzchoice

  6. Hi Trevor – thanks for the comment! Wise words from a guy that’s been there…
    I personally am not against raising money though. But that’s a post for another day 😉
    April

  7. Thanks for the comment Gregory.
    I didn’t get into the influence that VC’s can have on a company’s vision but it can be a big factor. Some VC’s like to make larger longer-term bets and some are looking for faster returns. It’s really important for a startup to find one whose investment horizon matches the vision.
    April

  8. Great post April. I really enjoy your insights. The framework I have in my mind when reviewing business plans has been: is this a feature, a product, or a business. Now I will also add: is this a potentially great company!

  9. When there is nothing but an idea, the founder must believe what no evidence supports. When the company is an infant, the founder must switch from being an idealist preaching to being an action-based person getting stuff done.
    There is a time when thinking about the exit is important. Before that keep your mind on what’s important in the current stage of your company. There is little reason to think about an exit before you seek funding.
    You may be a mom and pop shop. If so there is no exit until you are ready to retire.
    Getting VC funding in not necessarily a good thing. They induce you to invest asymmetrically in your company, so your company becomes imbalanced. They will be thinking about your exit even if you are not. You can delegate the exit to the VCs.

  10. Thanks for the comment David. I agree that not every company needs to exist but once there is outside money involved there needs to be a plan for the investors to get a return on their investment. I’m not against taking VC money but there needs to be a good fit between the VC and the longer term goals of the founders.
    April

  11. Great post April.
    Many excellent subposts and debates in here but I’ll focus on the exit. Having been on both sides of this, like yourself, there can be several good reasons to acquire or exit most of which are mentioned here but I think the important thing for entrepreneurs/CEO’s is to establish, communicate and ‘live’ the long term strategy of the business. This is what gets employees engaged and part of the daily desire to execute towards a larger goal. If the vision is simply to grow and exit rather than engage, build, improve, whatever employees feel much more like hired guns rather than family members. Hired guns (unless they directly and significantly financially impacted by the exit which most are not) are rarely as engaged and vested in dominating a particular space because you want to improve your customers lives.
    Vision and execution are key to a successful business regardless of the exit plans.

  12. I find it a shame that startups don’t think big; that they do not have a longer-term, grander vision. Is it because of the Canadian culture? Maybe. But if you look at RIM, Nortel (in it’s heyday), Bombardier, and others then it’s probably not our culture. Maybe it’s just too darn easy to build something that a larger company does not have and wants. Regardless, I still find it disappointing that there are not more startups that start their venture with a large, long-term vision for their company.
    I too worked at IBM and it’s well known that IBM sits at the “big table” with its customers. I also worked at smaller (ok much smaller) companies and they sit at the procurement table – hence they’re referred to as vendors. Oddly enough, if you are sitting at the procurement table, the odds of you being replaced when times are difficult or you are no longer perceived as useful, are a lot higher than if you sit at the “big table”. Without a grand vision, you’ll never get to the “big table” – doesn’t gaurantee it, but you definately won’t get there without one.

  13. Hi,
    Thanks for the comment Peter. I don’t like to think it’s a Canadian thing. One thing I do wonder about is if nobody at the startup has ever seen what’s it’s like at the big table, they think the little table is all there is. This is where the Canadian brain drain to larger companies in the U.S. and the lack of larger head offices in Canada is a really big problem for us. Again, a topic for another blog post 🙂
    April

  14. Thanks April, great post.
    One of the problems I often come across is because start-ups often don’t think the issues through early on, they miss doing some very basic things that will trip them up later.
    The list includes; shareholders agreements, assigning IP, employee contracts, monitoring of where additional IP comes from, etc, etc.
    Then we have to come along later and fix it all up if a trade sale is going to have a chance of going through.

  15. I really enjoyed your article as well as the arguments you discussed. I actually used the “vision” concept in my latest post “Startups Craving to be Acquired… A Big Mistake?” to explain why I think the biggest mistake startups are making is building their efforts towards being acquired rather than growing and prospering on their own!
    Thank you for the insights your view of the topic provided me.
    Regards

  16. Great post… There are a lot of great insights, as mentioned by many comments… I was personally struck the ‘vendor’ comment… How smaller companies are simply automatically considered vendors and are so easily replaceable… It made me ask the question whether a small company can ever not be considered just a vendor… does one have to be a big company in order not to be considered a vendor? i know alot of big companies are simply vendors to me, i.e., bell canada, rogers cable, etc,… April, do you think smaller companies can ever break away from the ‘vendor’ label?

  17. That’s a great point. I think you could easily write a long series of blog post on IP issues. When I was at IBM it was not at all uncommon for us to walk away from a deal solely because of issues around where additional IP was coming from, particularly open source.
    April

  18. Hi Christine – thanks for the comment and that’s a great question. I think there are a number of ways that smaller companies can avoid the “vendor” trap.
    One is to focus on a segment where you can dominate. I worked at a startup that was competing with a much larger company. We closed very large deals competing with them by proving to our customers that we understood our niche better than the big competitor did and would be a better strategic choice.
    The second is to work with partners. Another startup I worked at had a strong strategic partnership with a large vendor in a complimentary space. Together our solution was very strategic for companies and got us out of the vendor trap.
    The final way you can do it is, similar to choosing a segment, you become the leader of a new way of thinking or doing things. I worked at a startup that had some revolutionary tech in the database space. If we had tried to compete directly against traditional databases we would have died a quick death. Instead we focused on talking to customers about our approach and how for certain types of problems, that approach was the best way to solve the problem.
    April

  19. Hi April
    I like this article. As I am writing on http://www.produkt-manager.net about customer intimacy, and innovation, I will probably comment on it with an own post. I’ll let you know, once I had the time to publish it.
    You are also right with the comment about vision and execution. Vision w/o execution is like “warm air”, and vision with execution is like “result”.
    regards
    Andreas

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