To beat a Las Vegas casino, you need luck and strategy. The software market is a casino, too, with its own versions of roulette and blackjack, where luck and strategy are just as important. While there isn't much that you can do to make your self-funded software company luckier, you can have a good strategy.
Casinos have all the advantages. They have millions of dollars of video equipment, databases with the names and faces of known card-counters, bet-tracking and facial recognition software. They hire hundreds of people to watch video monitors, walk the casino floor and investigate big winners. They even offer free booze. All that works against you.
Beating the "house" in the software market is intimidating, too. Existing players have huge bankrolls, large staffs, every conceivable advantage. Launching a self-funded technology startup into the market feels like Homer Simpson walking into Caesar's Palace with $10 in his pocket.
But people still beat the casinos. The MIT Blackjack Team beat Las Vegas with a team of players using sophisticated card-counting techniques. Now, I know, the people at MIT aren't Homer Simpsons; they're smart. But their techniques were founded on basic strategies, like card-counting, that anybody can understand.
For your self-funded software company to win, it helps to build your own MIT Blackjack Team for corporate strategy. You begin by learning basic corporate strategy and expected outcomes for the two games in the software market: "roulette" and "blackjack".
In Las Vegas, roulette is a game with a small white ball and a spinning wheel with colored and numbered slots. (In Russia, it's a whole different game.) To win, the player bets on the ball to land in a particular slot or group of slots. The basic strategy is to make a single large bet. In the software market, betting on technology is software's version of playing roulette.
Blackjack is different. Blackjack is a card game with only a few players at a table who bet against the dealer. (Blackjack players die in France, not Russia.) Each table has different minimum bets: $5, $50 or $500. The basic strategy is to first bet small and move on to bigger bets as the odds move in your favor. In the software market, starting in a niche and working your way into larger markets is software's version of playing blackjack.
To play "roulette" successfully, you build a technology-based corporate strategy. Like Las Vegas roulette, you put all your hopes into a single product. To give yourself the best chance, you look at current technology trends and forecast three months to a year in the future about what will be popular. Then, you work like a madman to build the software while adapting and re-positioning as the market changes. Then, you get Homer Simpson-esque lucky.
To play "blackjack" well, you build a niche-based corporate strategy. You begin by building a product for a technology niche, such as bug tracking tools or grid components, that new products can easily enter and often succeed in. With the revenue, customers and infrastructure from that niche product, you build later versions and subsequent products for larger, non-niche markets. It's mostly hard work; little luck is needed.
Technology-based and niche-based strategies work differently so you gotta know which one you are using. If you are playing "roulette", you make only one big bet because making many bets simply dilutes the chances that any of your products will have a major payoff. Similarly, playing "blackjack" with "roulette" strategies only leads to a risky technology with little or no market.
Let's start with the technology-based corporate strategy. When you use this strategy, there are three likely outcomes.
The best outcome is to strike a multi-billion dollar new market just as it develops and become perceived as the market leader. This is where the stars align and that tiny, white roulette ball sinks into Red 16 like a catcher's mitt. eBay did this in the Internet auction market. Pierre Omidyar started and self-funded eBay while working as an engineer at General Magic. But, when the company began its rise, eBay quickly took venture capital and transitioned from a self-funded company to a venture capital backed company. If your company has a technology-based corporate strategy, be ready to do the same thing. Being good at corporate strategy sometimes means knowing when to reorient the company towards maximum growth at the expense of your control and your conservatism.
A more likely outcome in using technology-based corporate strategy is to sell your company to a larger company who can use your technology as part of their strategy. This is a difficult option to exercise: you've both got to be pretty good at forecasting technologies and realistic enough to know that technology is worth a whole lot less than sales. I know, I know, it doesn't seem right to us, as software engineers, that a sophisticated technology with only a few sales isn't worth much. But, the casino, and large companies, only pay out big-time for winners, not should-a, could-a, would-a beens.
Oddpost, recently bought by Yahoo!, is a company that sold itself on the merit of its technology. It was perfectly obvious to everybody that Oddpost would never own more than a tiny fraction of 1% of the Internet e-mail market. Yahoo! and MSN Hotmail already locked up that market and locked out any small competitor. By itself, Oddpost was never going to have more than a handful of customers and, at $30 per year each, sales were limited. The technology was the only thing of value. The launch of Google's Gmail, of course, made Oddpost momentarily attractive to Yahoo! who wanted to use the technology to help them beat down Gmail. So, Oddpost sold, probably for a fair amount, and almost certainly not for a king's ransom.
The third outcome in using a technology-based corporate strategy is a complete bust. Laying your life savings on Red 16, watching it come up Black 24 and then whining to the casino management about how you "saw Red 16 come up three times before in the last hour so it should have worked" is fruitless, not to mention embarrassing. During the Internet push craze, PointCast was offered $450 million for the company. But, only a few years later, sold at a $10 million fire-sale and its founders probably got bupkis. They were lucky to get even that.
With the technology-based corporate strategy, you have a chance at a super-sized payoff but the other outcomes are difficult and risky. If your company is self-funded, it is best to expect to take venture capital at some point. Even if your company is more likely to be bought than become the next eBay, venture capital should be taken and used to help give you access to potential corporate suitors. In addition, venture capital will be used to spruce up your company for sale and to keep the company viable during a relatively long period of poor sales. A company may have a great technology but, if it is self-funded and has few contacts and even fewer sales, it isn't going to be attractive or even known to potential buyers.
The niche-based corporate strategy works differently. A niche is a market that well-known to be friendly to new competitors and nearly impossible to dominate by one company. My article, "Small Fries", dissects the most common niche markets for software. In Las Vegas blackjack, the best strategy is to bet a little at the beginning and then bet bigger as time goes on. The $5 blackjack table, and a niche market, is a good place to begin but a sound niche-based corporate strategy requires you to engineer ways that your company can expand into larger markets.
When you use the niche-based corporate strategy, there are two likely outcomes.
The best outcome is to use your success with a niche market product to allow you to progressively enter larger, non-niche markets until your company is bought out by a larger company. The key to this strategy is to engineer products which can both enter a niche market and be used as leverage into a larger market. At a minimum, a steady income from a niche market product can provide cash flow for a self-funded company to remain self-funded and gear itself up for launching more ambitious products. That's at a minimum; a better corporate strategy is to invent a niche product which, by using your imagination, can be expanded into larger markets in future versions or in follow-on products.
The other, lesser outcome for a niche-based corporate strategy is to remain focused on one or more niches. This is the trap of the niche-based corporate strategy. Niche markets are friendly to new competitors and nearly impossible to dominate. If a company establishes itself in a niche, it is very tempting to continually invest more money and effort into gaining incremental revenue from the original niche market or by entering other niche markets. While remaining focused on niche markets nearly guarantees incrementally better sales each year, the cost is the loss of money and effort being available for products that would improve the company's value (either to a larger company or to the market in general). It is an opportunity cost. A player who wins $5 bets at a blackjack table still wins by betting $5 but he wins more by moving to larger bets.
An optimal niche-based corporate strategy focuses on hypergrowth. As a rule of thumb, each major version of the original product or each new product should appeal to a market that is ten times as big as the previous version or product.
Unfortunately, unlike a company with a technology-based corporate strategy, a multi-billion dollar success, such as eBay, isn't really possible using a niche-based corporate strategy. Winning big only really works in roulette. It works because it is fast and unexpected but winning at blackjack is slow. eBay grows huge because it rides as the leader of a single, new, fast-growing market with huge momentum. Companies with niche-based corporate strategies don't have that kind of momentum; they are composed of a collection of smaller reinforcing momentum waves and these reinforcing waves simply cannot match the power of a single, major wave.
While not being able to build eBay-sized companies, a niche-based corporate strategy allows a company to remain fully self-funded. It also trades a chance at a super-sized success for a better chance at fairly big success.
How do you choose between a technology-based and a niche-based corporate strategy?
A good corporate strategy revolves around your initial product idea. If your initial product idea has broad appeal and is almost certain to be thought up by others soon, it is likely that you'll use a technology-based corporate strategy. For a new approach on an existing product which is not being hyped up in the magazines, a niche-based corporate strategy is better. Inevitably, your personal bias towards risk and the kind of company that you want to build will shape the kinds of initial product ideas that will appeal to you. If you are a roulette player, you'll think of product ideas that allow you to play roulette. If you are a blackjack player, you'll think of product ideas that allow you to play blackjack.
Place your bets.
E-mail Dan Howard about this article