What happens when you intersect the Innovator’s Dilemna with investment, ROI and stragic planning? Especially since new, disruptive technologies aren’t adopted overnight – they can take ten years or more to be widely accepted. Conversely, investors are generally more short-term oriented.<\/p>\n
Bottom line: markets have their own timing which require companies to adapt.<\/p>\n
In the VoIP space this meant that companies with great ideas in the nineties from Quicknet Technologies<\/a>, Tundo<\/a> and many others were wiped out because they were early to the market and investors couldn’t see past the bubble-burst with enough clarity to keep these businesses going.<\/p>\n Salesforce and 8×8 are two companies which could have just as easily closed down as become large, successful organizations. Both defied the odds and perservered thanks to management teams that stayed loyal to the companies and woudn’t give up.<\/p>\n But making it through tough times can be bittersweet if you subsequently allow others to dominate the multibillion-dollar market you blazed a trail in, forcing you to become a minor player.<\/p>\n When the opportunity is there, you need to invest and invest quickly in sales and marketing to grow your business. The alternative is to see your ideas get implemented far more successfully by others.<\/strong><\/p>\n If youv’e watched the PBX\/UC space over the past decade you’ve witnessed once very successful players being sold off for parts. Quite often the same issue is at play – a lack of sales and marketing. Cloud isn’t new – anyone remeber CENTREX? Yet, many incumbent players seem to have forgotten that you need to stay on the leading-edge of tech as well as marketing or you’ll get demolished in the market. Mitel and ShoreTel for example are companies which embraced cloud – not early but relatively early enough to sustain their companies with new customers and reduce defections.<\/p>\n Brian McConnell has been a long-time contributor to TMC publications and was gracious enough to allow me to republish his latest thoughts on the hosted PBX, cloud communications space. He is razor-sharp and always posessed keen insight on all things telecom and tech.<\/p>\n When Apple was just starting to turn around, Brian was one of the few people I know who predicted their success. We’re happy he has offered to share his experience. Finally, he has a bit of an issue with hired gun managers and when you finish reading, you’ll definately understand why.<\/p>\n <\/p>\n —-<\/p>\n Inaction Is A Deliberate Choice (One That Can Cost You Billions)<\/strong><\/p>\n Technology startups, and startups in general, are all about balancing risk against opportunity. Try to grow too fast, and you risk crashing and burning Hindenberg style. Grow too slow, and you risk watching latecomers crash your party and walk off with all of your booze.<\/span><\/p>\n Today its commonplace to host all sorts of business services in the “cloud”, everything from HR to accounting to messaging is hosted off site for a monthly subscription. Twenty years ago, the landscape was quite different. Back then, every service had its own box, usually located on site. Phone systems in particular were a dinosaur technology. Most of them were not unlike mainframe computers, and were sold exclusively through local distributors who’d often grossly overcharge customers for antiquated technology.<\/span><\/p>\n Back in 1995, Steve Lange, a telecom software developer, was working on a call center for a consulting client, when he had the idea of hosting a complete business phone system in the cloud. The system offered most of the features you’d find in a conventional system, known in the trade as a PBX (private branch exchange), except there was no on site equipment to buy except basic telephone handsets. Everything else was hosted offsite on a pay as you go basis. The company, Virtual PBX, was one of the first companies on the scene with a product like this.<\/span><\/p>\n The idea of outsourcing your entire phone system was a tough sell in the mid-1990s, but as cloud computing became more familiar, resistance to the idea fell away. The transition from traditional landlines to VoIP (voice over IP) also meant that customers could just plug phones into their LAN and treat them like network appliances. Meanwhile, the cost of phone calls dropped through the floor, making a service like this not only simpler, but also cheaper than other alternatives. It was clear to many of us in the trade that much of the money spent on business telephone equipment would shift over to subscription telephone services like Virtual PBX. This was easily a billion dollar opportunity, and they were in a good place to own most of that market, with a lead on competitors, and a product that was not trivial to copy.<\/span><\/p>\n Unfortunately that was not to be. Instead they became an example of what happens when a technical founder appoints a risk-averse manager from a big, slow moving company to run a small, high risk startup. Managing a startup is all about managing risk. Naive managers tend to over focus on the risks of doing something while ignoring the risks of not doing something. The logic is simple. Doing something usually involves spending money, and if that something doesn’t work out, that money is gone. The problem is that not doing something can be just as deadly, but it feels safer because the outcomes are not directly measurable. Key lesson: always remember that inaction is a deliberate choice, and evaluate its potential costs.<\/span><\/p>\n Technology product categories tend to follow a pretty predictable pattern of development. What you do, and what you focus on depends a lot on where you are in this path. I’d define these phases as development, growth and consolidation. Development is all about innovation and getting to a point where you have a boilerplate offering. Growth is all about acquiring and retaining customers better than your competitors. Consolidation is all about weeding out the losers (you want to be the one doing the consolidating).<\/span><\/p>\n A common trait among technical founders is that they tend to be quite good at technical innovation and product development, but often are not so good at, or just don’t enjoy selling (Steve was pretty candid about not wanting to run the business). That’s OK when you’re in the development phase of the market because customers often don’t know what they want yet or aren’t ready to buy it, so its better to focus on the product anyway. Competitors usually don’t have their act together either, so you’ll often get years of breathing room to figure things out. The problem is that can lull you into complacency.<\/span><\/p>\n The growth phase sets in when a consensus emerges on what the standard product offering should look like, and someone figures out how to make customer acquisition and sales repeatable and scalable. In the hosted PBX category, this started to happen about ten years ago. By then businesses were more comfortable with cloud based offerings, and services like Skype introduced VoIP to the masses. This is about when Vlad Schmunis, the founder of Ring Central, appeared on the scene with a cloud phone service. Several other relative latecomers such as Grasshopper and 8×8 introduced similar offerings around that time.<\/span><\/p>\n None of these competitors stole Virtual PBX’s idea, but they did reverse engineer it (in fine Silicon Valley tradition). This gave them a huge advantage over early innovators. Since they had a ready made template to emulate, they could skip years of product development and focus instead on sales, while also starting fresh with newer technology. These second wave companies tend to be founded by people who are more sales oriented, and who understand that most products don’t sell themselves. Once a product category reaches the growth stage, the math is very simple when each customer you acquire generates several times as much revenue as you spent to get them. The companies that invest the most aggressively and efficiently in customer acquisition and retention win.<\/span><\/p>\n That’s exactly what happened, except it was Ring Central, 8×8, and Grasshopper that raised money, spent that money buying customers, and built big businesses, not Virtual PBX. Ring Central would go on to IPO on the NYSE (current market cap as of 11\/10\/15: ~$1.5 billion). 8×8 would go on to IPO on the NASDAQ (current market cap: ~$1.0 billion). Grasshopper would go on to be acquired by Citrix in a generous deal. Virtual PBX, with its ten year head start, could have easily raised money and built a world class sales and marketing team, but instead they let newcomers walk away with it all. Most of this market value could have and should have gone to them if they had executed well, so its not an exaggeration to say that their CEO probably forfeit several billion dollars in value to competitors. Ouch!<\/span><\/p>\n And that goes back to my point about not doing something being potentially more dangerous than doing something. The risk in not doing something is the outcomes aren’t really measurable. It’s easy to measure the profit or loss from a tangible action, and hard to measure the cost of inaction. What was happening while Virtual PBX was hoarding cash because of the CEO’s fear of dilution was its competitors were silently growing their businesses several times over. By the time it was obvious what was happening, they had grown 10x or more, and early innovators like Virtual PBX were left with a small share of the market. While that’s better than failing outright, it is demoralizing for investors and especially employee shareholders who were lured in on the promise of joining the next blue chip company. Disclosure: I entered the company via an acquisition, and was one of those who was disappointed to see how badly the company was getting trounced by competitors.<\/span><\/p>\n Virtual PBX’s story is a pretty common one among startups, and sadly it was avoidable. Probably the biggest mistake they made was hiring someone who came from a big company to run a startup in a high growth industry. Startups are hard, and you have to be comfortable with risk to see and take advantage of opportunities. Where a startup CEO would have seen an opportunity, he would see an expense item, and because of that bias he forfeit several billion dollars in value to competitors who plowed money into acquiring customers.<\/span><\/p>\n There is a lesson here for technical founders like Steve as well. It’s common for engineers to doubt their business skills, but here’s the thing, if you’re an engineer you’re by definition good with math. Finance is math. Do you know what x = y^n means? Congratulations! You already know about half of what you need to know. You can teach yourself the rest of business finance pretty easily. If you’re smart enough to write software, you’re more than smart enough to build financial models and run Monte Carlo simulations (and you might even find that you enjoy tinkering with them). You may want to have someone else do sales, meet with investors and all that, but if you understand the basic math of the business, you’ll be in a better position to understand how its doing, and if the managers serving you are serving you well.<\/span><\/p>\n Mostly I feel bad for Steve. Today he’s in the unfortunate position of watching several other companies walk off with billions of dollars off an idea he not only had, but also acted on many years ahead of everybody else.<\/span><\/p>\n And I suppose that’s the main lesson for any would be entrepreneurs reading this. Don’t let yourself be bullied into thinking that some pedigreed “seasoned” manager knows better than you. Unless they have founded and run a startup from start to finish, they are just as inexperienced as you are, and their opinion is no more valuable than yours.<\/span><\/p>\n Beware of the “hired gun” manager. He or she may be an expert marksman who can pick off distant predators (or shoot your own company in the head).<\/span><\/p>\n Brian McConnell is a long-time telecom entrepreneur based in San Francisco. He founded several telecom startups over the years including PhoneZone, an online catalog of business telecommunication products and services. His first real job out of college was working as a phone sex repairman for a 1–900 operator where he programmed IVR (interactive voice response) systems.<\/em><\/span><\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" What happens when you intersect the Innovator’s Dilemna with investment, ROI and stragic planning? Especially since new, disruptive technologies aren’t adopted overnight – they can take ten years or more to be widely accepted. Conversely, investors are generally more short-term oriented. Bottom line: markets have their own timing which require companies to adapt. 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