Friday, April 24, 2009

Startup Lessons #2 - It takes a customer

There are startups and then there are startups. We were never going to be a "web-based" company. We had decided to use web-centric technology to address specific enterprise problems, so ultimately we would be an enterprise software company. The problem we set out to solve was summed up by one angel like this, "Everybody knows and understands that data behind the firewall is a mess." We hoped to fix that.

My partners worked on a number of large telco projects that ultimately failed, and for a variety of reasons. We understand what the corporation is left with after the legion of offshore programmers and consultants leave. We've watched the systems go live only to then crush under the weight of massive data. We got it that no matter how good the user interfaces, reports and controls seemed to be, what gets delivered somehow doesn't quite provide the value imagined months or years before getting into the project. There is often disappointment.

We came up with a concept would make data easy to access and integrate and that would be massively scalable. We decided to jump. We were going to launch a startup.

But this isn't your internet startup. There are a whole different set of problems when launching a software company that intends to sell to Fortune 1000 companies. With a web based company, you build it, and when you are ready to go, you make the site public. You are deployed. Typically the web startup's next problem is that no one shows for the party. You've got a whole different set of problems.

But for enterprise software, you have to build it, test it and then deploy it. That takes time---time to not only build the software, but to decide on a target market, to build customer relationships, to persuade someone at the company to let you in the door. It takes time to see through the initial deployments, to make it work in the real word, to seal a deal or two.

All of this comes out as you work through the business plan; you realize that it is going to take big money, bigger than you originally imagined, to make it through to those first customers. It's going to take VC money. It seemed to us, at the time, to be the the only way forward.

But there is a chicken and egg problem: The VCs won't give you the time of day until you have those first customers. Don't kid yourself into believing anything else. Seriously. This is not the late nineties and no one is lining up to throw money at every clever software idea. I swear.

Our team has a combined 50 years of experience in the telco space. We have a salesman with a proven track record, a versatile product manager, a data integration specialist with a knack for people, and a software architect. We knew we could build it and had good long-standing relationships in our space. The combination of our ideas, our relationships, and our technology gave us confidence that we would be able to get our product deployed and eventually sold. The VCs and angels liked hearing this, but they asked, what about the customer?

We know about big problems at Verizon and ATT, we told them. Are you in talks with them? Well, not them specifically, but we have talked to a number of other interested parties. You see, that's why we need your money. We need it to see us through until the software is mature enough and while we work up the relationship hierarchy looking for the best champion within these companies.

That's when they tell us to come back once we're deployed at a customer site.

Using our combined efforts we were able to raise some initial money. It wasn't much compared to what it would take to keep our team working full-time for a year (I'll get to this in another post), but it was a start and it gave us hope. We were able to take advantage of a government program to secure matching seed funds. But additional funding did not come as quickly as hoped and our rope grew shorter and shorter.

I built the software while my partners worked every possible existing relationship. The feedback was always positive. Yes, they really liked our technology. Yes, they wanted to work with us. Yes. Yes. Yes. By February we had developed a small sales pipeline, but we were out of money. With no customer, there could be no investment. With no investment, where does this leave the company?

I have omitted the fact, thus far, that the economy tanked during this our first 10 months. I suspect that had it not, we would have secured funding from one or more of the angels we were courting. There is of course no way to really know that.

At this point my partners are looking for services work. They will eventually find themselves engaged on location with one of our company's target customers. At that time, they will look for problems that our software, or new software, can solve. It may be that they'll learn of new problems that require a completely different solution, but once they find it, they'll be in a great place to recommend a software solution. They will have a technology foundation---that they own---that can be adapted to solve a number or data classification, access, performance and integration problems. They will present their ideas and have a much easier time of getting it deployed than they would if they were coming in from the outside.

This solves a number of problems. They will be able to articulate clearly the specific problem to the next investors, which was a bit of a problem during the first go-round. (Clearly they won't be hired by a client unless there is a real problem to solve in the first place!) They will be getting paid for their services work, eliminating the need to use investment to pay their salaries. And most importantly, they will be engaged with a real-world CUSTOMER.

Hindsight really is 20/20. We probably should have gone this route on month one instead of month ten.

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