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Sunday, August 3rd, 2008

Memo from the past: Don’t fight city hall

in: Competition, Create, Startups

Sometimes, the benefits of a new product are so awesomely, amazingly, tremendously good that people are willing to change their behaviors.

It’s not going to happen for you. Most of the time, people won’t work to try and understand a new approach. And no amount of education is going to change that.

koolaid6mixs.jpgThis is a fundamental challenge for entrepreneurs. We’re deep in the product, conjuring up reasons why it will win in order to attract investment and keep our employees motivated. But just because the rank and file is drinking the Kool-Aid doesn’t mean the rest of the world will.

There’s a great example of this, and it’s not just a small company example. It happened to the word processing industry.

Read more…

Monday, May 26th, 2008

Plan B: Five reasons companies merge and acquire

in: Competition, Create, Exit strategy

Every startup dreams of making it big. And some do; but it’s vastly more likely that you’ll get acquired by a bigger fish.

This is one of the reasons VCs look so hard for exit strategies involving other people in your market. It’s a more likely outcome, and it means that if when things go wrong, you have a Plan B.┬áIt’s important to understand why companies want to merge and acquire within their space.

When acquisitions happen, particularly by public suitors, the business must be accretive to revenues in the first year, and must not impact margins. This is because the public company’s investor’s will scrutinize revenues and margins, and will expect to see an uptick. So the obvious motivations for acquisition are for getting new stuff to sell to existing customers, or for getting new customers.

When a market consolidates — meaning firms of roughly equal size acquire one another, or the bigger players roll up the smaller ones, different criteria dominate. This tends to happen in “nuclear winters” like the funding shortage many think is upon us.

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Strategic Marketing 101 talks about four kinds of products: Stars, Dogs, Cash Cows, and Question Marks. The classification comes from two dimensions: Whether the product line is profitable (showing things like decent revenues and good margins) and whether it’s growing (showing an increased number of users and buyers, with hopefully an accelerating rate of adoption.)

Everyone wants a star, and that’s what startups are after. Most startups are question marks: No customers, no revenues, and high hopes. If they can get both growth (customers) and profitability (revenues), things are good. But if they manage profits without accelerating growth, it’s a clear sign that mergers are in the cards.

Here are five other motivations behind M&A in consolidating markets. Read more…