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.

This 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.

Back in university, I worked in the school’s computer lab to pay for some of my beer.^*

The curriculum for non-comp sci students included three products: DBaseIII for databases, Lotus 1-2-3 for spreadsheets, and Wordperfect for word processing. Of these, the one I had the hardest time explaining to people was, surprisingly, Wordperfect.

People would type their documents out using the monospaced, 80-characters-per-line screen. Then they’d print the document out on our fancy new laser printer in proportional, Times Roman font and everything would look wrong. They’d type a line of text and hit [enter]. Sometimes, when the line of text was nearly 80 characters, they wouldn’t hit [enter]. The result was a ragged printout, wasted paper, and a confused look on their faces. Try as I might, it was abundantly clear that people simply weren’t able to grasp the concept.

Remember, these are mostly commerce students. And they were stumped more by text formatting than by building and managing desktop databases. Not understanding proportional fonts was a common point of confusion, and there are lots of pages devoted to explaining it. The concept of hitting [enter] at the end of a line was so ingrained, so obvious, that they couldn’t grok it. We’d tell them, “only hit enter at the end of a paragraph.” Nothing.

Today, this isn’t a problem. It’s not because we all understand monospaced fonts and paragraph markup. It’s because Microsoft came along and decided we shouldn’t need to learn about all that. And in doing so, they came to dominate the word processing market.

Microsoft had a word processor, too. And while very early versions used monospaced fonts, they were quick to embrace graphics mode (albeit without the right fonts) even prior to Windows. Word was What You See Is What You Get (WYSIWYG.) No more wondering if what you’ve typed will come out right: You can just see it.

“Word was the first application with such features as the ability to display bold and italics text on an IBM PC … Although MS-DOS was a character-based system, Microsoft Word was the first word processor for the IBM PC that showed actual line breaks and typeface markups such as bold and italics directly on the screen while editing, although this was not a true WYSIWYG system because available displays did not have the resolution to show actual typefaces. Other DOS word processors, such as WordStar and WordPerfect, used simple text only display with markup codes on the screen or sometimes, at the most, alternative colors.” (Wikipedia)

Using graphics for text seemed like a silly idea to many people at the time. Remember that word processing wasn’t a common skill back then; often, it was the domain of secretaries and administrators. Microsoft’s graphics-based word processor was sluggish, often taking seconds to catch up with fast typists. Professional typists, trained on Wordstar, considered word processing a “trade secret”: If you knew how to tweak a document’s arcane “Reveal codes” mode (analogous to editing HTML directly) then you were the wizard of the new steno pool.

But WYSIWYG dramatically increased the total addressable market for word processing. Instead of forcing customers to learn new paradigms that contradicted with what they already knew, Microsoft did the hard work for them. Graphics caught up, Word became more usable, and Microsoft won. They didn’t just make it easy to grasp: They actively courted Wordperfect users with a “wordperfect mode” blue screen and key mappings.

A great overview of the Microsoft and Apple battle talks about this:

In 1991 Word Perfect released Word Perfect 5.1 for DOS and Word Perfect 5.1 for Windows. Word Perfect was the biggest application of its day, but the company failed to adapt quickly enough to the popularity of the GUI … the famous but complicated ‘Reveal Codes’ feature which was rendered essentially obsolete by WYSIWYG editing.

Within a few years, Microsoft crushed everyone else. Here’s a chart from UT Dallas that shows the dominance of Word for Windows and how Word for DOS paved the way:

You may be thinking this just proves Microsoft’s monopolistic tendencies, but the UT Dallas piece does a good job of refuting this.

Microsoft Word was a superior product at a time when consumers were rethinking their adoptions  …

In 1994, Novell bought Wordperfect for $1.4B. Two years later, it was sold to Corel for roughly $124M (some components were kept and some sold, making the actual amount hard to value.) Today, Corel’s entire market cap is $237M, less than one time annual revenues and just 64% of its estimated value.

Ouch.

Clearly, you want to be Word, not Wordperfect. Opinions vary on why Word was able to overtake the incumbent. But I have a few ideas that apply to any new venture:

• Hang your hopes on a disruption. Microsoft realized that a new technology, the graphical user interface and mouse, would be a disruptor for the word processing market that would help average users produce complex documents that rivaled professional design applications.
• Don’t fight city hall. By making the product accommodate users, rather than trying to educate users about the complexities of layout and Reveal Codes, Word had a less steep learning curve and less explaining to do. When you’re explaining something, it means the benefits aren’t self-evident. And that’s bad. Your startup doesn’t have the time or the money to change the way people behave.
• Make it easy for people to move. Microsoft has always been able to import others’ file formats, and offers conversion tools. Sometimes they’ve been nasty about this (not letting people save back into imported formats.) But by making the screen background blue, or supporting Lotus’ “/” commands, people felt comfortable trying out the new product.
• Identify the barriers to adoption that limit your target market. The printing thing was such a headache that word processing seemed like a profession. Today, it’s just something we do. Microsoft has consistently tried to make its products appealing to everyone, giving them the largest possible markets.

* I have another way of paying for beers, but you’ll have to get some in me before you see that.

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. It’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.

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.

1. Cost-side economies of scale. By spending less money on development and amortizing fixed costs across more customers, they can milk the cash cow for more. Oracle’s roll-up of the ERP/CRM world, including Peoplesoft and Siebel, is a great example fo this.
2. Technology, particularly IP litigation. If one firm has a legal advantage, they may be able to “cash out” and let the other guys do the work. This is different from “patent trolling”, where there was no desire by the patent owner to bring the idea to market. Rather, it’s a pre-emptive response to what would otherwise be a lengthy and disruptive process for both parties.
3. Controlled pricing. If the company can own most of the market, it can often set pricing monopolistically because it is the de facto standard. As a result, it can dictate prices and boost its margins.
4. Expanding the total addressable market (TAM) of the company. When like competitors in the US and Europe merge, it’s a clear sign of this. Both firms want to address a global market and can’t afford the effort of a pitched battle on the others’ turf. It’s also a way to artificially show growth, to some extent, which might help move from a cash cow to a star.
5. Follow-on sales. It’s far easier to sell something to an existing customer than it is to go find new ones. So if one firm has customers, it can sell the second firm’s product to them.

This is a pretty fundamental list. But it does offer some advice to startups who want to ensure their Plan B is in place. So what should a startup CEO incorporate into their strategy to ensure a plan B?

• Be boring about what doesn’t make you special. This makes you easy to assimilate, and it wasn’t your strategic advantage anyway. For example, don’t use weird chipsets. Follow standard management interfaces. Use open APIs. Many of the networking companies Cisco has bought over the years used a command-line interface that Cisco’s support personnel could understand.
• File IP. You don’t want to be forced to buy someone because they could make trouble. Plus the act of filing will make you aware of what others are up to. The Content Delivery Network is rife with examples of this, with constant infighting between players. This means you still have some threats, and your acquirer something to show for their work.
• Charge the market in the way it likes to pay. Learn how the market likes to pay for things, then go along with it. If you’re trying to get your customers to pay per-CPU and everyone else pays per-seat, you’re going to have a hard time. In SaaS, this is often per-seat, per month. In on-demand computing it’s per compute-hour. For enterprise servers, it’s per computer core. It will make it much easier for your new spouse to assess your value.
• Pick a niche that others will need later. In some cases, this could be a foreign language version, a government sector, or an unusual region where you can be the market leader. Several companies we talked to have become real contenders because they “snuck up” on the bigger firms by getting big in Asia. You’ll be on the right side of a build-or-buy decision later.
• Plan to play nice with others. If you have a potential suitor in mind, create default configurations that work alongside them. Follow their pricing model. Find ways to augment them. Eventually, buyers will start putting your product on their invoice. Going back to Cisco again, NetQOS has done a great job of managing alongside Cisco’s Netflow protocol, even before it was a standard, and it’s contributed greatly to their success.

Done right, Plan B can be a great outcome.