Thursday, June 17, 2010

The Young Man's Business Model

I've had an idea bouncing around in my head for awhile that randomly came together recently. And given I have a blog, I thought I'd write it down. This idea came from 3 experiences I've had - and here they are:

Mini-story #1:

In my early 20's I pretty much did 2 things. Ride motorcycles and code. Oh, and given my motorcycles were always sort of junky and I beat the snot out of them, I spent plenty of time fixing motorcycles too - I guess that's 3 things then. (If you think I forgot dating or went to bars or some such - nope. We're good. 3 things).

Every now and then we needed an "old man" (like in his 40's or something) to help us fix something when it was beyond our self-taught abilities. Now when I say "old man" here and throughout this article, I don't necessarily mean "old" (and I don't necessarily mean "man") - I mean "experienced". Experienced at whatever I'm interested in at the time - or more specifically, experienced at what I wasn't experienced in at the time.

And as far as fixing motorcycles, what struck me was the way he'd go about it.

A rather common case would be something like there being one final screw holding on some engine part that we needed to replace, but it was buried deep inside the engine - i.e. you could barely see it. My first reaction was to wedge a screwdriver in there as far as I could - and see if, with luck, brute force, and karma, I could turn it enough to get it out.

The old guy on the other hand never went this route. He merely looked at it a moment, then immediately started taking off the neighboring easy-to-remove piece of the engine. Once that was off, he then effortlessly put his screwdriver in to remove the now exposed screw. Now mind you, the old-guy's way was my back-up plan - but I was betting that my brash exuberance would payoff in a slightly quicker result. Sometimes it did - sometimes it didn't - and sometimes I broke screwdrivers.

This trade-off of investment up-front versus brute-force hope became so obvious that my friends and I used it as vernacular. "Do you want to try this the 'young man' way or the 'old man' way?". It was surprising how without any further explanation we would know all the precise steps involved in both for whatever situation.

Ok. That was mini-story #1, here's mini-story #2. This is a business story but its actually surprisingly similar to the previous one whether you know it or not.

In 1997, I was writing a Java optimizer (this made a lot of sense when Java was interpreted) called DashO. Somewhere along the line I was introduced to a guy at Adobe, who (I was told) wanted exactly what I was building.

When I finally spoke to him, it turned out that the Adobe guy didn't really want Java optimization at all. What he wanted, was Java application size reduction. It had literally become a show-stopper for what he was developing. He was clear that money wasn't a problem - if I could solve his issue, he was a customer.

Wanting to please my newfound (big-time) customer I said "Sure! I can add that in!". Then I shrewdly secured the Adobe guy as a beta tester. This changed the direction that my product took and added about 2-3 months of development, but given the payoff, it seemed worth it.

About mid-way through those 2-3 months my partners and I had lunch with a veteran ("old man") business guy that for some reason seemed to like us and liked to keep tabs on our progress. As I excitedly told him the story of Adobe waiting anxiously for our product, his reaction wasn't as I expected. I thought he'd be excited for us, but instead he had a look of disappointment on his face.

Me: What? What's wrong - this is awesome - Adobe is our first customer!
Old-guy: So you spoke to Adobe. Directly to an internal guy that's a customer
Me: yeah!
Old-guy: And he has plenty of money to solve his problem.
Me: yeah, tons!
Old-guy: And how much of that money are you going to get in the best case?
Me: erm. um. We'll sell a copy.
Old-guy: Right. A copy. Maybe a few if you're lucky.

Old-guy went on to discuss how that deal should have gone. Adobe had effectively contracted me to build them a product that didn't exist (this was true). It was possible that no other customers would ever want that functionality (possible). Simply put, they had a specific business need, lots of money to solve it, and had hand-picked me to be the solver.

I should have structured the deal as a contracting agreement. Charging on a per-hour basis to develop their product using what we already had as a base. Then, give them a discount rate on the hourly rate in exchange for full-rights to further develop and sell the product as our own. This would have been a 6-figure deal which would have meant a lot at that time. What's worse is you might be thinking that I missed an opportunity to fleece a customer - but I argue you're wrong. In fact, that arrangement would have actually brought more value to the Adobe.

In the old-guy's arrangement, Adobe would have then had a hand in guiding the project and making sure all the features they wanted were in the soup. Not to mention, if I didn't build this for them, they simply would have had to hire someone else to do it - probably spending lots more.

Once in awhile, you have a fucking-duh moment - and for me, this was one. If you're thinking "well obviously" then clearly you've done this before, at that time - I hadn't.

Story 3 - a recent breakfast.

I recently had breakfast with a guy I met at an entrepreneur event. He was CTO of a pretty popular website. When he first described his site, I liked the business model a lot. His site fed him data that allowed him to refine his real product: pre-built server boxes which he sold to companies that allowed them to use his software internally.

Visions of sugar-plums and multi-million dollar deals immediately started dancing in my head. As he talked, the rolodex in my mind quickly flipped from person to person. I thought of potential customers, potential partners and even maybe people appropriate to join his team. His product was good, and not that he asked me to, but I couldn't help forming a deal network in my head.

I asked about his sales infrastructure. His answer left me wanting but I figured he was probably still fleshing it out (a very hard task). I almost rhetorically asked about the sales cycle. There wasn't one. Now I was getting confused.

As we talked more it became clear that he and his company were following what I'd call the young-man's business model.

He was basically building a (good) product, then laying it out on the web for all to see and hoping to get a million eyeballs. The viewpoint of the business is to get eyeballs, often from things like Digg or Techcrunch, and then figure out how to keep them. And then amazingly often, this really is the step where entrepreneurs have no clue what happens except they are sure the next step is "and then Profit!".

This is an extremely innocent look at business - and in some sense, its the most logical one if you simply have no other avenues.

This model isn't wrong but now to me (who has of course only recently come to rather shocking self-realization that I am... an "old-man" at how I view business) it seems like a business model without considering connections. Deciding to make connections for your business of course isn't conscious. When something happens, the first thing that pops in your head is "Boy, Fred needs to hear about this". And depending on how many Freds you know dictates how often that idea pops in your head. (and of course, the more Freds you know, the more Freds you will know).

My old-man/young-man nomenclature may not be perfect but it might be statistically correct. Its probably safe to say that on average a 30 year old has a generally more business connections than a 20 year old. From there people simply follow business plans as they occur to them.

To me, my friend at breakfast had a sure winner if he had put together a solid sales and marketing infrastructure. His product should have been selling inside 6 figure deals with several month sales cycles. Now clearly, this model doesn't apply to everything. And plenty of new Web 2.5 startups don't fit this mold - but I also think many people underestimate the idea. So far it seems the evolution of all businesses, even something so webby as Facebook eventually becomes about making deals with big partners at least as much as its about eyeballs.

It wasn't so long ago that saying your new startup was monetized by ads wasn't scary. Some companies go right from eyeballs to ads and to sell-out. Thats great work if you can get it. But the number of eyeballs is limited. Its scary to think that, but on the web, we tend to give value away and "make it up on volume". The only problem is you need a hell of a lot of volume to make up for free. And 6 billion people isn't all that many when it comes down to it.

Personally I think web businesses are growing up. The eyeball business model is getting to be like Market street in San Francisco. Everyone is pierced, shaved, screaming, or on fire. They're crying for attention and they have to keep shouting louder than everyone else to get it.

I have plenty of opinions about business models, but to me, the best business model is one that makes your customer money. I didn't say "saves" them money - big difference. Also, its better yet if that customer is a business. You need less businesses as customers to be successful than if you had individuals as customers. A common sweet-spot is BtoBtoC. Supply to businesses that supply to consumers (and of course, make them money).

If you don't have a ton of business experience, try this - think about your next great web app, then imagine the slickest (or sleaziest, your call) old-man salesperson you ever met sitting in front of you. Picture the idea that this guy is really good at persuasion and networking. He can't code, you may not like him, and he wears shoes you wouldn't wear on halloween, but he's good at what he does. Then imagine handing the old-man 5% of the company (I know its hard, try - remember, its just pretend). You need him truly on your side.

If you had access to the old-man and his imaginary immense rolodex of connections. How else could you sell this? What value could you bring to some customers that currently you can't reach?

Your real business model might be hiding like that last screw holding on part of the engine. Despite you stubbornly breaking screwdrivers, you might not get to what you need. It might just be worth asking yourself, "WWTOMD" - What would the old man do?