Don Dodge (of the Microsoft Emerging Business Team) hits the nail on the head for creating a successful position from which to sell your start-up:
“It comes down to this; if the company in question has a product that is squarely in the domain of an existing Microsoft product than the valuation is some multiple of the internal development cost. If the company has market leadership in a new product space or market segment than the valuation goes up significantly.
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Entrepreneurs should remember this. The “barriers to entry” are most often market position, not technical brilliance.”
I come from a background of working in an environment of technical excellence. I’ve worked in software dev teams where the code doesn’t get released until it’s perfect (well, almost perfect).
That dev team was part of a department whose strategy has been to concentrate on the quality of the propositions they build to the detriment of staying ahead of the competition. They’ve focused on technical brilliance and not market position.
Looking back on some recent projects, that’s bitten them on the arse. Yes, all their existing products and services are nice and shiny. But they lack one or two propositions that the competition are already offering – and that they should have been offering first.
It’s easy for us geeks to get hung up on the quality of what we are building and forget that there maybe others out there who are more than happy to put out poorer code in return for market position.
In a start-up environment, this is critical – and is why we have so many “perpetual beta” services floating around (but you don’t need me to tell you that). The point is we’re now seeing how this plays out into the end-game, when it comes time to flip your start-up.
I’ve come to realise over time that it’s simply not about having the better product – it’s just as much about the market position too (which as a geek is pretty depressing).
I call it the Starbucks effect – your local café can have the best roasted coffee in the world, but people will still walk to the Starbucks around the corner because Starbucks have market position. And they could always buy in your better coffee if they really wanted to anyway.
Geeks and coffee connoisseurs (often overlapping demographics) will assess which RSS aggregator and latte house is best based on the quality of the product.
But the world isn’t full of geeks. Most people will make their choice based on what is popular, what they’ve heard of and what their friends are already using – and that’s something us geeks need to remember.