It’s really hard to get your start-up off the ground and find initial product-market fit. Very few companies do. An even smaller percentage of entrepreneurs ever come up with Act II. Act I can take many successful tech businesses really far. Google did $15.9bn in revenue, $14.4bn came from advertising, $10.9bn of that came from Adwords. 20 years into its journey and after we have heard of Google getting into video, android, self-driving cars, maps, Google aps, infrastructure to power websites, Enterprise and so many other businesses – nearly 70% of Google’s revenue (and an even higher proportion of its profits) comes from the same business it entered when it was founded. Despite their diversification efforts of launching into new markets, things aren’t much different at at Salesforce (known for CRM, but also with Service Clouds and Marketing Clouds) or at Cisco (known for networking equipment but present in telephony and cable). Microsoft, after its amazing success with Windows, created an Act II in the productivity space – Microsoft Office. Remember, Act II is not a pivot. It’s a second great business.
Why is Act II so hard? When do you need to invest in Act II and how can you give them a better shot at succeeding?
Most businesses never even attempt to build a second meaningful product. For most start-ups, if you achieve meaningful success and market share with a first product line as we have with BloomReach Organic Search all the forces at work will cause you to double down on that business. Customer feature requests will be intended to enhance the existing product. Revenue growth on a larger base will feel like it more easily comes from growth in the existing product. Your distribution model will be much further along for your initial product, so you’ll put more into it. All of this makes sense if you happen upon an initial business whose market size is MASSIVE. The common element of the database market for Oracle, the networking market for Cisco, the CRM market for Salesforce, the Search market for Google or even the Ride-Sharing marketplace for Uber is that they all tackle markets that could be $50bn+ for the initial product they build.
Success in that initial market can take you an awful long way. But here’s the paradox – most successful start-ups don’t start by having their initial product tackle a $100bn market because to do so involves competing with an incumbent that has seemingly unlimited resources on their terms. The graveyard of start-ups that have directly attacked Cisco in networking, Oracle in databases, Google in search and Facebook in Social Networking is extremely large. So what do you do? You fight on the edges.
You attack Google not at Search but by focusing on doing a better job on a highly profitable part of their business (as Amazon is doing in Commerce) or a by riding a different trend (Apple with Siri and other apps steals Search views from Google). Start-ups employ similar strategies. There are a large number of start-ups focusing on the salesperson rather than sales management in an attempt to gradually eat away at Salesforce. There are noSQL alternatives hoping to gradually eat away at Oracle by dominating certain workloads. But here is the challenge. The exact thinking that leads you to pick a market segment that you can genuinely win, causes you to narrow your market size.
Many of the recent public SAAS companies have all but acknowledged that they need an Act II to take their business to the next level. Marketo bought Insightera to expand from Marketing Automation that is B2B centric to Website personalization. Splunk has rapidly expanded its suite of “Solutions” away from just IT operations to a whole range of other domains. All of this is about expansion of the addressable market. It’s about Act II.
At BloomReach we made the decision to expand our platform from a single successful application (BloomReach Organic Search) to a suite of applications to build a full personalized discovery platform. That is our Act II. It is off to a terrific start and I believe will at least quadruple our addressable market. I’ve learned a couple of things along the way:
- You can’t rush new products: If you are judging $1 of incremental revenue on your new product at the same value as $1 of incremental revenue of your existing product, you’ve forgotten the trials and tribulations you went through in your first business
- If you’re building a new product line, make sure it does not need a new distribution channel: You simply can’t take on building a new product and building new distribution at the same time. If your core business is in Enterprise in the US, make sure your second one is too. (It’s totally fine to expand distribution but do so for the same product, not a new one).
- Set up a separate team to tackle the new product: Focus is the key to execution and a separate team (at least in product/engineering) is the only way to drive focus.
- Don’t over-resource your new products: Remember most great software products fail because they don’t meet demand. Adding more people to the team doesn’t necessarily fix that problem.
- Build an appropriate financial plan: I’ve often gotten this wrong – expecting instantaneous results from a product lifecycle that has to go through its paces. You still need early customers. You still need to prove value. You still need to create customer success. You still need to invest in scalable systems. You can’t skip steps.
- Simplify, don’t extend the marketing: The temptation when you are selling two products is to double the size of your slide deck. Take the opposite approach and simplify.
Building and making Act II successful has been as hard as making Act I successful. I have many more resources ($s, customers, distribution, brand and technology). At the same time, I have many more distractions so I can’t take it on myself or with my co-founder. In fact, making Act II successful has involved creating an entrepreneurial team led by our product managers, tech leads and other execs on the management team. Hiring and mentoring entrepreneurs capable of building your Act II and moving obstacles out of their way is a necessary pre-condition for success.
Building a great company is like building cities. You go back and forth between building the infrastructure (highways, internet, waterways etc.) and building the new neighborhoods. Nothing is more exciting than adding another neighborhood, just make sure it’s somewhere people really want to live.