@tlas Insights

Freemium Vs. Premium

If you’re launching a web service for consumers, you have an important decision to make: how will you take your web application to market? You have a pricing decision to make and trying to grow your user base by selling at list price probably won’t work. Most successful launches involved products that are free for initial users.

Of course, free for initial users doesn’t mean free forever for everyone. Typically, Freemium refers to products that have two (or more) versions with the lowest functionality free to users. Think of AVG anti-virus or Adobe’s PDF. Premium refers to products that are sold at all levels but usually (and probably should be!) are offered with a free trial period (like many enterprise software products).

Your decision regarding Freemuim vs Premium is based on these factors:

• Support requirements
• Serving costs
• Go to market method
• Migration potential

Let’s be clear that this is a decision regarding shades of grey in many cases – it’s not easy but the above factors will provide a framework to think about it.

Support Requirements. Freemium models usually grow more quickly at first (free forever has a lot of appeal). If you think this will be the case with your offering, consider the amount of support you need to give to users. Some applications require customer support or labor to set up accounts. A Premium model can offer more controlled growth to ensure a good user experience as you grow your user base. And don’t think the community is going to provide support; certainly not initially. You don’t have a community yet and one will never grow unless there’s initial support.

Serving Costs. To have gross profits on a Freemium model, you’ll need solid adoption to the up-sale versions and/or advertising revenue. While your product could break the trend, about ½ - 3% of consumers typically upgrade from a Freemium product. If you’re selling other products (think of free photo sharing sites selling prints and coffee mugs), adoption can be slightly higher but likely won’t exceed 5% in any event. If your serving costs are high, you may not be able to afford all those free users and you may need a Premium model to ensure positive margins.

Go To Market Method. Growing your user base for a Fremium product requires building a consumer brand. There are limited options for partnering or boosting the initial user base outside of marketing. Successful launches depend on viral growth. This strategy is always scary to me – it you build it, they will come. A Premium product has a look and feel that’s more suited for traditional sales methods – channel sales, even inside sales. This is because you’re, well, selling (not giving something away). Implementing a Premium strategy means you can force-feed the user base to get it going. If the product has a viral growth opportunity, then you should be able to see it grow that way (you may need to change to Freemium for it to grow quickly).

Migration Potential. Let’s assume your crystal ball will have a bad day when you make this decision and you need to change your mind. Moving from Freemium to Premium will require breaking a promise to your users (the promise that the product will always be free at its base level). You can only do this in the very early stages of growth and, even then, it could be quite costly to your reputation. If in doubt, launch with a Premium model because changing from that launch point is more palatable.

It might sound like I’m advocating launching your product with a free trail period instead of a free version. I’m not. This is a complex decision that every company must deal with differently – I believe this framework will allow you to make that decision.

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Sales Commission Plans – It Doesn’t End with the Percentage

We’ve dealt with many commission plans. Some we inherited, some we wrote. And we’ve faced the unpleasant task of disputes related to them. First-time drafters of commission plans don’t realize that a plan only starts with the commission percentage – there’s much more.

Commissionable Sales – It may be obvious, but we need to state what products or services are commissionable. In early stages you probably intend to have your one or two salespeople get a commission on whatever they sell. While stating the product or service in the plan might seem unnecessary, think about the potential of some new product or service or signing a distributor. Maybe the same commission rates should apply but maybe not – best to state what you want the person to sell and leave anything new to be discussed.

Commissionable Amount – The plan has to state if you’re calculating commissions on gross revenue or revenue net of deductions. In some cases, you may have high shipping or license fees that need to be deducted before the calculation of commissions.

Territory – Territory can be defined as a geography or a market. If using geographic areas, we usually state that the office of the decision maker represents the location. In some cases, one company might have multiple possible locations (say you’re selling recycling services to Walmart and the store manager makes those decisions) or they might have one (if you signed a deal to distribute your product in all Walmart stores). A market territory is usually a vertical market like “local governments” or “home builders”.

House accounts, exempted accounts – Are you actively pursuing accounts that need to be exempted because they’re going to be “house accounts” (nobody gets commission – maybe the CEO is handling) or because they’re near closing? Upsales – The commission rate for sales of a new product to an existing customer are often a bit lower than that for sales of a new product to a new customer. If you have customer support, will you ask them to upsale? If so, will they get a commission? A good friend told me that commissioning CSRs on upsales drives a wedge between them and Sales unless there’s a commission split. I lack direct experience but that sure made sense to me.

Renewals – Like Upsales, renewals are easier than initial sales and usually carry a lower commission rate. The plan also has to state for how many years a commission will be paid on a customer’s renewals; usually the rate declines over time. We often limit these to two or three years but some companies (where renewals require substantial effort) need to pay commissions on every renewal.

Override – If you hire a sales leader, he’ll have his own deals and he’ll be managing a team. It’s customary to compensate a sales leader with an override commission on the team. This override commission is usually about 1/10th to ¼ of his normal commission rate. And don’t forget to do the math on total commissions you’ll be paying on each deal. Duration – The effective period of any plan should be directly proportional to the amount of time the company has been selling. startups producing their first commission plan should enact plans with periods of a quarter or two because the chance of such plans achieving target total compensation is slim. Short periods just mean there’s an anticipated review of the plan.

Multiple Recipients - Commissions are determined individually and not based on the combined sales efforts of other salespeople. Where the company has authorized more than one salesperson to be involved in the sales activity, and a sale results, the company will determine the allocation of commission earned between or among the salespeople and the total commission paid won’t exceed the commission otherwise paid to the person with the highest commission rate.

Confidentiality – The plan should stipulate that the contents of each person’s plan are confidential and not to be shared within or outside of the company.

Channel Sales – The plan should carve out any channel sales opportunities and either assign those as house accounts, to someone with that specific responsibility, or at least use a different (smaller) commission percentage.

No Representations – Be sure to remind the sales team that you’re not making representations, promises or predictions regarding: (a) the amount of any net sales proceeds or the ability or likelihood of the Salesperson to earn any commission; or (b) the assignment, allocation or continuation of any accounts, clients, customers, territories or regions.

Prior Plans – Be sure to note that any prior plans are no longer in effect.

Timing of Payments – As a CFO I like quarterly payments as they reduce the processing cost but whether monthly or quarterly, they should be based on customer receipts, not “sales”, especially when cash flow is a critical measure.

Pricing – To be commissionable, sales must adhere to the established price list(s), unless given specific authority by someone of authority.

Returns - In the event that a customer is refunded in part or in full, the company will recover the appropriate amount of commission paid from the salesperson.

Active Status – We usually state that the salesman has to be an active employee on the date his commission payment would be paid in order to be eligible.

Draws – I just hate draws. They’re a payment without a link to activity at a time (when the sales person is getting started) when activity should be highest and results (momentum) matter most.

Pipeline Payments – You should expect something a little out of the ordinary from Atlas and here’s our offering to sales comp plans: the death of draws! Bring on the Pipeline Bonus! When your salesperson is getting started, the expectation is a growing pipeline. So, rather than write a check not dependent on results - pay for performance; pay for building this pipeline. Is it exact? No. Is it easy to defraud the company? Yes. But is it much better than a draw? Oh yeah.

The idea is simple. Standardize stages to classify deals. Here’s an example:

• 10% - Prospect Stage - transferred to regional manager and contacted; some interest.
• 40% - asked for a proposal and have expressed buying interest.
• 60% - proposal is in engagement and negotiations are being discussed.
• 80% - Yes to Terms - champion or decision maker has agreed to terms and to buying.

The salesperson builds a list of potential customers in the pipeline report (this usually includes prospect name, contact person, potential revenue, next steps and other items that are company or product-specific).

The probability weighted revenue of all deals in the pipeline yields the value of the pipeline and we measure that against goals that are set with mutual agreement between the salesperson and management. We use this pipeline payment during the period we expect no actual sales due to the duration of the sales cycle or while waiting for product completion or general assimilation.

We usually give salespeople the opportunity to earn a little more than the draw we would have paid if the greatly exceed expectations on the pipeline.

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Atlas Accelerator Continues Expansion By Merging with Platform Marketing Group

Atlas Accelerator Continues Expansion By Merging with Platform Marketing Group
Venture Consulting Firm Builds Out Internet Marketing, PR and Communications Services

June 19, 2008 - Atlas Accelerator, the largest venture consulting firm in the Pacific Northwest focused on growing technology companies, has merged with Platform Marketing Group, a Seattle-based strategic marketing consultancy.  This merger broadens Atlas Accelerator’s existing finance, operations, sales and technical expertise with strategic marketing services including Search Engine 0ptimization (SEO) services and Internet Marketing and Public Relations.

Atlas Accelerator has helped start-up companies hit key milestones for over ten years by investing time and resources in filling critical operational roles. Atlas Accelerator invested about $2 million in 2007, and will invest over $4 million in 2008. Like other Atlas services, the new marketing practice will use Atlas Accelerator’s unique venture consulting model to provide services for a blend of cash and stock.

“Working with Atlas gives companies like ours access to world class resources we wouldn’t otherwise know how to find, or be able to pay for,” said Michael Droz, CEO of TagCow, an Atlas Accelerator client. “We’re looking forward to Atlas providing a broader range of services to help us grow our business more quickly.”

Platform Marketing Group built its consulting practice by designing and executing high impact launches, internet marketing campaigns and overall communications strategies for over 15 private and public company clients since its founding in 2001.

“As CEO, my mission is to help my company grow by finding new markets and opportunities while conserving resources,” said Matthew Sutton, CEO of Hyblue, a Platform Marketing client. “This merger means HyBlue has an opportunity to tap into a broad range of technical and business services that are optimized specifically for startups.”

“Joining Atlas means that Platform Marketing clients now have access to the resources, networks and brainpower of Atlas Accelerator’s high-performance team,” said Cornelius Willis, Founder and Principal Consultant at the Platform Marketing Group. “Adding our Internet PR and search practice will help start-up companies get launched and get noticed when they need it most. And Atlas Accelerator’s innovative business model gives entrepreneurs a unique, unbeatable advantage, allowing them to conserve precious start-up cash as we help them bring  innovations to market.”

In 2007, Atlas Accelerator added deep technology and development expertise and a top-notch sales acceleration team by adding industry veterans Michael Cockrill and Brant Williams, who joined the firm as managing partners. Earlier in 2008 Atlas announced its merger with the Athena Chiefs placement firm, and the formation of Atlas Recruiting, led by Athena Chiefs CEO Tom Ryan. Cornelius Willis of Platform Marketing Group will join Cockrill, Williams, and Atlas Accelerator founder R. Michael Crill as a fourth managing partner. Atlas Accelerator will continue to grow to serve companies in the greater Pacific Northwest, including Seattle, Boise, Portland and Vancouver, BC.

For additional information on Atlas Accelerator and the merger, contact Cornelius Willis ([email protected]) or visit http://www.atlasaccelerator.com.

ABOUT ATLAS ACCELERATOR - Atlas Accelerator is the largest consulting firm in the Pacific Northwest focused on the needs of growing technology companies. Atlas fills critical roles in
early stage companies so they can make stuff, get noticed, sell stuff and operate themselves. Atlas Accelerator has helped over 100 startups get off the ground. Over 85% of their investments successfully moved to the next level. To date, 23 have had liquidity events.

ABOUT PLATFORM MARKETING GROUP
Platform Marketing Group develops and executes communications strategies to help companies connect with the influencers and buyers that are most important to their business.

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Dilution is Your Friend

One the most common discussions we have with entrepreneurs relates to valuation of their A round. Series A stock is quite difficult to value - the company typically has no revenues, the team is incomplete, the story is compelling. These factors mash against each other on the whiteboard of valuation calculations in a bumbling way that eludes quantification.

And so, we’re left with a general sense of comparable industry values for early-stage companies. For the most part, Series A rounds are priced between $2MM and $5MM. There are many exceptions to this and venture-backed Series A rounds are nearly always priced higher (and they’re more mature or more attractive companies).

Most of the deals we see should be priced between $2MM and $4MM (we work with companies on the earlier side). And now to the common discussion – where to price the round. We make no secret about the fact that Atlas advocates under-pricing the security. The pain of watching a deal get stale after an energetic entrepreneur spends more than six months trying to raise $1MM is great but the long-term impact of an under-funded enterprise with a CEO that’s never out of fund-raising mode is greater. We believe that lower prices correlate to shorter funding cycles. I suppose that should be intuitive but what’s not intuitive is the relatively minor toll the founder pays for a lower share price.

The mode for the size of an angel-backed Series A is about $1MM. Let’s assume that our Series A is to be followed by a $5MM Series B and that we have options to issue as well. Our founder starts out owning 100% of the business but sells $1MM in the Series A. Below you see the outcome using either a $2MM or $4MM pre-money valuation.

The founder’s share moves from 47% to 60% if the valuation doubles. Now, on to the Series B round where we raise $5MM at a $10MM pre-money valuation.

After the Series B, the founder’s share will have moved from 21% to 28% based on doubling the Series A valuation. And now let’s sell this company because, heck, that’s what we’re all here to do. Here’s a summary of the outcomes, post-Series B, of a sale at different sale prices.

In this scenario, the $50MM exit is probably about the minimum that the venture investor would like (I won’t say accept because there have been too many exceptions). Now, think of the marginal utility of that $3.4MM to someone who just made $10.5MM. This difference is about the same as if the company sold for $20MM before the B round (the founder would make an extra $2.6MM after earning $9.3MM).

Halving the valuation of the Series A has a radical effect on the likelihood of closing that round and the time and effort involved in doing so. Since most start-ups fail to close their first funding rounds, entrepreneurs should consider lower valuations to ensure success (I’m not advocating halving: rather, reducing). On the contrary, the marginal utility of capital of, say, $3.4MM to a successful entrepreneur cashing a $10.5MM check is not “radical” – it’s the difference between “I never have to work again” and “fuck it, I’ll have the chef come to my house rather than go out”.

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Convertible Notes, When to Use Them, How to Structure Them and Why Investors Hate Them

Ahhhh, convertible notes. So easy to use, such a comfortable way to avoid the “v” discussion (valuation), so simple to understand. But why aren’t they universally loved?

Let’s think about convertible notes in two classes – standard and “true convertibles”. Standard notes are used more often than they should. They remain in effect for long periods (over nine months) and are issued before the triggering financing event is easily foreseen.

These standard notes are quite often an inappropriate use of a convertible note. Sure, they avoid the valuation discussion but leave investors with poor value given the risk they’re asked to take.

Investors set out to achieve about a 10x return in most of their early-stage deals. It takes about four years to get that return so about 2x per year is required (I’m allowing for some compounding) with higher returns in the early years. First-money in a start-up needs better than a 250% return in that first year to make this work. Well, I suppose you could offer a 250% per annum discount on a convertible note but something tells me the math will be problematic. Investors who buy convertible notes as first-money in start-ups without a clear plan (e.g. company is in diligence with the Series A investors) to trigger the conversion are taking all the risk an equity investor would take but without the reward.

True convertibles are different. This is a convertible note issued when the note will likely convert in under nine months and they’re particularly appropriate when the issuer needs to extend cash-flow negative operations for a few months while diligence is concluded or while the business completes a transition to profitability.

As to structure, there only a few terms that really matter.

• Discount or Warrants. For the unfamiliar, this is the key consideration offered with a note. The choices are a discount that allows (well, compels, actually) to convert his note into the upcoming security at a percentage of price paid by those who buy the security directly. Warrants represent the right to buy future shares at a fixed price and, in the case of convertible notes, are typically offered as a percentage (called “coverage”) of the note. Ten percent warrant coverage would typically mean that the note holder receives one warrant for every ten dollars loaned on the note.The advantages of discounts include lower taxes for the note holder (long term capital gains since warrant holder seldom (or seldom should) exercise their warrants within 12 months of an exit) and more voting, pro-rata, and other rights (warrants don’t provide the rights of the underlying security until exercised).
  The advantage of discounts to the company is a somewhat simplified cap table. A disadvantage of warrants is subtle. Since all issued warrants will also reduce the per-share price of future rounds (i.e. they are included in the count of fully-diluted shares), the warrants have to be purchased but there is no positive adjustment for their purchase price. Hence investors treat warrants as more costly (they have to be bought); they have all the negative impact on the cap table with no offset for their eventual positive impact. The advantages of warrants include… well, there are none. In fact, discounts are so much more favorable to investors (largely due to taxes), that a company should be able to offer a discount rate that is about 80% of the warrant coverage it would offer; a structure benefiting both sides of the transaction. That is to say at a 24% discount should be preferred by investors to 30% warrant coverage given the tax and other benefits and the lower discount is certainly preferable to the issuer.
• Linear Discounts. A per-annum discount of 30% - 50% is reasonable in most cases. But how that is structured matters a good deal. It’s a mistake to simply award a set discount to all who invest regardless of when they do so. For the company, it makes raising money harder as investors are not incentivized to invest early – a smart investor will be the last note purchaser. Discounts can either be earned linearly (e.g. 3% per month) or non-linearly (e.g. a cumulative discount of 10% in the first month, 7% in the second, 5% in the third, and 3% each month thereafter). Non-linear discount schedules incentivize early investment more heavily.
• Trigger for Mandatory Conversions. This is largely misunderstood. The trigger is the amount of capital raised in the pending equity financing that will mandatorily convert the debt. Too often, companies assume that it should approximate the capital requirements of that round. This is wrong. The trigger should represent an ample capital raise to eliminate the potential of the company dragging the convertible note holders into a non-market based financing round. If the trigger is set too low, the company could close on a questionable and company-friendly round to the detriment of the note holders. The trigger should be set at a minimum of about $250,000 or two times the amount of the convertible note, whichever is higher, to avoid this.
• Maturity. Convertible notes should mature in one year or less.
• Actions at Maturity. Too many notes are simply written with a balloon payment upon maturity. This is an invitation for a later negotiation. If the note isn’t mandatorily converted prior to maturity, the company has likely stumbled and is unable to repay the notes. The note holders will meet with the business that they now effectively own and negotiate next steps. Better to offer an alternative that has some potential for viability. We favor giving the company the choice of either making the balloon payment or increasing the interest rate to the usury limit and repaying over time.
• Conversion Prices. Investors should have two different conversion prices: one for a change of control while the note is outstanding (this should be set at the market price when the note is issued) and one for an optional conversion upon maturity (this would be a bargain price as the company failed to cause a mandatory conversion).

There are other factors like interest rates (typically 6 or 8%) and secured interest (companies should offer first position on the assets of the company and investors shouldn’t think that’s going to give them much) and others, but they’re either well-understood and agreed-to or just don’t matter.

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Sales Blunders - Blindspots

If the first time you’ve heard a customer’s objection is on the first sales call, then it’s too late. If you’re a sales-team of one (meaning you’re the CEO), then it’s your job to listen for what your customers want BEFORE you’re done building the thing you plan to sell to them.

It may seem like simple steps, but it’s rarely done. How many times have you seen a ’solution looking for a problem’. That doesn’t build great companies…that doesn’t even build mediocre companies. Just because something is ‘cool’ doesn’t make it a commercial success.

Get in front of your customers, learn who they are, what they care about. Let them know that you plan so solve some big problem for them and make sure that what you plan to solve is in fact a big problem for them.

Building in a vacuum is like kissing for the first time. You think you know what you’re doing because you’ve seen it and have an idea of how it should go. OK, that’s a really bad analogy - hope it brought up some funny memories for you all.

Get the picture. Build a relationship with a few key customers BEFORE you complete your product.

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No, they won’t validate your parking

For those of us who work regularly with the venture community, we take certain rules or behaviors for granted. I’m occasionally blindsided by an entrepreneur’s (completely reasonable) questions or false assumptions about how to handle venture meetings. It’s been said, and rightfully so, that I’m a fan of venture capital. You won’t see many derogatory comments below but know that there are certainly others who will augment my advice with more cautionary lists. The below set of rules includes the obvious and the more-obvious. My contemporaries would agree with most and I’ve tried to note where I’m likely stepping out of the conventional view.

• Let’s start with a controversial one. Don’t take a meeting until you’re (almost) far enough along for them to offer a term sheet. For the most part, VCs love to take meetings. And why not? They’ve got a squad of young, smart MBAs armed with limited industry knowledge. These initial meetings help to educate the associates. If you are successful in developing your business, every VC would be happy to have built a relationship. So, in general, they want to see you and hear your story.

Sure, there are stories of VCs who built a long-term relationship with someone and watched as the company communicated milestones then knocked them down. Hearing about the day that a six-month relationship turned into a term sheet makes me think of the covers of romance novels I see at the grocery store checkout line.

But these are small minority. And what risk do you take for going in too early? Well, you may only get one chance. If you’re dismissed as someone with an idea that doesn’t resonate with the audience, you’re likely done. If you just blow the presentation, second chances can be hard to get. Sure, companies do get passed up and then re-emerge, but why take that risk? You can just make a good first impression when you’ve (almost) got your story ready.

• “They didn’t say no”. Well, yes they probably did. There’s little motivation for a VC to decline a relationship clearly. Who knows? You might turn it around. You’re surely going to talk to others and no venture firm wants a reputation for saying no. The absence of a follow-up request is a no. Sorry about that.

• Dress code. There’s not much to this but here’s a few points. First, if there’s several of you, talk among yourselves and look like you came from the same office. I had a meeting where my CEO wore a suit and tie and the CTO had jeans and flip-flops (no, seriously, flip-flops). Second, relax (subject to the flip-flop comment preceding). Most venture partners and associates are business casual (I was surprised to see this even on a recent trip to Manhattan). And if you’re an artsy-smartsy guy, you’re expected to look like it. The founder of Seadragon, a Princeton PhD and one of the smartest guys on the planet has never worn anything but a black t-shirt (I’ve asked to see the baby pictures). Hey, when you’re that cool and you’ve got a thing, go with it. Just make sure you’re CFO doesn’t show up in a suit (of course I didn’t).

• Sit on one side of the table. If there’s more than one of you, sit on the same side of the conference table, facing the door. You’ll be able to see the partner when she enters and, by sitting on the same side, you can keep eye contact with the people who matter (not the ones who joined you in the rental car).

• Arrive early. Something’s going to go wrong. Your two-monitor set-up will flummox the big display, the wireless password won’t work, the last guy took the Ethernet cable. Get there in time to figure it out.

• Have a back up. It’s easy to put your pitch on a second laptop. Cheap insurance.

• Not that they want them, but remember your business cards and if you don’t have them yet, spend the $40 on line.

• Assume the meeting will take an hour and, if you’re making the rounds that day, leave plenty of travel time. It’s better to take another day than to risk showing up late.

• Pay attention to who’s in the room. The General Partners or Managing Directors matter more than the Vice Presidents or associates. It’s a good sign if, during the meeting, someone suggests an addition to the meeting.

• The time to debrief is in the car. Resist all temptation to say anything about this meeting or the next meeting in the elevator, hallway, or, for the love of god, the bathroom.

• Don’t go it alone. It’s usually best when two people make the pitch. Three is the max and only works when there’s clear distinctions among them. Rehearse who’s going to talk to what slides and, more importantly, who will answer what genre of questions.

• You’ll find that certain phrases work for you. Don’t think you need to shuffle your language because you’ll sound scripted. When you’ve got a statement that works, resist the temptation to say it differently because you just said the exact same thing two hours earlier. Nobody’s comparing notes.

• And don’t ask them to validate your parking; you’ll look like a dork.

Disclaimer
I’m offering advice with the hope that it’s useful. In order to make it more so, I’ve over-simplified and generalized. Sure, there are exceptions to most of the statements I make but please don’t think you’re going to be a hero by pointing them out. We know them. I’m focusing on the middle 80% of the bell curve and offer conservative advice that most people can follow and win. Yes, I’m aware of Skype and Facebook, really I am. But I’m not willing to assume that your project is going to put you on the cover of the Business 2.0, let alone Forbes.

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Focus Kills Companies

One of the more common words overheard at board meetings is “focus”. It always seems like the right thing to say and it’s a basic tenet of marketing strategy. Heck, even the military covets it as one of the fundamentals of warfare.
But, for start-ups, focus can be deadly.

In the mid-late 90’s, I co-founded a company named ThinGap motors. The technical founders met with me over breakfast at a Santa Barbara beach restaurant and displayed their medical drill that featured a new motor design. The motor had an exceptional power-to-weight ratio, emitted less heat, operated in high ambient temperatures, and would operate longer from a given batter charge. After we talked for a bit, I offered what would prove to be a piece of good advice that was followed by a series of missed opportunities for the same. “Why not just build the motors?” I asked. And so the three of us set out to build ThinGap Motors, Inc., a start-up with, frankly, some of the coolest technology in the industry.

And our first market? Well, medical devices, of course. Using the $1.5MM or so we raised in our series A, we set out on sales calls and developed commercial prototypes. But after several unsatisfying months, we discovered that a match between our motors and medical devices was not to be. FDA approvals, long buying cycles, the need to design the motor into a product with acute footprint constraints crushed our hopes for quick sales. It would be many years before such sales could be considered and ThinGap would have to grow from its “start-up” demeanor to be taken seriously.

Time to focus on a new market.

The ThinGap motor had no cogging (the stuttering feel you have with conventional motors when you slowly spin the axis); it responded quickly to commands and these qualities made it ideal for pick-and-place machines (the robotic machines that place components on circuit boards). The team made trips to Japan where the motor was met with justified enthusiasm. More sales trips, prototypes. But the enthusiasm proved naïve for a development that required firmware changes, design-in and resulted in a 10% improvement*.
Time to focus on a new market.

Over the following years, there were many. To our (limited) credit, two or, occasionally, three at a time: Hand-held power tools where the ThinGap motor would offer more torque or longer battery life (long buying cycles, design-in was significant, lack of trust in a start-up); the automotive industry would benefit from the lighter weight and smoother controls our motors would offer (difficult market to penetrate, long design-in cycles); even windmills which need to keep spinning in low winds and, thus, need an efficient motor lest the power providing continuous movement negate the power generated (needed to scale the motors well beyond their then-current fractional horsepower size); and others.

By 2002, ThinGap had exhausted the patience of its investors. The promise was still present but market adoption always seemed just out of reach.

Then we discovered oxygen concentrators. Or, rather, that market discovered us. For a person needing supplemental oxygen, the battery life of the portable device is the governor on leisure time. The efficiency of the ThinGap motor would increase the time between charges from about two to four hours. Now a movie is possible and dinner isn’t just “usually in the safe zone”. Sales began slowly but then soared to bring the company to break-even.

If, instead of focusing on one market, we had cast a wide net – considered any opportunity, attended more trade shows, engaged any interested party with a nominal budget to vet their interest – we may have found traction much earlier and with far less expended capital and fewer earned frequent flier miles.
The point is that we thought we were selling when we were actually marketing. Selling is an activity that occurs when you have a defined customer type, a product or service that you know that customer will buy, and a price at which they’ll buy it. Sure, there’s business development where some of these factors might be in a range but they’re present.

Start-ups usually have a product or service with enough novelty that the customer, pricing, and other requirements are unknown or at least unsure. Initial market outreach might look like selling (more on this below) but it’s marketing. It’s information gathering. Cast a wide net and have an open mind.
This market research can best be called market validation. But a salesperson is the right tool for the job, not someone who calls himself a marketing expert. The desired outcome is that salesperson’s enthusiasm: “I can sell to this market at this price. This is the decision maker. These are the objections and here’s how I effectively resolve them. This is the sales cycle. I’ve closed a few deals and here’s my pipeline”. You won’t get that from marketing.

So, when your product or service is ready to demo, get it out there. Go broad and feel free to try markets and approaches that might seem unusual. And remember the Operations Excellence credo – you don’t know what you don’t know.

* Technology improvements are often thought of in two categories – significant and the 10% improvement. The latter offer inadequate change to justify the disruption cost of their adoption. And it’s not just technology; many in business have little patience for such innovations. I recall hearing Larry Bossidy (CEO of AlliedSignal) say: “Incrementalism is the sign of a mediocre mind”.

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Myths about good salespeople

I’ll start by saying the CEO is the best salesperson a company has. That’s the case for the first 5 customers - or the first 500 customers.

I’m in sales. A portion of our business is based on our ability to sell concepts/widgets on behalf of our clients - and teach them how to do so. We talk to a ton of entrepreneurs - and it’s still shocking to me the profile that entrepreneurs have of the people to whom they will trust their livelihood. It seems there are 3 fundamental misconceptions about good salespeople:

1) They are great at talking/pitching…

No. What really makes a good pitch is understanding your audience and how that audience measures success. The best salespeople in the world are great at asking questions and LISTENING for gold in the answers. Beware the salesperson who shows up in a meeting and takes up anywhere near 50% of the time. The worst thing you can do in a meeting is to ’show up and throw up’. Even moderately skilled salespeople know this - however I see startup CEOs do it all the time. Spend time with the other human beings in the room, and learn what great result of the meeting would be.

2) Great Rolodex is required…

Nonsense. While world-class salespeople do have a powerful rolodex…that does not mean that having a rolodex makes someone a great salesperson. The purpose of a rolodex is to get a meeting and leave some level of trust within the target organization. It will NOT get a million dollar check cut. The product needs to solve a serious problem for the target - otherwise the best contacts at the company aren’t going to get you the deal. So look for a sales resource that can understand choosing the right targets, and choreographing the nuance of an enterprise sale.

3) Dial-for-dollars.

What?..really? You’re going to trust the future of your company to someone because their inexpensive and is willing to call strangers?

Yes - willingness to get on the phone / on a plane / on email is a must. However I would rather call 5 people and have all 5 of them buy, then I would call 100, create 15 conversations, where 3 of them buy. Choose someone who can identify who it is that is losing sleep tonight (the actual individual who is losing sleep - not just the industry or company) because they don’t have what it is you sell. Find out how to get in front of them so that they realize it solves their problem. And then get on the phone.

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Welcome to the Atlas Blog!

Atlas has been around 12 years…helping startups grow, fund and execute their ideas. We’ve worked with over 100 companies - playing every strategic and tactical role in the book. Why in the world haven’t we been blogging to share some of what we’ve learned?!

Now we are. We will write as the CTO, CMO, the CFO, a board member, an investor - and the operational roles we fulfill.

You are entrepreneurs…Those who are willing to create something from nothing, commerce where there was none, solutions where there were problems. Keep it up - we hope this will help.

Onward,

Brant, RM and Michael.

Posted in News and Goodies | 2 Comments »