Do or Die – The Adoption Venture Funding Quagmire

November 14th, 2013 by Matthew Rosenhaft Leave a reply »

For disruptive technology companies, the key is to become less disruptive in your adoption. For technology venture investors, the key is to minimize your cost of adoption to the buyers, which will drive your market adoption. Investing in the market before buyers is an expensive proposition for which there is a better use of funds.

Venture capital is a risk management game. Invest in a certain number of companies, expect a certain number will fail, but make sure you have a minimum number of “wins” sufficient to drive a return. Simple, right? Not really because the elephant in the room is adoption. Great technology, but unable to find a market, couldn’t capitalize on the early wins, couldn’t get it to market, beat by a weaker technology, bigger guys moved in, etc.

Let’s face it, if technology investing was really about “technology”, every venture firm would be really a R&D shop. Good technology is the first step in developing a technology company on the way to building a market to driving a return.

I know, as I was one of those wiz-kid CEOs back in the Dot-com days. I raised $10M between debt and equity. Business plans on the back of napkins, market potential, first mover advantage, buzz, pre-market valuations, pre-technology investments based upon concepts. I flew around the country pitching venture firms in all the right places. I also failed spectacularly. For a lot of reasons, but let’s say it wasn’t about the technology or probably even management. It was all of the soft things – board, risk management, burn rate, expectations, fundraising, forecasted demand, and go-to-market planning. Funny, in all of that, I never thought about adoption. I remember working hard on the hockey-stick model. It was laughable when I first started, but everytime I got questions from investors that I couldn’t answer; it got better. I even survived a 2 hour grilling from a former CEO of American Express. Talk about nerve-wracking. I was 28 and thought I was the “game”, but it was all false bravado.

But, in retrospect, no one ever asked me what problem we were solving and for whom. It was about technology and market, but it wasn’t about buyers and problems. It wasn’t about how do we help them understand what real underlying, systemic major business issue can we fix? How do we recognize a company that has “our” problem? How do they recognize it? How do they make decisions and get concensus to move forward?

I think back to all of the money we spent on brand awareness, product marketing, acquiring customers, and even planning for customer service. When in reality, we should have focused on the end first. How do we satisfy them to sufficiently fix their problem? How can we exceed their expectations in the fix process versus just deliver the solution.

It is funny in that most technology companies are so myopic on trying to improve what their technology does, but they forget about what their technology doesn’t. Most of the time, it is what you can’t control that affects the perception of your product’s value. “We delivered the system, everything is working fine, but we can’t get the users to use it. Not our fault!”

Voice of experience over many of start-ups, technology product launches, and implementation projects now leads me to see it from the buyer’s perspective.

If it doesn’t fix the right problem, it isn’t that valuable:

  • Fix implies people actually use it
  • Right problem means that we aren’t treating superficial symptoms, half the problem, or we misdiagnosed
  • Value is not only just in the outcomes, but in the process. If it takes you 3 times to get it right, it dimishes the value.

We all know that the transparancy of online peer communities is impacting market expectations. I don’t have to buy it to know what is in it anymore. I can go online and check your references prior to even contacting you. I probably know more about how it really does in the real world better than you do because I actually asked someone who tried to get it to work.

Bottom line is that venture funding isn’t about technology innovation anymore. The VC community doesn’t usually fund on innovation or concept, they want the proof-of-concept complete (usually). Angel investors are expected to have not only gotten proof of concept, but also funded through proof-of-market viability. Series A is about market expansion, not survival.

But, I would contend that Series A investors are looking at adoption from a seller’s lens, not a buyer’s lens. I think that actually increases their risk to their portfolios. The 18-36 month model is built upon a seller’s adoption modelling – investment for building market awareness to the potential market, with an expectation of a trickle-down response rate, with the assumption that a certain percentage of companies will make it through the adoption wall to build their market, while holding off the competitors. X companies won’t make it through year 3, Y companies will not hold off competitors to retain market leadership so their valuation will be middling, and hopefully a couple will make it through years 5-7 with their market leadership intact.

Major Burning Questions

But, what if what we understood market development wasn’t the same today? What if we the new online virtualization of markets, the online peer world, that you didn’t need to make the same level of investments to drive adoption? What if you could find pre-market buyers who self-identify to the problem? What if you could focus your efforts on identifying likely buyers based upon their needs rather than wait for the market development to fish them out of the potential pond?

Do you still need 18-36 months to prove that their are buyers in need? How about less than 6 weeks to identify problem differences, buying process differences, and pre-market buyers in their communities they are engaged online. It only takes about 3-6 months to build the inbound problem adoption framework.

Don’t you still need to build market awareness? Is the market awareness about the problem or the solution? Buyers know if they have a problem. Do you need to “build it and they will come” or can you talk to them about their symptoms and their diagnosis in their peer communities?

Don’t you still have to educate them on your disrutptive innovation? How will they buy if they don’t understand? Win the battle, not the war. I don’t have to educate you on the wonkiness of my solution to help you understand that you have the problem I solve. If it is a must-fix problem, I will jump at the chance to discuss my problem with you as an expert. If you are a technology looking for a problem, I don’t have time to determine whether it is relevant or not. Most likely buyers who probably have your problem, don’t know they have it, let alone know that you can solve it. Start with the problem and tailor your education around your technology to fixing the problem, not the features and functionality techology. Technology is an enabler, not the solution.

Matthew Rosenhaft

Matthew is a Social Marketing Executive and is co-founder of Social Gastronomy, LLC and the Social Executive Council. Prior to founding Social Gastronomy, Matthew has over 18 years’ experience as an executive in marketing, product management, and sales. Matthew has an extensive background in the SaaS Software, Social Media, Mobile, IT Services, and Telecom industries. He has prior entrepreneurial experience as a founder and executive in several early-stage venture-backed technology companies, as well as, holds several US patents for a mobile marketing technology. Matthew is a prominent blogger and regular industry speaker on social marketing and strategy topics. Matthew’s blog can be found at www.socialgastronomy.com/blog. For more information on Matthew, you can check out his LinkedIn profile at www.linkedin.com/in/rosenhaft or contact him directly at mrosenhaft@socialgastronomy.com.