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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Create the Best Product

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The original iPhoneI’m mid 2011 I wrote a post titled Competition. Things in my universe had heated up and many of the companies I was an investor in were facing lots of competition. It’s 18 months later and there’s 10x the amount of competitive dynamics going on, some because of the maturity, scale, and market leadership of some of the companies I’m an investor in; some because of the increased number of companies in each market segment, and some based on the heat and intensity of our business right now.

I wrote a few more posts about competition but then drifted on to other things. But I came back to it this morning as I find myself thinking about competition every day. Yesterday, I was at the Silicon Flatirons Broadband Migration Conference hosted by my friend Phil Weiser. I go every year because it’s a good chance for me to see how several of the parallel universes I interact with, namely government, academics, broadband and mobile carriers, incumbent technology providers, and policy people think about innovation in the context of the Internet.

News flash – most of them think about it very differently than I do.

One thing that came up was the idea of creating the best product. This has been an on and off cliche in the tech business for a long time. For periods of time, people get obsessed about how “the best product will win.” Then, some strategy consultants, or larger incumbents, use their market power to try to create defenses around innovation, and suddenly the conversation shifts away from “build the best product.” And then the entrepreneurial cycle heats up again and the battle cry of the new entrepreneur is “build the best product.”

This isn’t just a startup vs. big company issue. I remember clearly, with amazement, the first time I got my hands on an iPhone. Up to that point I was using an HTC Dash running Windows Mobile 6.5. It was fine, but not awesome. I remember Steve Ballmer in a video mocking the iPhone.

We all know how this story has played out.

comparing_mobile_platforms

I remember a world when Microsoft and RIM were dominant. When Apple and Google didn’t have a product. And when people talked about “handsets”, WAP, and we squinted at our screens while pounding on keyboards that were too small for our fingers. Next time you are in a room full of people, just look around at the different phones, tables, and laptops that you see.

In my startup world, the same dynamics play out. Building the “best product” doesn’t only mean the best physical product (or digital product). It doesn’t just mean the best UI. Or the best UX. It includes the best distribution. The best supply chain. The best customer experience. The best support. The best partner channel. The best interface to a prospective customer. I’m sure I’ve left categories out – think about the idea of “the best complete product.”

This is getting more complicated by the day as technologies and products increase in interoperability with each other at both the data, network, application, and physical level. That’s part of the fun of it. And being great at it can help you dominate your competition.

Give me the best product to work with any day of the week. But make sure you are defining “product” correctly.

Resegment If You Aren’t In The Top Three

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Six months ago I wrote a post about how I think about competition which included a list of topics that summarizes my philosophy. I covered the first item, Be The First Mover, but then went on to other things, like thinking about competitors every single day. I’m back today with the second topic, “Resegment If You Aren’t In The Top Three.”

If you look at the Foundry Group portfolio, you’ll notice a lot of market leaders. Zynga is the obvious one, but I’ll assert that there are many others, including AdMeld (now part of Google), Cheezburger, Fitbit, Gnip, Makerbot, Oblong, SendGrid, Topspin, Trada, and Urban Airship. After that there is a category of companies who might be market leaders, but it’s too early to tell as they are still very young. And, if you look at some of the successful companies we have had from our previous investing at Mobius Venture Capital, you’d see market leaders like Postini, Return Path, FeedBurner, Rally, Stratify, NewsGator, and Sling Media.

An important nuance is that these companies weren’t unambiguously market leaders when they got started. While some of them created entirely new markets, others entered into existing markets. In some cases, there were only a few players as the markets were new. In other cases, they took the existing market and resegmented it.

Existing markets are wonderful places to go play in especially if they are expanding rapidly. Entrepreneurs are drawn to fast growing markets, which is awesome, but there are many who I see that are simply trying to play a fast follower game. I’ve been there, having invested in “company #17 in a market.” Unless you get lucky, that generally sucks.

I’ve developed a viewpoint that if you aren’t in the top three in your market segment, you should “resegment.” Step back and redefine the market segment you are going after. Change the customer, change a product focus, change the distribution channel, or change the partner dynamic. Sometimes it’s a tweak, other times it’s more radical. But change something so that you are in the top three of the “new market”.

Don’t bullshit yourself about this. I’ve been the investor in many companies who weren’t in the top three that were going to get there with the next release, or a new sales VP, or something exogenous that would happen to the existing market leaders, or a magic trick that no one had thought of yet. This is almost always a losing strategy. Don’t count on luck. Resegment.

Code Red

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Many of the companies that we invest in are the leaders in their respective markets. Often they create the market. Sometimes they appear out of no where and dominate. And sometimes they are in a brutal fight every day with another company or two for market leadership. We don’t care which case it is – we just want to be investors in the companies that are #1 or #2 (and have a chance to be #1) in their markets.

Jack Welch taught us the power of being #1 or #2 in your market many years ago and the VC business reinforces that over and over and over again with relative exit values. The VC cliche is that the market leader gets 50% of the value, #2 gets 25% of the value, #3 gets 10% of the value, and #4 through #263 get the remaining 15%. While these numbers move around (I’ve been in situations where #1 got 90% and in situations where I got lucky and #17 got 25%) they are directionally correct.

Whenever a market leader I’m an investor in is threatened by a competitor, I’ve encouraged them to call a Code Red like they do on ER. In a Code Red situation, every who can is focused on the threat for a short, intense period of time. If the company is less than 10 people, this is easy. But if it is 50 people or more, it’s really hard. And – at 1000+ people, it’s a magic trick to get it right.

When the CEO calls a Code Red, there is often a negative reaction from parts of the organization ranging from sales, development, to operations. Often some people in the organization don’t believe or understand the need for a Code Red. Other times they’ve been through so many unnecessary fire drills in other companies that they don’t believe the Code Red is real. They simply don’t see the same threat the CEO sees. Or they feel undermined by the CEO.

Part of the CEO’s job is to call a Code Red correctly. If you call it every other week, it’s not a Code Red, it’s shitty management and leadership. If you never call it, you’ll one day find yourself no longer the market leader. There’s no right tempo – it’s random, but as with many things you’ll know the moment when you encounter it.

A Code Red can’t last forever. It has to be incredibly focused on the specific threat you trying to address. It has to be clearly communicated across the entire company. It has to be quantitative – once you’ve effectively neutralized the threat, the Code Red is over. This might be in an hour, a day, a week, or a month. But if it lasts much longer than a month, something else is wrong.

I know some people who like to use DEFCON 1 instead of Code Red. I don’t – it’s too nuanced – who cares about the difference between DEFCON 3 and DEFCON 1 – you are in a critical situation. Make it binary.

I know some managers who hate the idea of ever being in a Code Red situation. This is unrealistic view to take in a startup or fast growing company. Once you are a visible leader, people will be gunning for you, imitating you, or coming out with products that disrupt your business. Welcome to being a market leader – own it and when a Code Red occurs use it to propel your business into an even more dominant leadership position to build on. And – for every employee in a company having a Code Red – take it seriously and crush it – the rewards will be quick and obvious and the downside of not dealing with it sucks.

Be The First Mover

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Recently I wrote a post titled Competition where I listed out a set of topics that summarizes my philosophy around competition. I’m involved in a lot of companies, many of which are either the market leader in their segment, fighting head to head with a few other companies for clear market leadership, going after an existing incumbent, or creating a new segment entirely. As a result I spend a lot of time thinking and talking about competition, as well as executing a variety of strategies to address competitive dynamics.

The first topic I want to address is the idea of being the first mover. Several people challenged this idea in the comments and there are many investors that like to invest in “fast followers” (I’m not one of them.) There’s also a well worn cliche that you can identify early leaders as they are the ones with arrows in their back. While I understand the convention wisdom around this, especially in the context of corporate strategy and general innovation theory, I take a different approach, especially in very fast moving markets like the ones I invest in.

When I talk about first mover, I don’t think of being a broad “market” first mover, but rather a “category” or “segment” first mover. In an article I wrote recently for Reuters titled Note to entrepreneurs: Your idea is not special I made the point that “the products and their subsequent companies became great because of execution.”

“Google? Not the first search engine. Facebook? Not the first social network. Groupon? Not the first deal site. Pandora? Not the first music site. The list goes on. Even when you go back in time to the origins of the software industry: MS-DOS – not the first operating system. Lotus 1-2-3 – not the first spreadsheet.”

So, when I talk about being the first mover, I don’t mean “being the first person to come up with the idea.” Rather, I mean that when you begin executing your business, you need to aggressively be the first mover in the current phase of the innovation cycle. While Facebook wasn’t the first social network in the Web 2.0 era, they out-executed everyone else dramatically, and cemented their first mover advantage when they launched the Facebook platform at their first F8 developers conference in 2007. The iPhone wasn’t the first smartphone, but once it established itself as the first real computer in your pocket with a tightly integrated app economy, there was no looking back until Android started to challenge it.

When I go through our portfolio at Foundry Group, I consider many of the companies we’ve invested in to be first movers in their current segment. Others are fighting with a few other companies to be clear leaders, and, as a result, first mover status is ambiguous. In these situations, I encourage the companies I’m an investor in to Do More Faster, right now. If you are in a fight to be in the pole position, you have a few choices:

  1. Invest targeted resources more aggressively in areas that you think will put you in the lead. Basically, double down on your bets.
  2. Buy one of your competitors or a complimentary company that will leapfrog your business ahead.
  3. Change the game, usually by redefining the segment you are playing in.

If you aren’t the first mover, and one of your competitors is steadily leaving you behind in their dust, changing the game is usually the best approach. My measurement window here is usually six months, not five years. Assuming the markets and products evolve rapidly, you have a lot of chances to change the game early on in your life. That ability changes when you’ve clearly defined your path and competitive universe. But don’t be afraid to weave around as you are looking for the segment where you can become the first mover.

In my little corner of the universe, the ultimate first mover was Steve Prefontaine, one of my heroes. The dude always raced from the front. Early on, his coach and Nike co-founder, the amazing Bill Bowerman, encouraged him to “change the game” by running the 3 mile (5k) instead of the mile. Pre rarely lost (usually only in the mile) and always put in an amazing performance. In the process of running from the front, he demoralized his competitors.

As I said in the intro post, these are my ideas and I’d love to hear different perspectives. Challenge me on anything you disagree with.

Competition

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I think about competition all the time. Every company we invest in aspires to lead whatever market segment it is in. In many cases, they want to create entirely new markets. Regardless, they always have competition, whether from other startups, existing companies, large incumbents, or companies they don’t even know about yet.

Whenever the startup world heats up, there are many more new entrants. We’re once again in the part of the cycle where there are an abundance of new companies being started. While there are plenty of unique ones, there are a much larger number of “me toos” and “fast followers”. While VCs love to put this on entrepreneurs (for not being innovative / creative enough) and entrepreneurs love to put this on VCs (for just funding me too like things), this isn’t really anyone’s fault as it’s the natural cycle of things and has been going on forever (see Clay Christensen’s excellent “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” for the classic examples of this.)

I’ve worked with many entrepreneurs who have spent an enormous amount of time thrashing with the issues of competition. Sometimes I’ve been on the winning team and sometimes I’ve been on the losing team. This experience has helped me develop a pretty clear view on how to think about competition that I regularly use. Following are a set of topics – which I’ll write more about in the coming weeks – that nicely summarize my philosophy.

  • Be the First Mover
  • Resegment If You Aren’t In The Top Three
  • Create the Best Product
  • Provide the Best Customer Experience
  • Have a Long Term Strategy
  • Understand the Ecosystem You Are Competing In
  • Obsessively Focus On While Ignoring Your Competition
  • Keep Your Friends Close and Your Enemies Closer

There is an age old VC cliche that the market leader gets most of the rewards, #2 gets enough to be interesting, #3 might make a little money, and all of the rest are irrelevant. This cliche strongly informs my perspective and you’ll see it woven through what I’ll write about.

I’m especially focused on the evolution over time of competitive responses. Nothing stays static and the software / Internet industry is one of the most vigorously competitive in the history of man. There are an increasing number of externalities – such as government regulation and patent strategies (both NPEs/trolls and big company patent thickets) that occasionally get focused on but in my experience are not what actually matters. More specifically, I think that if the government completely left the software / Internet industry alone and software patents were abolished, the software / Internet industry would have even more vibrant competition.

I’ll try to stay out of politics in the upcoming posts since I don’t think entrepreneurs can do much, especially at the early stages of their companies, about these externalities. Instead, I’ll focus on the things that I think really matter and can make or break a company in the first five years of its life.

Of course, like all blog series, I’d love any comments and feedback, especially if you disagree with me, as that’s the best way for me to continue to evolve my thinking.

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