Eric Sink writes about the "function of proactive sales in a small ISV" and a situation which we (and other software companies) face regularly:

At some point in the many activities of a small independent software vendor (ISV), the customer trades money for software. No column on "The Business of Software" could be complete without some discussion of this magical event.

I'll start by defining some of my terminology. Before the customer makes the purchase, I like to say that there is a "gap". This gap is the distance between the prospective customer and your product, and it looks something like this:

Product -------------------------------- Customer

In order for the sale to occur, this gap must be closed. Until that happens, the gap represents all of the issues and obstacles that are preventing the customer from making the purchase:

The customer has never heard of your product.

The customer doesn't know enough about your product.

Your product is too expensive.

The customer needs two levels of management approval for the purchase.

Your product lacks a feature the customer needs.

Your product doesn't interoperate with the customer's other stuff.

Your product isn't mature enough to meet the customer's expectations.

To continue to exist as a business, your small ISV must find a way to close this gap, over and over again. There are exactly two ways to close the gap:

Move your product to the right. Tell the world about your product. Make your product better so that people will want to buy it.

Move your customer to the left. Find people who might want your product. Convince them to buy it.

Phil Windley reports on a talk given by Clay Christensen:

Clayton Christensen contends that startups fail for knowable reasons. He lists some questions every startup must answer.

- How do we beat the competition?
- Which customers should we target?
- What products will our customer want to buy?
- How should we distribute to and communicate with our customers?
- Which things should our company do and what can our suppliers do?
- How can we avoid commoditization?
- Who should be on our management team?
- What is the best organizational structure?
- How can we know when to change course?
- Whose investment capital will help and whose might hurt?

The "disruptive technologies model" shows that technological improvements in products out paces the customer's ability to utilize or absorb the improvements. These kinds of technological improvements are usually brought about my established companies for their customers. Disruptive technologies start out so bad that they are not good enough for the mainstream market. The trajectory, however, causes the new technology to overtake the established technology. Further, since the existing customers are over-served y established products, this creates an opportunity for a disrupter to provide a "good enough" product at a cheaper price. Established companies almost never bring about disruptive change.

You can't position a firm to be at a specific place in the value chain, because by the time you get there, it will be gone. You have to position the form for where the market is headed. Attractive profits are typically earned in the stages of value-added in which non-standard integration of components occurs. Once the industry moves from an integrated architecture to a modular architecture, the money is made not by the integrator, but by the maker of the subsystems and components.

Clayton introduces the "law of conservation of modularity." The idea is that either the integrated system or the subsystems need to be modular and comfortable in order to optimize performance for the other. He uses Microsoft OS and Linux as examples. Applications in Microsoft are suboptimized in order for the OS to be optimized (this is a result of closed source) whereas in Linux, the OS is suboptimized via an open and modular architecture in order to optimize the application (i.e. being able to change code in the OS to optimize application performance).

In Clayton's world, "modular" implies "suboptimal" or "inefficient." You can't make money on the modular layers in the value-added chain (they're the integators). You make money at the borders to the modular layers. Another way of looking at this is that no one is going to make money on SOAP, you're going to make money on the parts that talk SOAP, the services.

Tim O'Reilly, who Clayton recognizes in the audience and asks to comment, says that Mac OS X is an example of this. FreeBSD is the modular layer in the value-added chain that Apple has put a layer on top of, added value, and is making money there. Clayton says that Motorola and Nokia should supply chip sets and software to Chinese manufacturers who can battle it out in the integrator, commoditized space.

Startups can become established by competing against non-consumption. The example is the transistor radio. It wasn't good enough for anyone who could afford a table-top tube radio. But teenagers embraced it because their option was no radio at all. This allows the startup to avoid the demanding technical hurdle of competing with established products that are better than customers actually need.

Excerpts from a News.com interview with Ray Lane (formerly, President of Oracle, and now a VC with Kleiner Perkins):

Now, customers are looking for simplicity, integration and security across releases. They want standards-based software that doesn't require the labor expenditure of the past. Software CEOs have two choices: They can try to impose their proprietary methods on the market or they can adopt a new service-based approach to providing and maintaining software.

In the past, when customers have asked for improvements, we've said, "Replace your old system with this new system." That's not true anymore. You've got to use the existing infrastructure and take advantage of information already there. During the last 10 years, we did modernize the infrastructure. Now, I can actually do the renovation. I don't have to knock it down.

An Indian company is a better renovator. They're going to be a real player in the renovation market, because their business model has the advantage in the renovation market. It's like the home-building world. Most new home builders are not renovators, and most renovators are not new-home builders. They require different skills. But renovation is just as important as building new homes.

The new enterprise has to do five things: respond and deliver to support demand; grow or shrink, based upon changes in demand; operate any time, anywhere, under any conditions; minimize asset and labor content per unit of production; and provide real-time transparency of operations, both internal and external. Those will be necessary to understand, as you build a software company.

“Software is a service. We have to recognize it and a service company is a different DNA than a software company,” said Lane.

Using an automobile industry analogy, Lane said that today, someone interested in getting into the automobile business would more likely get into service business that improves the car experience rather than get into the car-building or car parts businesses.

He also said open source software would have a destructive effect on growth of the commercial software industry, although he did not mean destructive in a pejorative way. Open source software will keep the software industry the same size over the course of this decade, he said.

The software industry, he said, is used to “the next big thing” and is still waiting for it. He listed developments such as the PC, client-server computing, and operating systems as examples of previous “next big thing” developments.

“It’s idiomatic about our industry as to why the question is even asked. We expect the next big thing to come along to get us out of implementing the old thing,” Lane said.

“If you really want to wait for the next big thing, I think the wait’s probably a decade,” said Lane.

My Business Standard column:

During my recent visit to the US, I found myself standing on Sandhill Road at Menlo Park. Sandhill Road is at the heart of the world’s venture capital industry. Almost all the leading VCs have their offices there. It is one of three elements which make up the Silicon Valley ecosystem. A few miles away is Stanford University, whose mix of professors and students churn our start ups year after year. And then there is the famed Valley culture, which encourages and amplifies innovation and entrepreneurship. While it rewards success handsomely, it also does not look down on failure, seeing it as a milestone on the journey.

As I stood overlooking the freeway and the mountains in the distance from the Sandhill perch, my mind wandered to the eternal search that drives the innovation system. What is going to be the next big thing? Web services? Broadband wireless? Convergence?

There are two thoughts which struck me as I stood there. One, the epicentre of the next revolution is likely to be in the emerging markets of the world. Two, the driver for this revolution will be affordability rather than the next big technological advance. Let me explain.

In the developed markets of the world, the various technological waves came sequentially – computers in the 1980s, local area networks in the late 1980s, client-server software in the early 1990s, the Internet in the mid and late 1990s, and wireless and broadband in the past few years. One of the key drivers was Moore’s Law, which states that processing power at fixed costs doubling every 18 months. As computers became cheaper thanks to falling prices of chips and peripherals, it created a positive feedback loop that drove adoption across various industries.

Now, the same mix of cheap processing power and high bandwidth is working its way across the developing markets. There is one important difference. In the developed countries like the US, the various phases of technological enhancements were sequential, giving consumers and businesses time to adopt and adapt. However, in the emerging markets like India, there are all happening simultaneously.

Consider what’s happening in India. Cellphone adoption is increasing at over two million a month, leading to a user base of over 50 million by the end of 2004. Decreasing prices are driving computer adoption higher – this year should see sales of over 3 million computers. Wireless data connectivity is available in hundreds of cities. Cable companies, telephone companies, power companies and Internet service providers are all working to provide high-speed connectivity to homes and businesses. So, in India, even as we benefit from falling prices, we are having to adjust to a world where the same ubiquitous envelope of computing and communications is rising around us.

This, according to me, is the Next Big Thing. As nations develop, an unprecedented opportunity exists to create solutions for the next billion users from countries like India, China, Brazil and Russia. The challenge for entrepreneurs is to catalyse and capitalise on the technology-led development process that these countries are going through.

Once again, consider India. Even as we get taken up with offshoring and outsourcing opportunities, we need to understand that a focus only on services will not transform India. (To put this in focus, less than 0.1 percent of Indians are involved in
IT related services are currently involved in providing software and other business process services to international organisations.) As India develops, agriculture needs to become more efficient, thus reducing the labour force involved in farming. This surplus has to be absorbed in production. This means that the production of non-manufactured goods (such as handicrafts) and manufactured goods will have to expand and become more efficient to be able to absorb the surplus labor from agriculture and provide higher incomes.

Affordable technology solutions can help in compressing time and speeding up the development process. Information and communication technologies can help in providing much-needed access to markets. India can benefit from the technologies developed to accelerate the education of its people and the modernisation of its industries. The challenge for entrepreneurs is to think on how to create solutions in this context for the twin engines of future growth - rural India and the small- and medium-sized enterprises (SMEs).

The developed markets of the world are like the countries of Europe in the fifteenth century. The developing countries like India and China are like America waiting to be discovered. Entrepreneurs are like the intrepid explorers who set forth from the Old World to discover new lands for conquest.

For the VCs on Sandhill Road, the emerging markets are a world separated by many a continent and ocean. Even as they ponder on the future, Indian entrepreneurs have the opportunity to shape history – only if we begin to start looking at the market within. Rather than trying to only focus on providing services to the rest of the world, we need to start producing hard and soft goods for Indians to use and leverage. India, its IITs and other engineering institutions, and its entrepreneurs have the opportunity to create the platforms for the next markets.

Easier access to information can help simplify life and business. And yet, this is where we have to still struggle a lot in India. By using new technologies, it is possible to rethink how content is created and consumed. It is this base of information which will also help propel the use of computers across India, which is a must for building out the digital infrastructure across India.

The next-generation information platform can dramatically cut down the time and complexity for creating portals for various verticals in India. There are three key portals that are needed in the Indian context addressing the key constituencies of the neighbourhood, SME industry clusters and rural India.

LocalNews: Much of our life is centred around what’s happening where we live and work. There are also various small businesses which need a platform to reach out to consumers cost-effectively. Yellow Pages do this job very effectively in the US. In India, the use of yellow pages has still been somewhat limited. By getting people to come together to build “mirrors” of their neighbourhood online, a marketing platform is also created for the local small businesses to reach out to their potential audience.

EnterpriseDigest: Just like Reader’s Digest aggregates the best content for the family, we need the equivalent of an EnterpriseDigest for every industry vertical. This provides a two-way flow of information. In India, while there are many magazines which do cater to verticals, the cost of publishing and distribution can still be a significant barrier. The Internet can cut both costs.

RuralWorld: Rural India has to be one of the engines for growth. And yet, it is one of the most affected by the information gaps. From inputs on farming techniques to the latest prices of goods and commodities to the weather, the RuralWorld portal can bridge these gaps, as also connect farmers with other farmers so they can share best practices and answer each other’s queries, much like users do on community forums in urban areas. As Paul Romer is quoted in the book “Information Markets”: “Information’s capacity for simultaneous use means that we can take all of the poor people in the world right now, let them use all of the knowledge, all of the discoveries that we already take advantage of - and we can raise the standard of living without reducing our own.”

Indian entrepreneurs need to invest in building out the country’s information infrastructure, even as the telecom companies are busy laying the foundation for a “broadband Bharat”. The information highways will not be as useful without the digital worlds as destinations. Be it education or entertainment, food or fashion, business or barters, the Indian portals can serve as the energiser for the Indian Internet business and at the same time fulfill real needs in the daily lives of people and businesses in urban and rural India.

Tomorrow: Information Access (continued)