Market Segmenting may sound boring. But it works.

Sales people all dream of the close. After all, with that comes the rewards and recognition us sales types thrive on. But in startup environments, the focus of early stage salespeople (and anyone else supporting the commercialization effort) must be on identifying, finding and messaging the right set of customers.

Why? Because these days more startups build better mousetraps for existing markets than they do create brand new ones. And while many offerings among these are disruptive, they’re still tapping into an existing market.

By definition, prospects in these ‘existing markets’ have problems they have identified and perhaps even tried to fix. This alone makes existing markets noisy, with rampant indirect competition vying for attention. Sending your first sales team out to chase nothing more than a broadly defined set of initial customer targets may lead to trouble. (Read as: Very long sales cycles). A sales funnel with big names is nice to look at but ultimately its booked revenue, successful product implementations and happy customers that will be the biggest step forward.

Getting to those first customers takes more that a good sales person. It takes clear understanding of what problem your offering fixes (easy part) and specifically for whom (less easy part). ‘Whom’ cannot be as general as Universities or Enterprise. Instead – with the help of a market segmentation exercise – the ‘Whom’ could look more like american universities with a highly virtual faculty or mid-size enterprise with more than 30 locations.

This segmentation pays all sorts of dividends early on:

- sales people can focus their prospecting, generating a more qualified funnel

- hiring sales people can be done more selectively (ie. do they understand your ’segment’)

- Market sizing suddenly becomes more of science than a guessing game

- Positioning your company becomes much clearer to any number of audiences, once they can quickly visualize who you’re selling to

One offshoot to be prepared for. The list of targets may no longer be household names. Who cares. Revenue fixes a lot of things.

Steve Blank over at the Entrepreneur Corner of Venture Beat posted an article this week that prompted mine. That and a very long flight delay…

In summary, he writes about the notion of re-segmenting an existing market as a way to cure the more natural tendency to go after market leaders. The full article can be found here. Below is the excerpt that caught my attention…

I advise startups to first go after the companies that aren’t the market leaders in their industries, but are fighting hard to get there. (They usually fit the checklist above.) Then find the early adopter/internal evangelist inside that company who wants to gain a competitive advantage. These companies will look at innovative startups to help them gain market share from the incumbent.

The other place for a startup to go is the nooks and crannies of a market leader. Look for some “skunk works” project where the product developers are actively seeking alternatives to their own engineering organization.

Another Great Canadian Innovation.

Thank you, Dharmesh at OnStartups.

Sales Team Building 101 for Founders (no, not Dummies).

As someone typically looked upon as ‘the sales guy’ in every startup I have ever participated in, I have lived my share of being the first non-engineer into a building. And there’s no question we come from separate planets, which is why I found this LinkedIn Group post ‘Building Startup Sales Teams: Tips for Founders’ so interesting. It’s perspective is that of a successful, albeit programmatic, data-centric engineer (not that there is anything wrong with that).

It’s a long list, so you need to be interested (us sales people have small attention spans), but for the most part it really does offer very good advice. I’ve posted the original tips below, with my 2 cents (LL) added from a collection of my own experiences:

1. Don’t hire sales people too early. In the early days, the founders should be able to sell (and should be selling).

LL: Agree, although some founders (passionate or not) are just not meant to sell. Particularly if the sales process is complex. As an alternative timing mechanism, consider not hiring one until the product is fully ready for deployment. Sounds obvious, but even a little too early can waist a good effort.

2. You don’t need sales people, you need sales. Don’t think VP of Sales — think “Revenue Engineer”. (Not the greatest analogy, but just like you won’t hire a development “manager” as one of the first 5 people in a startup, you shouldn’t hire a sales “manager” either). Don’t get caught up in fancy titles — focus on dollars in the door.

LL: Agree on the title issue. However, be careful to hire someone senior enough to sell something that has never been sold. They will need to understand offer positioning very well, be able to intelligently deliver market feedback to you and be comfortable with multiple iterations of everything you do. Hiring too junior just to put feet on the street could backfire.

3. Don’t hire several sales people at once. Your goal is to figure out the “pattern” of what kinds of people are best based on what you’re selling and who you’re selling it to. You need some feedback from the system so you can continue to iterate on your hires.

LL: Fully agree. Hire in multiples only once the offer, the sales process and market segments are well flushed.

4. If you’ve never hired or been around sales people before, be prepared for a bit of a shock to the system. They’re not bad people, they’re just different. If you’re an introverted geek like me, it’s helpful to remember that your startup needs to sell stuff.

LL: Just different? Hmmm. I guess that is better than ‘bad’. Your first sales people need to have experience – where possible – being the first sales people, or at least close. Otherwise, trouble ahead.

5. Resist the temptation to create complicated compensation plans. If it requires a spreadsheet to figure out the commission, it’s too hard. You’ll have plenty of time to confuse sales people later — start simple.

LL: We like simple. And we like fair, realistic approaches.

6. Agile methodologies can work in sales as well. Iterate! Refine your demo script, your slides, and any other collateral information. Capture the lessons learned by the best-performing people and spread it to the rest.

LL: Good sales people will refine their message to each audience. Support this in any way you can.

7. Sales people will generally act in mostly rational (but often surprising) ways based on incentives. The rules of the game defines the behavior of the players. You were warned.

LL: See #5.

8. ALWAYS connect incentives somehow to ultimate customer happiness. If you reward just “deals getting done”, you’ll get deals — but at too high a price. You might get push-back that sales people don’t control/influence customer happiness, but they do. They “pick” customers, they set expectations, they control the degree of “convincing” applied.

LL: This does not apply to Senior sales people. They did not get to ‘Senior’ by abusing comp plans.

9. Make sure you understand the economics of your business. Figure out your total COCA (Cost of Customer Acquisition). This includes sales people, marketing people and marketing campaigns. Quick example: Lets say you paid a sales person $10k, a marketing person $10k and you spent $5k on Google AdWords (for a total of $25k) last month. If you sold 10 customers last month, your COCA is about $2,500. Different businesses have different needs in terms of sales vs. marketing spend. Make sure neither is too far out of whack.

LL: Excellent point. Don’t underestimate that these economics will changes with time and that the COCA may seem or need to be higher (in relative terms) at the outset. Also, be sure to make room for demand generation activities in this equation. Salespeople who are good at complex, first-of sales are not always best at pure hunting. But they should be very good closers. The reverse is true: great hunters don’t always make great closers. Bottom line: there are other ways to generate leads; there is only one way to close.

10. Your life-time-value (how much revenue you expect to generate per customer) should be higher than your COCA. No, I did not need a degree from MIT to figure that out. Once your LTV is a multiple of your COCA, you’re ready to start turning the knob and scaling the business a bit (hiring more sales people). But, if your LTV is way lower than your COCA, proceed with caution. If there is no hope for LTV getting higher than COCA, you’ve got a problem. Don’t try to hire additional sales people until the economics sort of make sense. If the car is pointed towards a brick wall, hitting the accelerator is not a good idea.

LL: This is a broader business issue; not only about how to hire sales people. Good point, nonetheless.

11. Track data maniacally (even if it’s just in a spreadsheet). Information you will want includes: What was sold, who sold it, when, for how much, etc. This data will be invaluable later as you start to scale. For example, you should be able to answer the question: We had 14 customers cancel last month — who sold those customers? Is there a pattern? In the early days, you likely won’t have the volume (or the time) to analyze the data — but you should at least capture it for future use.

LL: Track all the data you want but at the end of the day, you need to understand what qualified versus unqualified prospects look like. Good sales people should get you here as they are sensitive to being efficient in how and with whom they spend time.

12. Your pricing should be in line with your sales structure. For example, you can’t expect to have an outside salesforce (that meets with customers in person) if your average deal size is only $10,000. The math won’t work.

LL. Well said. Increasingly I see startups where good inside sales people are the answer. Hard to find resources though. It means being able to close over the phone – and being happy working over the phone.

13. Once you get beyond three or so people, running your sales in a spreadsheet will become painful. Start looking at CRM systems (like Salesforce.com).

LL: Never too early for CRM tools.

14. Start watching the shape of your “funnel” as early as possible. How many leads are you getting a month? How many turn into opportunities? How many of those convert into paying customers? Once you understand your funnel, you can slowly start tweaking your system to fix the “leaks”.

LL: See #11. Qualify. Learn. Qualify. Learn. Close. Repeat.

Last note: While it depends on what your bringing to market, typically anything that requires an outside sales person will also require six months of support and patience to make it work. Surely, you want to see indicators towards success. But if you go in believing that in three months you will go from no funnel to funnel, and a bunch of closed business – you may be disappointed. This is all part of creating an environment of success for your new sales team…

Thanks to Dharmesh Shah for a thought provoking post today.

Two links worth a click.

It’s Friday. It’s foggy. And frankly, with summer in its sweet spot, it’s been a little slower than normal around here. I guess we can all use a slow period at one point to save up for the rest of the year.

So today I will just share two links I tripped over this week that are well worth watching. One is industry related – a little performance that reminds us that phone menus can be used to hide behind. Be sure to interact with it for full effect. (BTW – if you find this one interesting, check out Fonolo’s answer to this not so unique problem).

And the second one has nothing to do with telephony. Not directly at least. Instead, it does a great job of poking fun at the Valley and bubbles that tend to build around it. A must see on a Friday afternoon.

mj27fgyiex

Dancing with Elephants.

Last week I finally had the pleasure of hearing Chris Shipley (of Demo fame) speak. Chris was invited to speak with a group of entrepreneurs at a Telecom Council event to provide her insight and guidance on how to best leverage what has become an elaborate ecosystem.

Turns out entrepreneurs were in the minority and instead the room was filled with telecom operators, some VC’s and curious onlookers like myself. So – as Chris so aptly put it – she called an audible and we shifted to an open dialog on how start-ups can or should work to secure larger, legacy operators as go-to-market partners. Hence her reference to ‘Dancing with Elephants’.

As with any good round table session, I left with a few new takeaways and a bunch of good nudges (aka. healthy reminders that validate what you already know). Among the most interesting was Chris’ assertion that startups outside of the Bay Area tend to focus on the basics (read as: very clearly defining both your value proposition and your target audience) than those in it. Interesting.

In my travels, I have found that companies outside of the Bay do in fact do more homework, to overcome what they perceive as unfair penalty for operating at a flight’s distance. Chris’ point was that locally – because perhaps of the proximity to talent, money and sheer moxie – that we tend to get a little lazy when it comes to the I’s and T’s of business planning. Her point to all: find the business problem you’re going to solve and solve it. Not the other way around.

Other learnings from the group worth mentioning:

- If a VC sees any or too much dependency on carriers as a channel, a red flag goes up. Too long to market.

- As obvious as this sounds, if you are targeting large carrier or enterprise channels, find the ones whose strategy truly aligns with your offer. We have all been guilty at one time or another of thinking….if that prospect would just see it my way. In the case of the large operator, their ‘way’ has already been defined by very expensive help. It’s not changing any time soon.

- Apparently some carrier may have programs for entrepreneurs or for VC’s to participate in to understand what it may be looking for in terms of product. No one seemed to know of any/many of these but sounds like a great idea. Surely a carrier does not have the resources to visit with every entrepreneur craving their attention. Some kind of structured program might be good for all parties.

- Lastly, if you put startups and carriers in a room, sooner or later it will deteriorate into a us-against-them syndrome. Thankfully someone pulled us out just before it happened.

If you get a chance to hear Chris speak, take it. She is to the point and full of reality checks, which are always healthy.

Jott this down. Be great at (at least) one thing.

Back in October of 2007 (can’t believe it’s been that long) I first posted about Jott’s arrival on to the market. As a voice services junkie, I was glad to see the innovation – even if I expressed question about an ultimate business model.

What I like about the news of Nuance buying Jott (other than the simple encouragement of seeing deals done in the space), is that it tells the story of some of the things Jott did right – and maybe sheds a little light on the future of the transcription market.

While Jott may have looked like a consumer-like, early adopter (and free) gadget when they emerged, in time they carved out a market position by adding premium productivity services targeted at larger business users. Salesforce (think Ribbit) and other like 3rd party integrations made them relevant to buyers concerned with automating processes. And the maturing/marketing of their API enabled them to rapidly integrate with and package a user interface to a broad variety of web apps.

The voice transcription space is suddenly a crowded one; and Google’s entry has lifted the segment’s visibility (to the benefit of the competitors). In any crowded space where to the naked eye all offerings start to look alike, start-ups must study the market, find a spot they think they can exploit and attack it. For their part, Jott appears to have stayed focused on validating demand through their direct channel, while focusing development resources on becoming the leader in 3rd party integration (which in turn opened alternate channels to market).

Whether Jott got to cash flow positive or a healthy exit, we won’t know. But picking their spot in the market and trying to own it did allow them to exit to a place where they will likely be relevant, and in a way that apparently pleased its founders.

As for the future of the market, I for one am looking forward to the full market launch of Jaimie Siminoff’s Grid. Given the success of PhoneTag (another good example of picking a spot and owning it) to date and his vision around Grid, we should expect the 3rd party integration segment to grow – and to see that there’s much more to voice transcription than reading voice mails…

Voice Platform. A single space no longer.

This blog’s focus is the emerging communication space, its many entrepreneurs who are changing telecom and more specifically business development and related strategies in the space. In keeping with this, I recently posted about Jajah’s and ooma’s deployment of distribution channels as a way to market – and specifically of how they act as data points among many suggesting a trend of launching an emerging comm business first as a direct (or consumer) offer, then leveraging that activity towards a successful platform business for long term scale. I can add others to the list, including Mobivox (who I am proudly associated with) which in the last year successfully vectored its voice activated services business towards platform, and continues to actively deploy partners around the world.

Since the post, interpretation – both on and offline – about some of things I said lead me to realize again just how much the voice platform business has proliferated and segmented in such a short time. Not long ago, many if not all emerging comm business came under the same moniker of Voice 2.0. Then, all were painted with the same vague Voice Platform brush. No longer.

To the credit of the many innovative entrepreneurs in this emerging comm space – the Voice Platform business has proliferated and is increasingly segmented. Jajah, Ifbyphone, Voxeo, Mobivox – just to name a few of many – can all be considered voice platform businesses or plays, but are not necessarily direct competitors of one another.

Mobivox (which delivers market leading voice activation applications from the cloud) and Jajah (a leader in IP network infrastructure services) share some elements in the offerings, but chose to partner last year in an effort to take advantage of their complementary strengths. And by visiting the Voxeo and Ifbyphone websites, one could interpret a similar services set, yet they are great business partners.

These examples serve as proof points to two conclusions: one, we are in a world of co-opetition, where an overlap of services offered is often an opportunity to partner for success, rather than a calling to compete. And two, the voice platform business is maturing nicely with niches being carved to respond to growing demand.

How the Cloud is Changing the SMB Equation

Selling to small business has always been considered costly. If one assumes that the sales effort was similar to the one required to make an enterprise sale (consider that for the SMB buyer, buying telephony was a big investment – to them), then quick math suggests that the return just would not scale.

No doubt times have changed – and continue to. The cloud (formerly known as SaaS, ASP, Hosted, etc…) is to thank for this. Innovation can be done with less CapEx, making the equation for developing services targeted exclusively at the SMB more compelling.

This leaves just the small issue of go-to-market to solve. It still doesn’t pay to put a rep on the road – short of selling to the ‘M’ in SMB – and building OEM channels takes time and money (see below). Enter the new ‘direct’ channel (online), coupled couple with lower cost inside sales people – and the formula starts to improve. This can work particularly well for very sticky services, and for those for whom the ARPU is beefy enough to incent said inside sales people. Don’t discount the value of the live body on the phone. The SMB appetite for mission critical services is high, but their ability to set-up and manage a service is not.

The SB is much bigger than the MB

Keep in mind that while the SMB universe in the US is huge, the great majority of these companies have under 5 employees. This great post from GigaOM over the weekend, complete with pyramid charts tells this story very well.

Yet even the one-person shops should use many of the emerging services to improve their productivity, create the image of a larger company or just to cut costs. The hybrid direct channel discussed above is one key to growth in this segment; the other is packaging. Build easy to understand packages for the buyer and where possible, make them flat rate (or such that the buyer can predict monthly costs). Bundling, while abused by some larger companies, can also be effective.

OoVoo Bundles Up

Take OoVoo, a neat video conference start-up that serves consumers and increasingly, the SMB. They’ve recently bundled voice services into their video offering so that their SMB user can use them as a one stop shop. And they went a step further and separated the pricing by how many people can conference at one time. This way the buyer can quickly bucket themselves and accelerate their buying decision.

Imagine a sales rep going on the road to sell a small business on 3 way video conferencing? Never. But with the cloud firmly in place, small business can use big company services. And with an optimized direct sales channel, startups like Oovoo can grow nicely.

Package well. Build traction in a live person-backed online channel. And keep an eye on the OEM channel for long term scale.

Distribution works. With Funding.

Invariably every business plan I see – or every pitch I make to a VC – includes an element of ‘channel’ in it as a means of getting to market. But equally, the response is increasingly the same: We love the channel, but the capital to do it can be immense and hence the risk equation is uncomfortable. And they’re right on all accounts. Right to love the channel because ultimately that is the way the company will truly scale. And right that it will be costly – and will take time. Lots of it. Yet it can work, and two recent announcements in the emerging telephony space validate this:

ooma raises another $18M: ooma has been at it a long time. But when you’re trying to disrupt the oldest business out there (home land line), it’s going to take a while. Yes this round came with valuation reset, but this is just a reality for companies who raised money before the crisis. More importantly is the confidence the investors are showing in what ooma has accomplished to date and in what’s on tap. And that includes – in no small way – distribution. Ooma will tell you that a combination of the scale of the Best Buy channel and a pricing reset is what finally put enough wind in their sails to see a bright future. Since then other critical mass distribution like Radio Shack have joined on. With surely more to come. Distribution – setting it up and supporting it – is capital intensive. But in ooma’s case, it’s the only way to execute on their dream to disrupt.

Jajah eclipses a billion calls: The once cheap-calls-for-anyone provider announced this milestone this week. But read carefully. Where they once spoke loudest about the 10 million customers in their consumer business, the message has shifted (rightfully so) to a platform and partner deployment theme. And it’s working. Jajah lists Yahoo, Plaxo, eHarmony and others as those large communities using the Jajah platform and network to power their voice applications. This did not happen overnight. A large consumer play and $20 million or more VC dollars fueled this success. But now with partners in play – both for revenue and credibility purposes – Jajah is perhaps better positioned than anyone in its market to really scale to the next level.

One lesson that is becoming clear and represents a departure from telecom business plans of the past: Go consumer first (or in parallel to a channel offer), build a brand and a service that works, but keep your eye on the prize – large distribution. Actually this is a trickier balance to strike than most believe. But when executed well, with a little timing or luck thrown in, all’s well that ends well.

The Wide(ning) World of Telephony is alive and well.

The recession continues. Notwithstanding the green shoots of better news of late (not including this week’s upward revision of the California unemployment rate), times are difficult – with gusts up to miserable – for many. Yet one of the unsung joys of my work routine is that I often get to meet very entrepreneurial people; they offer me a regular reminder that no matter how bleak the news continues to be, the pace of innovation – combined of course with sheer determination – speaks well for the future.

Just in the last few weeks, I enjoyed meeting and talking with three emerging communication start-up CEO’s (two of them Canadian of course) each after separate segments of their market, with their own twists. Here’s a note on each:

Fonolo: Shai Berger of Toronto founded this young Canadian company set to change the way people connect to – and be served by – large call centers, and their notorious phone menus. As a lifer IVR person, what I find remarkable about this offering is that no matter how many technologies we throw at this problem (voice mail, IVR’s, speech interfaces, ACD’s, call analytics and even outsourced agents) there always seems to be a better way. Fonolo’s approach is truly disruptive.

Oneeko: Since 2001 I have been using web conferencing in its many iterations yet I still regularly meet people who either don’t use it because of cost and complexity, or who barely know what it is. Opportunity knocks for the company that can make it dead simple, affordable and then get it into the hands of the right audience. Oneeko could be this company. Its one-download approach and true real time architecture makes its ideal for spontaneous sharing of all kinds. And they’re working on something that could radically reduce the cost for small business to help their customers online. And they’re from Quebec – even closer to my heart!

Sabsebolo: Yogesh Patel is a true serial entrepreneur. One of those guys that after a lunch with him makes you want to start another company yourself! His group recently acquired Jaxtr as piece of the grand puzzle they are building. Starting with the classic yet effective point solution of conferencing, Yogesh and company are building a telephony-as-a-service provider to enable carriers around the world to more easily serve and profit from the SMB segments. The boom of earlier this decade has opened telephony but at the same time created too many point solution providers – and carriers can’t do business with them all. Putting them all one platform is not easy, but Yogesh certainly has the energy and drive to do it.

Without question, this is but a sample of what’s going on out there. That’s the good news. Stay tuned.