How difficult is it to build hardware for a startup?

My gosh… I’ve always been a software guy but since I’m young I like to build things. It starts with lego, even “Mecano” (ok I’m not that young anymore and I have played with Mecanos as a kid..) and last year I though it would be really fun to try to build some kind of hardware and see how that works. I was inspired by the Makers movement and all the Arduino’s projects and thought to myself: I can do this!  So I did..

Here was the plan:

  1. Find a good idea (I had one already)
  2. Build a prototype
  3. Put it on Kickstarter and raise some funds
  4. Sell it and potentially expand the product line

That sounded about right.. My initial goal was to learn about hardware making and prototyping.. All those Kickstarter projects were pretty fascinating and the advent of 3D printing allows you to go pretty far. Hoping to help (or warn) other entrepreneurs about going that route, here is what happened:

The context:

I watch TV and I have kids.. I can never watch a good action or sci-fi movie without the risk of waking up the kids or annoying my neighbors so I wanted a device to wirelessly transmit sound from my TV to my ears. There are plenty of them out there already but without going into the details, they SUCK! The only ones that work very well are the Sennheiser, which will charge you an arm for them and force you into a single type of headset.. I have my headsets, some nice Bose QC15 that work perfectly and I wanted to use those instead.

The Idea:

Have a very small device on which I could plug my own headset to listen to the sound of my TV wirelessly.

The constraints:

Wirelessly transmitting sound is not easy when combined with TV: It cannot suffer any delays (latency) between the image and the sound otherwise it would look like a horrible foreign language dubbing! And it cannot use too much bandwidth because there are a lot of interferences with existing wifi networks already. Wifi is out, Bluetooth is out, regular RF is out and the only really good solution I found was the KLEER chip (also used by the high-end Sennheiser system)

The easy part:

Get a name: Soundora.com was available..

Get a quick website up and running www.soundora.com

Get a Logo (I have some really talented friends there)

soundora_high_transparent

Get a twitter account, an email and a facebook page

Barely any costs there.

Building the first prototype:

I found who built the KLEER chip, and luckily they were in the Silicon Valley so it was easy to contact them. They send me all the specs of the chips some reference designs, and all the surrounding hardware.. That’s where the nightmare started.. My electrical engineering skills are about 15 years old and those chips cannot be soldered by hand.. Half of the surrounding component I had no clue what they were, some had different options I didn’t understand either..

So after a bit of research I reached out to companies that built prototypes for you. They know their stuff! Great conversation but the initial investment was at minimum around $10K to have a single prototype, and probably around $50K to get a first low volume batch.. No go.

The fun part is that I initially did some designs without hardware constraints, and had a good idea of what it would look like, but as soon as you add: Battery, Connectors, and all the other stuff around the device, you realize the amount of magic required to build something as small as an iPod Shuffle is! Man, Apple is good.. So all my initial designs went to the toilet. I had to start from the inside and work my way out.

So I bought a couple of low end Sennheiser headset (which use the same KLEER chip as the high end) and tore them apart . I took the board and put it inside small box I bought at Frys.. What I didn’t expect is that buying components such as a 3.5mm jack plug, flat batteries, etc.. would take so much time. I also didn’t realize that they were never exactly the right format, the right length, etc.. Amazon doesn’t have a lot of it so delivery would always take 5 to 7 days to realize it wasn’t what I needed.. In the end I did get all my part and a bit of soldering later I had a working device:

First prototype of Soundora

When I say working, it’s partly true.. The button in the front for power and Volume were iphone buttons that are way to thin to work with.. I could not really change the volume or turn on and off the device.. I had to design my own box (which was fun).

Here you go a few days later I had my 3D model:

3D model or Soundora receiver

I used Shapeways.com which had the cheapest 3D printing service I found and got me the box. Very existing but another few weeks to get it..

1 IMG_8225  3D Printed receiver open

 

At this stage I realized that 3D printed is not really there yet.. Anything under 0.8mm space will be filled.. That means that my button did NOT work (again!!). I was starting to get frustrated with this, buttons are really tough to design, it’s just amazing!

Anyway, I got the circuit in and kicked it up

2 IMG_8228 2 IMG_8233

 

huh… That orange light wasn’t supposed to show up that much.. I even had build a little deflection inside the box to let the light come out through a small hole.. Interesting surprise.

Anyway, it worked! I had to have another batch of buttons from Shapeways to solve my issued and it now looks pretty cool.

I also found another battery pack that is flatter and should work as well so I was in good shape. I’ll have to do another box (thinner) though.

But here is the main issue: Ripping out a Sennheiser device for my personal use is fine but I can’t really do that commercially so I still needed to find a way to get my own circuit built.

Getting my own:

By total chance, I stumbled upon a small business that is building systems around KLEER for different customers.. They built the Dr Dre wireless headset.. so I contacted them. Very cool guys and they had small circuits (smaller than sennheiser) that I could use to get an even better device. Very exciting.

But then we talked about production batches.. The Kleer chips are bought by batches of 2000, pretty expensive per unit cost.. Building the box (transmitter and receiver) would probably cost about $4K to $5K to get the mold and get it ready for a batch. That doesn’t even count for prototyping the real thing..

Basically I need to raise at least $100 to $150K to get the project going, and it would mean a sales price in the $150 to $200 a system (1 transmitter + 1 receiver). You can add more receivers (up to 4 total) but it cost about as much as the transmitter.. So the economics barely work for small batches of a few hundred devices. They would for larger batches though.

I am currently kind of stuck there, I don’t want to do a Kickstarter project with a prototype that doesn’t look like a finished product (maybe I’m wrong in thinking that by the way), and I am honestly having a hard time with anything touching the electronic of the device.. I’m a software guy. Also I want to keep it lean as much as possible but I realize that the lean startup model of software doesn’t apply that well in the hardware world.

Other things to consider:

Even if I get to a point where I do have a working prototype there are other things to think about when building a hardware startup:

  • This one is a wireless device and requires certifications about the lack of danger of the transmitted wave. There are a bunch of certs you need to get for the device that will add costs to the project.
  • Designs should be turned from the current Patent pending status to a real patent in some way even though it’s using only existing technologies.
  • Packaging is another good one: Getting a nice box that is cheap but looks good and conveys the experience you want to provide to the users
  • Power plug adapters for distribution in Europe and North america, including different voltage and frequency
  • Documentation in several language
  • Distribution network: initially direct as done through kickstarter, but eventually through stores like Best Buys and others. This will hit the margins.
  • Shipping costs between China (or wherever the device is manufactured) and the destination
  • Maintenance and defects management: Some devices won’t work, some users will be unhappy, and you have to determine who is responsible, what’s your return policy, what costs can be projected around those issues, including shipping..
  • Potential competition from Sennheiser or others.. Roku came out with a similar device and even though it is limited to one listener and to sources from the ROKU box, it still is a fairly tough competition.
  • Unsold devices: If you create batches of devices, what if you don’t sell them all?
  • Delays in production and shipping..
  • etc..

Conclusion

I didn’t give up. I still would like to get to a point where I have a very nice looking prototype, but when I compare this to any of the software project I have done, I realize that it is a totally different world.. Fun in a way as you can touch and feel something, and as you are effectively building something, but the initial cost and technical skills required are really larger.

I have learned so much along the way and I now look at all those Kickstarter project in owe of the complexity I lived through. Some of those guys are really good.

I hope you you entrepreneurs out there will find value in this experience and maybe make you think a bit more before going into hardware. I also welcome any help from someone with electrical engineering, manufacturing, hardware engineering to get this through a first finish line 😉

Cheers, and keep making stuff!

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Gamification: The next revolution for the enterprise

In the last year or so as I was busy building our next generation of self-service support community product in my company, the question of users reputation came up many constantly from customers. I added the necessary activity tracking to app but was shy on exposing too much in the UI because I wanted to make sure I was doing things right. I did well to wait because as I started looking more deeply into reputation management around the web and what were the market trends in the field I stumbled on a world of opportunities under the name Gamification..

Gamification is the use of Game elements and Game mechanics in none game contexts.

You will find other definitions around the web but they all refer to the same core elements:

Game elements:

Points, badges, leaderboards, levels, etc..

Game mechanics:

Challenges, quests, transactions, win-state, etc..

Non game contexts:

Health & fitness, business processes, education, etc..

Think about it for a moment. Who doesn’t like playing Games? There are many research studies that have shown the positive effect of playing games on your self: Self-satisfaction, pleasure, sense of achievement, progression, sharing, socializing.

Games like World of Warcraft have cumulated over 6 millions years of playing hours by its players.. and it’s adding 3 Billions hours a week! That cannot be just because it’s fun.. The game mechanics of this type of games, WoW, Farmville, Halo, the Sims, etc.. are extremely powerful in engaging players, pushing them to overcome unnecessary challenges and spend hours and days on them for absolutely no other reward than pleasure or status..

Gamification is all about applying the same technics to other things than Games and hopefully generate the same level of engagement and fun for the users.

Applications of Gamification are almost limitless and despite the incredible hype around the term itself, it has proven to have enormous ROI. – If done right –

There are three major areas where I see Gamification could bring tremendous value:

Onboarding experience:

This would be to help a user start a new thing: A trial of a software for example. But also helping users learn more about an existing product creating little games to learn. Onboarding can also be for new hire in a company, instead of just throwing videos and intranets at them, why not taking them through a journey full of challenges and rewards which will make the on-boarding more fun.

Application specific behavior:

In a Community product I want people to post questions, reply, vote, thank others, select best answers, share files and interesting posts, provide ideas, etc.. What kind of game like tools can I use to drive the expected behaviors? Gamification has many answers to this question.

Real life games:

Want to help your employees stay in shape? want to help save the planet from global warming? want to have employee know each other more? There are many examples of real life challenges that could be tackled through Gamification.

This is the first post of many about Gamification that I am writing but I believe it is very relevant to entrepreneurship and especially to the potential success it could bring to entrepreneurs who embrasse gamification.

I will try to go through several example for each of those three buckets so you can have some insights and ideas for your own products.

Passion over business opportunity for entrepreneurs

Since I was teenager I thought about having my own company.. I had my dad as a model who never had a boss in his life and even if he never pushed me to start my own company and I seen as I grow up that it was what I wanted to do.. Early in my career I started a business in a field I liked (network security) within a great market. It was a services company with no product and I realized that I do enjoy building products which was part of my decision to take a big step, move to the US and get an MBA in the best place for entrepreneurship in the world. What happened, and I realize it now in fact, is that the MBA, despite all the great things it brought me, biased me into looking t business opportunities instead of listening to my passion.

This blog is inspired by the realization that a great business opportunity does not make it a great opportunity for the MBA entrepreneur…

In the MBA, you learn to study markets, business, massage company structures to make them work, look at synergies, macro economics, financial structure of companies and all the good stuff. The consequence is that I started looking at every opportunity through that lens.. The problem with that is that I got trained to look at a business and find a way (at least potential) to make it work. A lot of opportunities then become interesting to look at.. Many markets are still untapped, many markets and opportunities are still open or using old technologies that could be shaken up. Basically I kept seeing many opportunities all around me.

I came to believe that focus is important. Focus is the ability to set aside interferences and nail the energy in the one thing you want to achieve. I have always been in a rush in my career, jumping from an opportunity to the next, but as I listen to podcast of great successful entrepreneurs, I realize they often times have spend many many years in the same company, learning, getting really good at what they do, working long term projects, staying focus on their company. Comes a point where a trained MBA, with an entrepreneurial mindset, needs to focus as well..

Where are you going to focus? On a great opportunity or on something you are passionate about? That is the whole point of this blog.. I personally do not believe someone can stay focus on a great opportunity if it is not a true passion, and that it is bound to fail.

For MBA alumni or MBA students out there, stop thinking like an MBA on every opportunity you see, and match it to your inner passion… Do you see yourself working on this opportunity for 5 years? 10 years? Are you really interested in this field or industry? Is this field what you want to be the expert in? Are you ready to read entire books and reports about this industry without falling asleep?? Do you see this industry become your life on a daily basis? I feel this is fundamental and that the combination of technical skills learned in the MBA and the passion is the recipe for success..

Let’s keep searching, the opportunity is out there 🙂

A single metric for business: Profit per x?

I’ve been profoundly affected by a book: Good to Great by Jim Collins which has studied hundreds of companies to understand what made some of those good and others great. The findings are just incredible and the way the book is written allows any business person to reflect on its own attitude and approach and try to pursue the path of greatness in business.

I won’t go into every points addressed in the book, although I wanted to call out one of the thing Collins noted: great companies have a very clear metric they were following relentlessly. It’s the denominator of the formula: Profit per x. Each of the great company had a clear profit per x. For example, profit per visit for Walgreen, profit per employee for Abbott, profit per region for Circuit city, etc.. It seems very simplistic but it drove billion dollars businesses’ strategy and became the heart of their culture. The shift of revenue metric from one denominator to another was often time the starting point of fantastic results.

As I was reading this I asked myself what could be the right denominator of a profit per x of a very small business, and how could this drive the strategy of the company. I was fortunate enough to run such a small business, Iniflux, in the past and I was trying to think what it should have been.

The first step is to determine what metrics we have and that is probably the biggest issue most small businesses are facing. When you are small, you often live day by day, each deal is important, be it outside of your realm of skills, focus is not a virtue, and because management is so close to the field there is no time to think too broadly about culture, strategy, hiring and investment. Accounting is outsourced to a CPA which role is mostly to help filling taxes and make sure the company pays the right taxes to the state and the visibility of the cost structure is very weak.

Building those metrics takes time initially but they are crucial to growing the business. You need to ask the right questions:

– What are my costs? How much does every employee cost really? What’s my total overhead cost (attributing overhead correctly is also very important)? What is my cost per profile of employee? per employee? per deal? What is my sale cycle length? by type of deal, by size of deal, by sales person? How much hours of each profile have been put in on each deal? How much do I spend in marketing? where? for what return? what is my support cost? How much is debt costing me? etc..

– What are my revenue? What margin do I make by type of product, by deal size, by sales guy? How much revenue by practice if you have several? by region? compared to last year? and the year before? etc..

The idea is to have a perfect picture of your cost and revenue structure. The goal of this exercise is not to just do it once but also to be able to track those metrics over time and see trends appear. Once this is in place, the company has to compare itself to the market, and comparable companies in particular if this data is available. For example, what’s a good revenue per Sales in the first year? the second year? Hopefully you will realize that you are good in certain areas and weak in others but overall, you will know, from now on, how to plan for the future. By understanding your core metrics, planning becomes much easier. Later you can always compare your plans with your metrics to see if you are on track. Another to know more is to talk! talk to other small business owners, go to networking events, ask questions, talk.. IT is in fact incredible to realize how much first hand conversation can bring, and often times how people are open to talk about their company and experience. Who does not ask gets nothing. Talk.

So, as you are planning, what should be your denominator? The x of profit per x. Force yourself to think about a single one. What should it be?

I will take a few example to illustrate the impact that such an approach could have on your business.

As a service company, the denominator could be: Customer. Profit per customer. If you are set on this what does it mean: The number of customer is not that important, what you want is increase the profit for each of them. That might drive you to go see your current customers more. It might drive you to drop customers with which the type of deals you have are not in line with your strategy (service versus pure software/hardware sales for example). It might drive you to expand partnerships with a single partner. It might drive you to diversify your offer into a more complete or global offering. You will try to find ways to cross-sell or up-sell products with existing customers. At the same time you will try to reduce the cost allocated to each customer which means you might want to have someone dedicated to each customer that knows them in and out and can be efficient, spending less time on each new deal. You may want to incentivize your sales team on this metrics as well.

Now as the same service company, the denominator could be: Practice. profit per practice. Let’s imagine you have a security practice and a database practice and you want to maximize the revenue per practice. To achieve that goal you will have to develop certain expertise that justify higher sales costs, maybe find product in those practices that have bigger revenue and margin, your training costs will be distributed differently to maximize for this denominator. You may even want to drop one of the practices all together. Overall your strategy will be quiet different that is your denominator is “customer”.

If you are a SaaS software vendor, you denominator could be “visitor”, “paying customer”, “server”, “marketing campaign”, etc.. and each of them will call for a different focus, culture and strategy.

Finding your denominator is going to be very hard and will certainly be the source of many debate internally. Be honest with yourself, face the hard reality of your situation. Don’t just come with a denominator, try to figure out what is going to be the strategy to increase it (using the great tracking you have put in place earlier). You might realize that this focus will be what takes your company to the rank of great company.

Is SaaS such a great business model? – 19 months later.

Unbelievably I went back and read what I wrote in January of 2010 (link) where I compared BMC and Salesforce in terms of comparable companies (revenue speaking), BMC being a more traditional software vendor and Salesforce being the pure SaaS player.

Let’s look at the evolution of those two companies over the last 19 months

01/2010 SalesForce BMC
Market Cap $8.01B $6.84B
EBITDA $145M $633M
Revenue $1.24B $1.8B

Back then I thought that SaaS was not necesseraly the way to go for a startup, although fundamentally, I was seeing a lot of benefits to this model. Now about 19 months later the same table (looking at the last Balance sheet)

09/2011 SalesForce BMC
Market Cap $15.9B $7B
EBITDA $115M $677M
Revenue $1.94B $2.11B

Do you see what I see?? Salesforce doubled its market cap, increased its revenue by almost 30% and is dwarfing BMC.. That said it still has a small EBITDA. In comparison BMC basically stayed the same, with a slight growth and still a nice Earning number.

Salesforce numbers are impressive in terms of growth but scary in terms of earnings so the question remains: Is SaaS such a great business model?

Hell YES! I made one big mistake in my previous analysis and this post is here to correct it. I did not really look at the stage at which the companies were in their growth. Salesforce is a fast growing startup which has one thing in mind: Growth of the top line. On the other hand, BMC has been a stagnant company and is focused on its bottom line. I should not have compared those two companies in the first place because investment decisions are completely different in those two cases.

So why with only 6% of revenue in EBITDA is SaaS a great business model? The answer is simple: It’s the subscription model of SaaS, and it’s the growth.

If your business is using the SaaS model, you will get no big check when you sell your product, in fact it’s the opposite, you get a big cost. If the customer is big enough or if your reached a certain amount of customers on the same infrastructure, you may have to upgrade it, you will have larger server load, memory usage, bandwidth usage and all this will cost you from day one. Of course you will amortize those costs, and if you priced you offer well, you will collect the benefits of this model in the long run. So for Salesforce, a lot of those costs are applied today (R&D, Sales, Marketing, Infrastructure) which eat the margin (reducing the EBITDA).

The growth is the second factor. Growth is costly, you have to hire, you have to invest, you have to discount to win customers, etc. Marc Benioff said today in a keynote that we are trying to hire as many people as he can and the problem he has is that he cannot find enough people! Especially in sales. For a business, if the strategy is growth, where should you put your dollars? As earnings that will be taxed? distributed to shareholder (who will be taxed as well)? Or into your business to make it grow even bigger? Think about $1 of earning. Take out 30% tax. Distribute it, and take another 25%, this dollars is wasted. Now put this dollars in a business that has doubled its market cap in 19 months.. What makes sense now?

The low EBITDA of Salesforce is nowhere near the sign that the SaaS business model is weak, or that the company is not doing well, it’s the opposite. This business is doing very well, demonstrating how powerful the SaaS model can be. Companies using the SaaS as a business model cannot be evaluated as standard software vendor with on-premise solution. If you are considering SaaS for your own business, it should be very clear in your mind. It should also be very clear that transitioning from an on-premise model to a SaaS model is extremely difficult without significant hits on your revenue which is why SAP, Oracle and other big vendors have so much trouble.

Regarding Salesforce, the fun fact is that as soon as the growth starts slowing down, the earnings will explode through the rough relative to revenue. Funny how things work with SaaS.

Unlearning your MBA

I started listening (late enough) to podcasts a lot, and the one I’m really fan of: The Stanford Entrepreneurship podcast. It’s really awesome and you should look it up in itunes.. I’m going to post my thoughts about those because they have a capacity of making me react everytime..Wait till I get to the one where Guy Kawasaki talks!

I’m starting with the one about unlearning your MBA where David Heinemeier, one of the creator of Ruby on Rails is speaking. Interestingly enough, Steve Blank is the moderator (a guy I love). If you follow my blog you know that I was pretty harsh about Jason Fried who founded 37 signals (linked to Ruby on Rails), and I was really looking forward to hear David talk to see if I just was stupid in my analysis of what Jason said about a flat organization.. I will split up that post in 4 sections:

  • Unlearn MBA – the main theme of the podcast
  • Shouldn’t Take Venture Capital and spend your own money
  • Working like crazy to build a startup
  • Salesforce.com

I was optimistic about that podcast. I wanted it to prove me wrong and unfortunately started pretty poorly… Unlearn your MBA. David started criticizing how bad the MBA he did was and didn’t help him in what he did to build a business.. All his professors were so theoretical in nature, judging on the length of the papers he was handing in, and thinking 1980’s industries value chain and business models. Well, what I think is that the problem is not that people should unlearn their MBA: people should not attend the MBA he went to!! If that is the experience he got from his MBA in Copenhagen, they should really revisit the professors they hired and their curriculum because, excuse me, but David is right: He should unlearn all this.. I’m barely out of the Berkeley Haas MBA, and I have to say that a ton of what I have learned there can be apply to everything business I think about today. My professors were experience entrepreneurs (Steve Blank included), they were lawyers from the field (Mario Rosati), successful people from many startups and their knowledge was immense and relevant at every inch. They taught me to think much broadly than I was able to before the MBA, they taught me to question assumptions, they tough me to test my idea, pitch better, be more confident, challenge the status quo, everything. My view of how to tackle a business today has completely shifted thanks to the MBA and I thank them for putting together such a great program. That actually raises a valid concern if you are considering an MBA: how do you select an MBA that will allow you to NOT have to unlearn it afterward? Vesting your MBA is important, not all of them are equal.. but generalizing like David did is pretty closed minded.

So the podcast went on and David started talking about VC money. He is of the school that VC money is a time bomb on your business. I have to admit, that made me like him better. I agree that taking any kind of VC money could simply kill your business and make you focus on the wrong things. Taking VC money is not the only way to build a business. Spending your own money makes you think differently about what you need to focus on, and I agree with David on a lot of points he made. I would simply extend into the fact that some businesses are doomed to failed without VC money: Capital intensive businesses (clean tech or health care), or  industries where being the first to market is super important and extremely fast growth is needed (where market barriers are very low => think Groupon!). Some businesses, even software businesses (David restricted his comments to software/web) just have bigger chances of success if they are VC backed than if they are not. When do you take VC money, or what stage of the company is a true question that needs to be thought through carefully. Getting VC money is not an end goal, it has to support a growth strategy and make sense for your business and your industry. I think that fundamentally David is right, but again, a bit short sighted. VC money is not all evil, but he is right that many entrepreneurs fall into the bad trap of just looking at the money, not the underlying purpose of getting that money.

At this stage, I was neutral, and then David started talking about the fact that to build a business you didn’t have to work 100 hours a week or you get burned out and you might be much more productive working less and sleeping more. At that point I realized that I could relate to David’s experience. In my two former businesses I worked hard, but not like hell. of course I would spend much more hours on them than I would do for another business where I would be employed but not to the point where I would get burned out. I agree with David, efficiency is more important than quantity. Many people get overwhelmed very quickly and brag about how many hours they spend at work. When I hear that I always feel that those people have two problems: They don’t know how to prioritize correctly, and they are not efficient. Although I already hear some of you screaming that they don’t have enough resources, their deadline as so tight, etc and it is very true for many of you so I shouldn’t generalize. Let’s just say that “often times” those people bragging have those two problems. Prioritization and efficiency are extremely powerful skills that allow you to work on the right stuff, at the right time and get the job done without waste. Thriving for those two skills should be everyone’s goals. I am sure that David has both skills very developed. Good for him!

I started to like him at that point and thought that despite his take on the MBA, which is understandable if he did actually go to a bad MBA, made me think that I had been too harsh about 37 Signals. So I started writing this blog post thinking that I would praise the guy.. (not that anybody cares about who I praise or not by the way..). As I was writing I was hearing the Q&A section of the podcast in the background led by Steve Blank (which I love. Did I already say that?) and Steve asked him about the scalability of a business like 37 signals versus a $1B business. And he killed it.. David thinks he could run a $1B company with 15 people, the way they do today. No correlation. What the Hell?? Is he stupid or what?? 37 Signals is ten years old. I realized it’s like Salesforce.com. I thought to myself: well you are not a billion dollars company because you are short sighted, and salesforce.com is over a billion dollars company because they have done all thing you have been criticizing during the podcast. But what nailed it is when he started talking about Salesforce.com (I didn’t plan this! it just happened!). David said: did you look at their margin, did you look at their P/E ratio, it’s bad and all that stuff, it’s so low (P/E so high), how can a software business make 5% margin. This to me is just the final proof that David doesn’t understand what a growth business is about. Salesforce.com reinvests every possible dollars they have into their growth. Salesforce.com has had the goal of leading the revolution of enterprise software all along, they made the Cloud and SaaS a reality, they have a long term vision (something that 37 signals doesn’t have as – David’s words: they think 2 weeks ahead), they are buying their growth in a model where if they were to make no sales next year, and I means zero dollars, firing every possible employee, they would probably make over a billion dollars in margin (no cost). That is what the whole SaaS model is about, and that is what Salesforce.com is about: Growth! reinvest every penny into the business. If next year Salesforce.com announces 40% margin I’ll be pissed! Why didn’t they spend more in hiring, marketing, expending? When Salesforce.com is a $5B business I’m guessing the growth potential might slow down a bit and then the margins are going to explode, the P/E will go down from the really high level it is at today. When salesforce.com decide to stop fueling the growth, they will make huge amount of money: that’s the SaaS model, it’s not just software. David doesn’t get it apparently.

I’m coming out of this podcast wondering how 37 Signals is still alive. Basecamp is pretty good, I’ll give you that, but man, with such a management team, I’m surprise they are still here, and I’m starting to really think they have other sources of revenue to keep them alive. Anyway. Interesting podcast to listen to.

Cheers

Social enterprise: the rise or fall of corporations

Social enterprise has traditionally been more of a non-profit organization type of enterprise, but in the last 2 or 3 years, the term has taken a whole new dimension: A Social Enterprise can now refer to an enterprise that embarrasses Social Networks in every way. Internally this enterprise needs to foster collaboration, externally this enterprise needs to have a presence, monitor and interact with social media channels, and generally this enterprise needs to be much more open. All this has to happen in the context of a fundamentally mobile world.

I believe that we are in the middle of a grand scale transformation where large corporation are going to fall faster than ever because of social networks. New product come to market at lightning speed (Facebook, Groupon, iPad) taking over the worldwide market share in a matter of a few years, leaving established businesses in the dust. One of the most stiking example is Nokia.. After reading Stephens Elop’s burning platform memo (here) on how Nokia has found itself waking up with no better option than attempting to avoid drowning in about 2 years only, and Eric Schmidt admitting he “screwed up” with facebook (here), you can see how bad the situation is getting for those big companies. Granted Google is still pumping money in the machine like crazy and they are not necessarily in bad shape right now, but even then, as search is turning social local and mobile, Facebook is an very serious and dangerous competitor for Google already and in the years to come. Failing to recognize that social media changes everything is the guarantied failure of a company, big or small.

In my work, I now meet more and more of those big corporation and I can see how worried they are that they will not be equipped for this paradigm shift. There is no time to wait anymore, they have to adapt and we can see two attitudes:

The first (and very common one) is trying to work around social with minimal investment just as a way to say your are doing it.. For example, the enterprise sets up a facebook fan page, has a tweeter account, blogs a bit. It names a person or two to take care of this but doesn’t give much budget for it. This feels to me like the early days of the internet. Every company had a web site, but where was the presence? Where is the engagement toward a true change in the nature of business and of how your customers are interacting with you. The companies that did embrace the web at full speed are the one that benefited the most and have been successful. The raise of SaaS companies in the last 10 years versus on-premise offering is a demonstration of the shift. As the Internet grew, as people became more and more confident with putting data in the cloud, as technology enabled and supported this change, companies had to adapt to it. I wouldn’t go all the way to say that on-premise software is dead, but the next 10 years are going to be about the cloud and SaaS applications. Companies that do not understand this will fail.

The second is to recognize that social is where the world is going and make it a strategy for success. This has to come from the highest level of the organization and has to be nurtured internally as a cultural change. The change will come through more openness and transparency, more internal collaboration, and put processes and tools in place to manage the social channel presence. Having social agents dedicated to social conversation, having tools to monitor, sort, prioritize and drive business intelligence around social conversations. Collaboration is one of the major pillar of becoming a social enterprise. Collaboration is not just having meetings and sharing some files, it’s about open communication internally, open access to anyone, it’s about breaking silos in the enterprise, between teams, groups and the hierarchy. Being scared of social channel is a route for failure, isn’t offense the best defense??

Not a lot of companies can enable that change, the Microsoft of this world are entrenched in an old mindset, not necessarily because they don’t see the opportunity, but really because it’s in their DNA. Their business model, their technologies, their processes are not tailored to support the speed of change. How can a company adapt to change when they release major updates every 1 or 2 years? the iPad is just a bit over 1 year old!! ONE year!! have you seen the impact it had on the enterprise, on mobile workers? By the time people adopt a new product like the iPad, software vendors, and other company need to adapt their entire offering and almost business model. It is not with release cycles of a year or two that it is possible.

This situation also explains partly why startups are rising so fast. To be efficient in a world that’s moving so fast, companies have to be extremely agile, which is usually the strength of start-ups. This open tremendous opportunities for startups actually. One way to go at it is to try to find what what feature set of technology established companies need to adapt to the new social world. That would open for a good exit strategy.

The point here is really that I’m expecting some really established company to fail badly in the comping years, either taken by ultra-fast growing startups, or by companies that are agile enough to adapt fast to those changes. It is going to be interesting to live this change and see if the current frenzy of investment by the VC community will pay off. Who’s the next google? who’s the next facebook? who’s coming out with the next iPhone/iPad? I for one, love this uncertainty which is a bastion for innovation.