David Piccione.com

I read an article yesterday from the Financial Times via Hacker News at YCombinator. In it, the author Kevin Allison argues that in order to keep a lid on your great idea, you should guard it as something valuable when pitching to investors and the like. Nonsense I say.

Entrepreneurs have a tenancy to place a tremendous amount of value in the ideas they generate. While this is helpful and motivating, it also places the idea itself on an undeserved pedestal. The truth is, you probably aren’t a genius and your idea isn’t unique. There are 6 billion people on this planet, and the odds are quite high that your unique idea has circulated in the heads of many people before it made it to you.

Thinking Millions

People like Paul Graham put zero value in ideas. For them, execution is all that matters. I’m not as harsh in my thinking, but it’s safe to say that ideas are like penny stock; there’s always potential.

There’s little more than potential until you act, however. That acting isn’t continuing to dream and build out the idea, it’s putting it into something that can be tested. When your idea is in motion, you begin to make assumptions about how that idea will play out. If you figure the idea is poor, you tend to berate it until you figure it isn’t worth perusing. On the flip side, if you figure your idea is strong, you build it up to the point that you’re heading a 100 Million dollar company in your head. Everything working just as you envision - all thanks to your idea!

Projecting your million dollar vision into reality doesn’t really help matters, because nobody really shares it. It doesn’t exist.

Stop Thinking and Do

The fastest way to get over your insecurities is to put them in motion. For many people, this becomes the time for operating in “stealth mode” for extended periods, or looking for VC’s to give you money, while at the same time not sharing too much of your grand master plan. Someone might steal it after all.

Once you get into this trap, you start to impart value onto what might be and not what is. One of the biggest assumptions that you made when you came up with your idea is how the market would react to it. You assumed this, because if you actually had empirical evidence of how exactly the market would react to your product, you wouldn’t have an idea, you would have an existing business.

You were most certainly wrong in this assumption. No matter how well you know your space, you have no idea of the subtleties in market preference that will emerge in reaction to the change you’re about to introduce. You need to be able to react to these and take advantage of them. Your business isn’t going to be what you think it will be, the goal is to make sure that whatever it is you build is successful.

Fail Fast and Prove Your Assumptions

The best way to avoid placing too much value in your idea is to remove that market assumption as soon as possible. You can do this by taking your master plan, reducing it to its core elements and building and releasing a real product. These days, the entire iteration could be done by a dedicated team (or individual) in less than a month. That means you’ll release your idea into the world then, warts and all. If there is interest, you can develop it. If there isn’t you can re-evaluate it. Either way you’ll start to judge a real product and not a figment.

You’ll be one month ahead of the game when it comes to the competition. If it took you a month to get to this point, it will probably take them just as long. If Big Corp loves your idea, they’ll probably ship something next quarter - if they are lucky. Odds are if they’re smart they’ll just invest in you.

There is no reason to hide your idea, because you now have a product to evaluate.

But I Need Money!

No you don’t. You need time and effort and a real product, but not money. You can worry about money at a later stage, once you have something to actually invest in. The research is in, and the less money you spend up front, the more likely you are to succeed. Take a look at this.

“Only 65% of the companies that started with more than $100,000 were in the black in 2001, compared with 83% of those businesses that were launched with $1,000 to $10,000.”

Those are pretty compelling numbers.

Ideas Are Nothing Until They Are Something

The idea in your head isn’t worth much more than you are right now until you make it worth more. You do that by creating a business from it. The only way you can do that is to expose yourself. If you choose to attach a value to your idea, you’re only attaching dollar figures to an arbitrary notion instead of an actual product. In other words, you’re wasting your time.

If your idea has passed the “you” test (i.e. you’ve thought it through and figure it has potential) you should be building. You need to know if you’re right. Once you’ve done that - then you’ve created value.

Last Friday, Dharmesh Shah from On Startups wrote a piece that rather interestingly questions the sudden loss of buzz from the 37 Signals camp.

I found this particularity interesting for a couple of reasons. First, I flat out admire 37Signals, their products and philosophies and second, because I’ve noticed this effect as well.

If you aren’t familiar with the company, you’d do well to take a look at their site and get a feel for who they are and what they do if you want what I say here to make any sense. If you are, you know that they create simple, “opinionated” software and generally rail against established software development methodologies - to great success.

I really like their “Getting Real” mantra. I’ve tried to follow it in my own work and generally it helps the process of development. Thinking about what Dharmesh was saying, I wondered aloud at Hacker News if perhaps lack of buzz was simply due to the fact that the team is reaching its work threshold. With only so many people and so many hours, you can only do so much. 37Signals hasn’t added all that many new staff members, but if what they say is to be believed, - and I do - they’ve increased their business reach quite a bit. They’ve got both more products and more active users now than they did in 2006.

When Growth is the Enemy

For most businesses, growth is an appreciated challenge. But when you run your company on the mantra of being simple and using small teams, the pressure to grow takes on a whole new meaning. 37Signals runs the very real risk of turning into the one thing that they are trying to avoid - the large, lumbering company.

To complicate things further, anyone who understands developers knows that none of them want to do maintenance. It’s the next big thing and cool project that they what to be coding, not fixing an overflow error on software that’s 3 years old. Too much fixing and not enough creating sends good developers far, far away.

Finally, 37Signals are masters at marketing. They’re so good a creating demand for their software that they could probably launch another full book on the topic. This skill almost demands that they continue to launch products. It also means that they utilize the press coverage and buzz they receive directly - they translate it into sales more than others would. Losing the buzz they had in 2006 isn’t exactly something they can ignore completely, regardless of the health of their business.

Issues and Options - Growing Real

So what do you do when you have a growing client base, almost as many products as staff (they have 6 products to 8 employees) and a commitment to avoid becoming just another development shop?

It’s a good question, and not one that I’m sure I can properly answer. One of the most obvious things is that there are three options, two of which are not appealing at all, and one that would be as revolutionary as “Getting Real” was when it saw the light of day.

First, one could always decide to “become the corporation” and continue to grow, adding staff to accommodate. Unfortunately, this would mean abandoning their lean and mean strategies, at least to the point that they cease to be as groundbreaking as they are now. I doubt they will choose this option.

Second, they could refuse to grow any more and focus on the products they have, maintaining the philosophies that made them what they are. I can imagine that this is a very real option for them right now, or will be in the near future. I’d be disappointed if they chose this route, because I think it ultimately means they stop innovating. There’s only so much you can restrain the talent on that team, pretty soon they’ll find something else to do. Additionally, this would mean completely abandoning some great skill in marketing and product launch that these guys are really starting to harness. Although it’s an option, I’d like to think that this isn’t the direction Fried and company are planning to take the organization.

Evolution

The third option would see the team continue to release new products at the expense of existing ones. Although this is probably the trickiest route, I believe this is what we will begin to see from 37Signals in the near future.

There are a myriad of ways this can be accomplished, and here are three for example:

1. Discontinuation - They may decide that “6″ products is the most they can support in their desired state. This means that as a new product is released, another - under used/low profit/high maintenance - is discontinued. The trick becomes customer management - whom do you offend, how, and when? a variant of the theme would be to open source older products.
2. Product Sell-off - Perhaps another option would be to sell older products off to a company or companies that would be willing to continue offering the service. This is rather interesting in that 37Signals could then continue to innovate and possibly even finance new projects with the proceeds of the sale. The danger here again becomes the customer. If the “buyer” doesn’t offer the same level of service, then 37Signals itself may see push back from offended clients.
3. Acquisition - 37Signals have repeatedly stated that they aren’t interested in selling their company. But in a near future where they run the risk of growing into something they don’t want to be, this is always an option. Sell the farm, keep the team together and work on the next new thing using the principles they’ve become accustomed to.

Choices, Choices

I’m not under the illusion that this post is anything but conjecture. I don’t pretend to know intimate details of 37Signals or their current situation, but it seems clear that if they aren’t already battling with the paradox of being successful yet remaining small and nimble, they will be.

I’d be really interested to see how they would handle this challenge, or if they see it as being relevant at all. Clearly, lots of companies start out nimble and “real” and evolve into bureaucratic behemoths with success. Will 37Signals buck this trend, or will they be as revolutionary growing as they were at “becoming”?

Regardless of the outcome, I hope they continue to succeed building software that people pay money for to accomplish real tasks. They continue to be an inspiration to many of us, myself included.

Yesterday, I wrote that the current boom being experienced in the tech sector is about to come crashing down around us. To be honest, I didn’t anticipate the level of passion the article would stir up. There were a good deal of experienced opinions shared at ycombinator, and I may revisit the topic again soon.

For now, indulge the point I was making; is there anything that founders can do to isolate themselves as much as possible from the negative effects? Is it possible that even in a downturn, a particular company could find a level of success?

Of course it is. Back when the sector was hit hard in 2000, there were companies that managed to survive and grow. Even in a full on recession, the economy doesn’t stop. Knowing how to position yourself to take advantage of change will be key to your startup’s success in 2008. Even if I’m wrong, and the expected bust fails to materialize, following the advice here will give your organization better resistance to changing realities.

Understand Your Market

In a downturn, what will happen to the way your customers think? If you take a look at what’s happened in previous recessions, you can accurately predict the effects on your company. Traditionally, the mindset of a consumer changes in the following ways:

1. People pay more attention to purchases - Your consumer will be more critical of the value received from your product. This is especially true if your consumer is an advertiser. What you’ll need to demonstrate is a value for money that places your product high on the “need” list; the less likely your product - or the price of the product - is classified by consumers as a luxury they can’t afford.
2. People look for optimization rather than expansion - Your consumer is going to start looking to get more use out of what they currently pay for. It’s going to be difficult to launch a new product that requires a large investment. Instead, take a look at ways you can improve something a customer already uses for a smaller investment. Now is the time to check out the competition and see where you stand compared to them.
3. People act like the recession will last forever - Your customer will start to look at buying things in smaller amounts and lower price points. It’s more attractive to buy less of a product than more, even if buying more is a better value. Retaining the money in hand is a more pressing concern.

Play the Right Hand

If this is how your customer is thinking, you’ll need to position your startup to take advantage of their concerns. You can do this by adjusting your company as such:

1. Make sure your product is “real” - “Real” products address “real” needs. You’ll need to establish that your customer can’t live without your product - especially not now! Chances are, if you have end users that are already paying to use your product, this is a matter of perception. It’s time to focus on marketing: what does your product offer that others do not? What will the customer lose if they stop using your product? If you look at a company like 37signals, their products address needs that are perceived as essential. It’s doubtful that a Basecamp customer will cancel their subscription when they’re worried about their own sales. If you make your money from advertisers, take a look at what attracts them to your site specifically. How will you be able to prove to them that $10 spent with you is worth more than $10 spent with a competitor?
2. Offer efficiencies and savings instead of new features - Show the actual value in your product to your customers. How much time is it saving them? How much more expensive would it be for them to go elsewhere? If you know, spell it out for them. If you don’t, find out. Even better, look at your own efficiencies - are you doing things as best you can? Can you do them cheaper? Now is a great time to look inward and improve processes.
3. Focus on retention - In a down cycle, it’s difficult to translate a stay and hold mentality into a new sale. Because of this, put some extra effort into those customers that aren’t as happy with your service as they should be. Don’t let them become someone else’s win. Solve their issues, address their concerns, and put them back in your safe column. It’s the easiest sale you’ll make, and it’ll be easier to do now than when the market is up.

Things to Avoid

There are certain sure fire ways to ensure your company will implode as soon as people start to get jittery about their money. When you’re adjusting to survive, be sure to stay well clear of the following traps below. A special note however: If you happen to fall into one of these categories as a result of your deliberate strategy, it doesn’t need to be lights out. You just happen to be in a space that is particularly vulnerable, and you’ll need to be extra careful at the moves your organization makes.

1. Ad-based revenue models - One of the easiest cost savings a company can make is to cut its advertising budget. When this happens, you better be sure ads aren’t your only source of revenue. In 2000, almost all of the companies that went out first were those that relied on pay-per-click banner ads as their only source of income. It would be very optimistic to assume that more than one or two of our favourite multi-million dollar sites will be around in five years. Odds are that your startup is nowhere near their level. You may be able to mitigate the loss of ad revenue from switching to a pay-per-action model,- since the advertiser can then see real numbers - but overall it’s not a situation you want to be in.
2. Being recreational or “fun” - When people start to worry about their money, they reduce spending on leisure activities. In the depression, people were so concerned about making money that they actually took on extra jobs instead of having fun, which as seen as frivolous and risky. I’m not suggesting recessions are that bad, but staying out of this market is a good way to avoid being hurt unnecessarily by a slowdown. Admittedly, this isn’t a huge concern, but it’s something to keep an eye on.
3. Innovate at your own risk - In general, innovative ideas are going to be a tougher sell. The one area though where innovation will work is where it provides measurable efficiency improvements to the consumer. Case in point: Google. Releasing a search engine that provided a better result to the end user - saving them time - allowed Google to ignore - even capitalize during - the last market slip.

It’s About Good Business

An economic downturn is a time to separate the wheat from the chaff in business. Your startup will need to survive the harsh realities of stingy consumers and ruthless competition. You’ll do it by focusing on real needs, and improving results to the problems that don’t go away.

Recessions and crashes don’t do much except eliminate ideas that are purely based on speculation. If you can ensure your startup focuses properly, you’ll have no problem building a solid organization. If anything, you can rest assured that if your idea can survive and be fruitful in a recession, it will most certainly cruise through an upswing.