December 12, 2005
How Can David Beat Goliath?- Strategy #8: Defend Against Goliath’s Attack (Part 2)!
This is the second part of my post on defending against the large company attack.
In “part 1” of this topic, I described the attack vectors that Goliath might pursue. Depending on how aggressive and effective an attack the large company mounts, it will use a combination and sequence of the attack vectors.
This post is on how the emerging growth company can set up to defend against Goliath’s attack. The overarching point here is that the result of the attack will be determined before the attack begins! If you wait until the point of attack to respond, you will lose (unless you are lucky!). When you boil all of the possible attacks down, there are five major defensive focal points for the emerging growth company:
- The best defense is a good offense– Stay focused on building your advantages and minimizing goliath’s advantages
- Delay the attack as long as possible– Minimize your perceived size and attractiveness as long as possible
- Add the teflon coating– Minimize your exposure to Fear, Uncertainty and Doubt (FUD)
- Fortify your position– Make it very difficult and expensive for Goliath to win by building a really strong and defensible competitive position
- Be prepared to negotiate– If Goliath wants to discuss acquiring you, be prepared to talk to Goliath (and other possible acquirers) to help you guide the result.
If you execute against the first four points very well, then the only troubling attacks for you should be Goliath executing an all-out, focused, attack against you, either organically or by purchasing one of your competitors. Once it decides that a particular product market is attractive, a really well run large company will run the numbers before deciding what to, and probably start a conversation with you about a potential acquisition to help it decide its attack vectors. The key then, in point 5, is to use the conversation as a vehicle to help you guide the outcome of the attack.
I address each of these five major focal points below in more detail.
Focal Point #1: The best defense is a good offense…
Your first major focal point should be around maximizing your advantages and minimizing Goliath’s advantages. I have already written on several major advantages that the emerging growth company can focus on as well as how the emerging growth company can minimize Goliath’s strengths. These are all great concepts to consider, and the more you are able to implement successfully, the more defensible you will be to Goliath’s attack. Below are the links…
- Create an Information Advantage
- Create the Time Advantage
- Create the Scope Advantage
- Create the Scale Advantage
- Create the Innovation Advantage
- Set your Operating Point Closer to the Funnel Singularity
- Attenuate Goliath’s Strengths
Focal Point #2: Delay the attack as long as possible…
The major point here is that you have the opportunity to manage Goliath’s perception of both you and your product market. You need to directly consider Goliath’s window into your company and product market and determine how you can “paint the window” with the scene that you want Goliath to see (the more you dominate your market niche, the better your opportunity to hold all the paint brushes). Goliath’s perspective will help determine the emphasis that it places on attacking your market.
Goliath will have more interest in the market the larger and more profitable the market appears AND the easier it appears to win in the market. Therefore, your goals are to:
- Make the customer economics appear very lean or opaque, at least at first. If you aim for the economic singularity, you will have a much larger install base before your draw goliath’s attention. In terms of making the economics look opaque, the advertising driven economic model is an example of business economics that are very opaque to outsiders (whereas, a product with a set customer price is easier to understand).
- Focus on a niche market. Even with good customer economics, if Goliath applies it against a small number of buyers, the perceived market size will be small.
- Focus on an “older” market. This is not for everyone, but doing new things in an old market is not very attractive on the surface (it could be extremely attractive, but difficult for the large company to get its mind around until you prove it with results). Google may have bought itself a lot of time, for example, due to the fact that earlier search engines were not very successful from a business perspective. Similarly Salesforce.com enterered an older market in a new way, and there were a lot of early naysayers.
- Make your approach too “unique” for Goliath. An extremely unique product and/or business model will catch Goliath flatfooted for a very long time. The less data that is available on the approach, the more creative the approach, and the more differentiated the approach from Goliath’s business model, the more naysayers there will be in Goliath’s organization preventing any real attack. Google, Salesforce.com, Webex, and Skype are all great recent examples of this.
- Make sure that Goliath knows it will be difficult to win. The more you both execute and communicate on Focal Point #4 (below), the more difficult the market will be to win (this assumes that Goliath does the right analysis!)
Focal Point #3: Add the teflon coating…
The point here is to minimize your exposure to Fear, Uncertainty, and Doubt (FUD). I addressed the situations where FUD would be more effective in my last post. There are several ways of minimizing the effectiveness of FUD:
- Focus on customers other than Enterprise customers. Focusing on departments of large enterprise (rather than the entire enterprise), small and midsized businesses, and especially consumers will help prevent the effectiveness of FUD. (The smaller the decision-making group, the less effective FUD becomes.)
- Make your product very inexpensive to implement and to switch off. The lower the cost of a buyer “making a mistake,” the less worried he/she will be about making a mistake. The buyer costs include all of the costs associated with price, implementation, configuration, and learning as well as all of the costs of migrating to another product. Work hard to keep these costs as absolutely low as possible.
- Make sure that your product can’t be considered a “feature” of Goliath’s product. The more the buyer thinks that the product could or should be combined into Goliath’s product, the more he/she will wait for Goliath to offer it.
- Make sure that everyone surrounding the company makes good money off of offering your product. The more they suffer economic loss by waiting for Goliath’s product, the less interested they will be in waiting.
- Distribution outside of North America may help minimize the effectiveness of FUD as well. Stephen Pollack, CEO of Platespin (my most recent investment), pointed out in a comment to my last post that his experience FUD results are the strongest in North America and much weaker in other parts of the world, Europe most notably.
Focal Point #4: Fortify your position…
The last two focal points (3 and 4) are really medium-term tactics (they are important, just will not be long-term in nature). Longer-term, once the large company decides that it is interested in your market, you want the larger company management looking at you and thinking “man this company is going to be extremely difficult to displace!” (You also want it to be true!) Below I list the characteristics that you should consider building into your company that will give you this strong, defensible position:
- A very very large number of really really happy customers who speak highly of you and your products (if you bought enough time, it will help you get more customers prior to the attack). You get this from
- building a product that truly meets your target customer’s deepest needs at a very reasonable price point,
- creating great customer support,
- not making missteps with your customers (for example, a product update that has too many bugs), and
- continuing to make the customer experience better
- An architecture that is easy to evolve and has a rich API. This may be the most important factor in your product. It is hidden from the outside world, but amazingly important to the continued strength of your product advancement!
- A large amount of engineering and development. Assuming that your development writes highly efficient code, the more lines the better from a defensibility perspective (also, this assumes that your customers find every line valuable!)
- A daily-use and intuitive user interface. The more intuitive your user interface the better, and the more frequently the user interacts with it, the more comfortable the users will be with your product, which leads to a level of defensibility.
- The “real world” problem solving that gets baked into your product. In my experience, most products have code that is theoretically replicateable. The problem is that the newer entrant (large company) will need to hit all of the real world “snags” that you did (scale issues, customer environment issues, interface issues, etc.). But when you were trailblazing the market, your customers were pretty forgiving. Now that you have a fully baked product, your customers are going to be less forgiving to the new entrant. Why buy their product with all the “snags” when your product has solved these problems? In my view, the more snags that you hit along the way, the more defensible the product…think about the snags as “tacks in the road” that are behind you but in front of the new entrant (note: this issue is a real defensibility, but it is very difficult for the large company to understand until they start trying to deliver a similar product…most companies underestimate domain expertise until they hit the “snags”!).
- The heterogeneity of your product environment. The more your product works in heterogeneous environments, the more defensible the product (assuming customers view this as a benefit).
- Interoperability-interfaces to other products and services. The more you easily integrate into other products and services, the more defensible the product (again, assuming customers view this as a benefit)
- Your networked externalities. If you have a product whose value increases with increasing users (like the telephone, fax machine, social networking sites, e-bay, Craig’s list, certain spam filter approaches, etc.), then your product will be more defensible (assuming you have a number of users that the large company can’t easily replicate).
- The combination of data and application delivered together. In the past there were application providers and data providers. This distinction is blurring and the companies that can provide both add more value and are more defensible (at least until the approach becomes more common).
- The outside world only seeing the tip of the iceberg. The more your product details and plans are hidden from view, the more difficult it would be to copy what you are doing (Google has been extremely effective with this approach…all the outside world sees is its simple user interface).
- Your patents. I wrote previously on patents, and continue to believe that this is an important area to explore. The more useful patents you have, the more defensible you are.
- Your employee turnover. The fewer employees that leave the company, the less information can be shared outside the company. Hire the “right” employees, separate out the “hiring mistakes” early and keep them happy and productive!
- A very high growth rate with a positive cash flow (the higher the better),
- A strong balance sheet, and
- Investors with deep pockets.
If you do all of the above very well, then the large company will have a much lower probability of organizing to compete directly with you, and if it does, you will have a much better probability of defending the attack. Once it does the analysis (assuming that it does the analysis correctly), the large company will probably approach you to discuss the potential for purchasing you (and will probably approach your competitors as well).
Focal Point #5: Be prepared to negotiate…
If you have executed on the appropriate points above, then you should expect an e-mail or phone call from the large company at some point (I actually work to make sure that the appropriate large companies connect with my portfolio companies at the appropriate stage of development, which helps to grease the skids for this call). What you need to focus on is what you want out of this call and its follow-on activities. The issue that you need to address is whether you are ready to sold and, if so, at what price and terms.
To help you determine this, you should be considering:
- What is a real scenario (or probalitity weighted scenarios) if you continue to go it alone?
- What is the probability that Goliath executes a very targeted attack AND what is the probable outcome if this happens (you probably want to assume that Goliath purchases your best direct competitor to help)?
- What are the other opportunities to be purchased, both now and in the future?
With these two issues fully considered, you should be in a relatively good position to determine what the best outcome of the conversation with Goliath should be. For example, if you are convinced that you will win regardless of Goliath’s attack, then you should hold out for a very strategic price or just go it alone (and be careful about the information that you offer up). If you are less convinced, but think there is a better acquirer, you should start a conversation with that company in parallel with the Goliath option. If there are many likely acquirers, you may just want to “do nothing” at this point. If Goliath is the only game in town and you are convinced that Goliath will win (or just want to be part of the Goliath team) determine a fair price and sell…the point is to fully understand your decision tree and to determine what you need to guide the conversation down the best path(s).
This post is not about the details of the communication or negotiation strategy with the large company (perhaps a later post). However, Ed Sim has a couple of good posts on the topic of selling to large companies to the extent you are looking for some good thoughts on the issues (Companies are Bought and Not Sold, Beware of Fishing Expeditions).
The overarching point of this post is that you need to set up well in advance of Goliath’s attack so that you are best positioned for a positive outcome. The more time you have before Goliath attacks, the more defensible your strategy, and the more prepared you are to discuss acquisition, the better the outcome.
I did not directly address attacks on your reputation or regulatory attacks here. My best advice on reputation attacks is to ignore them (take the “high road”). They reflect more on the company making the attack then they do on you. With respect to regulatory attacks, these are so specific to individual situations that it is difficult to offer broad advice in advance of the attack. Therefore, my best advice is to surround yourself with the best advisors to construct and execute a plan if/when you find yourself in a situation where you think this type of attack might be possible (and, as with all of the other points, take action well in advance of the attack!).
(note: you will see that many of the supporting actions for building a defensible position were also supporting points to developing an advantage. These overlapping actions are particularly important to consider. In later posts, I plan to describe the implications for each of the functional areas of your company, which should help clarify the priority actions.)