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Tag Archives: Technology M&A

Superpowers or Asteroids? HubSpot gets all Asymmetric

Just read an excellent blog posting by Brian Halligan, founder and CEO at HubSpot, the leader in inbound marketing. Entitled “8 Lessons From HubSpot’s $32 Million Round with Salesforce, Google, and Sequoia”, the blog’s ostensible purpose is to act as a set of do’s and don’ts for wannabe tech entrepreneurs. It’s a very good post with lots of valuable insights from a business that has defined a new marketing service category and, putting their money where their mouth is, leveraged their own technology to grow their user base from zero to over 4,000 businesses in a mere four years. Impressive stuff.

Accolades aside, the lesson that really resonated with me was number 7, “Partner with Asteroids”. Quote:

“I had dinner a couple of weeks back with Drew Houston, founder of Dropbox.  He said that a big part of his job was navigating his spaceship through the asteroid field of potential competitors.  Part of that statement motivated me to partner with Salesforce.com and Google on this deal as they are asteroids that could blow up our spaceship or could accelerate it if we can hitch a ride.  Too early to tell if this decision is a good one, but it feels right.”

Good decision Brian. Co-opting the momentum of two SaaS juggernauts rather than going head to head with them is a great idea. There is no question that your assessment of Google and Salesforce.com as potential ‘asteroids’ who might wrest the Inbound Marketing opportunity away from HubSpot at any time is wholly accurate. Better to align your interests with theirs and, in doing so, explore opportunities to make their scale and momentum work for you.

HubSpot has learned the most important play in the Asymmetric Marketer’s book: Identify you most likely ally (or competitor) from amongst the ‘software superpowers’ and find out how to make what you do work for them, all the while quietly (formlessly) nurturing your own aspirations for market and ultimately, multi category, domination. This is a tried and tested approach that has helped propel numerous businesses from startup to multinational cross category aggregator, organizations like Microsoft, Oracle, Google and Salesforce.

HubsSpot seem to get it. I’m going to watch how their Asymmetric strategy plays out with interest. I suggest that all superpower aspirants do the same.

 
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Posted by on March 15, 2011 in Uncategorized

 

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The New Asymmetry: How web 2.0 businesses are outfoxing the superpowers to remain independent and strong.

The hegemony Enjoyed by software superpowers (for new readers unfamiliar with the lingo, this means multinational IT aggregators with a product or service in every significant technology category) has long been maintained through the consistent implementation of a very simple strategy, that of market co-optation. When a superpower feels threatened by an emerging technology player they generally do their best to neutralize the threat; either through the introduction of an alternative product, like Microsoft bundling Explorer with Windows to crush Netscape, or through acquisition, like EMC’s masterful takeover of VMWare. As superpower businesses are, for the most part, highly cash generative, they have historically possessed deep war chests with which to employ such tactics. And they have generally been successful, as evidenced by the sheer size and breadth of businesses like Oracle, Microsoft and SAP. It appears, however, that the rules might be about to change.

The world was shocked in December of last year when Groupon, a high growth provider of localized promotional offers, turned down Google’s $6Billion takeover bid. On the surface, the deal appeared to be beneficial for both parties. Google would have an opportunity to diversify its business and Groupon’s stakeholders would get a mighty payout. What happened instead was interesting and bears reflection. Groupon leadership leveraged the Google bid to raise almost a billion dollars in private finance. This is not the first time a superpower has been denied in its drive to acquire a promising business. It may be the first time, however, that a small player has used the interest of a large acquirer to access a massive amount of third party capital.  A new normal? A paradigm shift? Is it possible that age old mechanisms for establishing and maintaining superpower status are suddenly invalid? I think the answer is yes. Perhaps. Temporarily.

The fact is that there is an awful lot of cash on the sidelines right now, as investors attempt to ascertain which way the global economy is going. There is also a scarcity of quality high growth investment opportunities. The result is that investment banks are falling all over themselves to invent investment vehicles that enable Web 2.0 businesses to retain their independence and escape regulatory scrutiny while onboarding giant infusions of capital. This in turn allows such businesses to satisfy their own aspirations for category domination while evading the clutches of their friendly neighborhood superpower. An anomaly? The world’s biggest software businesses hope so.

 
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Posted by on March 8, 2011 in Technology

 

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Software Superpower 2.0

Facebook, the leading social networking site, reached a couple of significant milestones this week, achieving a valuation of $50Billion and toppling search juggernaut Google as the world’s most visited site. This news got me thinking, do we have a new software superpower on our hands? Does Facebook possess an asymmetric advantage in the social networking space that allows them to lock in users and lock out potential competitors (particularly the cross category players – Oracle, Google, IBM, et al)? Have they successfully co-opted the resources and momentum of a superpower  to help to catapult themselves into the stratosphere? Do they have a business model that is sufficiently sustainable to enable them to wrest strategic new markets and service categories away from lesser foes? I believe that the answer to most of these questions is a qualified yes. Let’s look at the facts:

Sustainability: Facebook has apparently generated some $2Billion in annualized revenues in less than six years and is projected to grow at a 50% clip for the foreseeable future, an unprecedented achievement. This is clearly a business with legs.

Asymmetric Advantage: While the social media phenomenon has been dismissed by some pundits as a fad driven by users who are fickle and will quickly move on to the next big thing, I am not so sure. Facebook is a place where 500Million users can easily and reliably communicate with friends, view images, remember birthdays and access up to the minute status information instantaneously. All for free! It would really take something special to make all of those folks go to the trouble of porting contacts over to another service or, worse still, ‘friending’ everyone they know all over again. Make no mistake, they are locked in. That doesn’t mean that Zuckerburg and his crew are taking it easy. They are constantly adding new services like the new messaging facility they released last month, a calculated masterstroke that will make transitioning to an alternate service even more challenging. These guys are well versed in Customer Barrier Management. Their users aren’t going anywhere.

Locked-out Competition: Facebook also appears to have enough of an asymmetric advantage to fend off much larger players. For example, Buzz, Google’s attempt at social media market co-optation was an unmitigated failure.

Superpower Sponsorship: Microsoft had the right idea when they bought one percent of Facebook. Not only have they already seen a threefold return on their investment to date but they also secured an exclusive agreement to serve ads to Facebook users, an asymmetric strike against arch rival Google. All this despite the fact that Facebook is a viable threat to Microsoft’s core OS business. I am certain the Redmondistas are well aware of the potential harm that a rival platform like Facebook might do them but the truth us they have no choice here, they have to play nice. Arguably it is Microsoft that is leveraging Facebook’s momentum not the other way around.

Category Cooptation: In another year or so Facebook will go public and speculation is rife that they will enjoy a crazy valuation, perhaps as much as $100Billion. This is going to be a business with a deep war chest. They will have plenty of resources to build out new service categories and buy out or develop around competitors with technology that impacts their strategy.

So is this a possible software superpower? Let’s recap. Facebook is a company with incredible market momentum, massive barriers to entry, a locked in user population, the sponsorship of the most significant cross category software player in existence and  (soon) billions of dollars to counter threats and develop new markets. They are truly a superpower in the making.

 
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Posted by on January 4, 2011 in Technology, Uncategorized

 

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Customer Barrier Management: A Source of Asymmetric Advantage

A few years ago, I was asked by my then employer, a provider of SaaS-based storage services, to attend an IT trade show in London in order to get a sense of what the competition was up to and gauge attendance in case we wished to exhibit the following year. While picking up some marketing collateral at a booth, I managed to get into a conversation with a competitor sales engineer, who spotted the name of my company on my name tag. It was a pretty interesting discussion. He was a very passionate fellow who knew a lot about the business and had some truly visionary ideas about where the industry was heading. During the course of our conversation, I mentioned that although it was very difficult (at that time) to convince organizations to store their electronic data in our system, I felt that, once they overcame their concerns and signed up to our services, they would likely be customers for a long time, if only because of the sheer volume of data under management and the cost and complexity of moving to another provider. My interlocutor took exception to this viewpoint. He was angry! “Why would you want to lock your customers in?” he demanded, ” Is it the policy of your organization to hold its customers hostage? At my company, we are working to make it easy for clients to seamlessly transition away from our service!”  I walked away, bemused. “Why would any company want to make it easy for customers to leave them, potentially for another competitor”, I thought.

It might have been more appropriate to ponder whether software superpowers ‘hold their customers hostage’. I assure you that they do. They not only make migration  from their systems difficult by holding data in proprietary formats, they also erect barriers to competitors’ attempts to integrate or interoperate with their offerings. Think of the way that Microsoft Outlook natively rejects third party plug-ins, advising users via a dialogue box that ‘poor system performance is due to the [Salesforce, NetSuite, Mimecast] add-on’ and enquiring whether it should be disabled. Another example of the use of such tactics is the way that Apple’s iTunes software works with the iphone but not with Android phones, making it challenging to switch mobile phone platforms if users want to take their music with them. This kind of “Customer Barrier Management (CBM)” is a wellspring of asymmetric advantage for software superpowers. It is not only not an accident or an afterthought, it is core to their product strategy. After all, locked in customers are a source of continuous revenue and growth for the superpowers, not to mention an inaccessible area of the market for their competitors.

I am not suggesting that practicing CBM obviates the need to deliver value; aspiring superpowers must ensure that their offerings are ‘best-in-class’ and established players must continuously invest in the development of value-added features. No force on earth will compel potential customers to buy or stick with subpar products. I am merely recognizing that the most successful software businesses jealously defend their client bases from competitors by making migration and, in some cases, interoperability, next to impossible.

Both startup software businesses and single category players looking to expand into new markets (or resegment existing ones) can benefit from this approach by ensuring that all future PRD’s are asymmetric (meaning they both customer barriers and distribution though cooptation of superpower momentum are baked in to product design). Although serious consideration must still be given to how the product must function if it is to address customers’ needs, it is also important to think about how to architect the system in a manner that locks clients in. Failing to address this element of product development might well be an invitation for competitors to coopt the market long before a chance of superpower-dom is a reality.

 
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Posted by on October 29, 2010 in Technology

 

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Could Omniture and Netscape have been Superpowers?

Asymmetric war can be confusing, my friends. Sometimes what looks like a win may in actual fact be a lost opportunity. In the high stakes world of technology M&A, multi-billion dollar exits are typically celebrated as victories. However, retroactive analysis of such ‘victories’ with one’s asymmetric marketer’s cap (or helmet) on can sometimes reveal a different reality entirely. By way of example let’s look at the rather nebulous case of Netscape. Founded in 1994 by Marc Andreesen and Jim Clark and sold to AOL for $4.2 billion in 1998, Netscape is the poster child for hi-tech success. Or is it? Perhaps not. Consider the facts:  Netscape went from establishing and dominating one of the most significant product categories (internet browsers) in the history of information technology to having their market viciously and meticulously co-opted by late entrant & noted asymmetric marketing veterans, Microsoft. Their Navigator product  has gone from a near 90% market penetration in the mid ’90’s to less than 1% today while Microsoft’s Internet Explorer enjoys a 50% share. In hindsight, Andreesen & Co’s propensity for stating that their browser was going to be “the OS of the future” may have been ill-conceived. By explicitly threatening Microsoft’s second most important revenue stream, they essentially gave them no other choice but to enter and, ultimately, lead the market.

What if these guys had worked with the enemy, instead of against them? What if Netscape had allied with Microsoft to exploit the near limitless synergies exposed through the marriage of their browser and Windows? If you are a reader of this blog you know that Netscape would then have been exercising creative symbiosis and co-opting Microsoft’s momentum from within, leading to…. Who knows? Netscape morphing into a platform and crushing Windows? Possibly. Speculation aside, the fact is that, despite a respectable and highly lucrative result for the Netscape team, there might have been potential for so much more.

Given the vertiginous drop-off in popularity of Navigator, one would think that the Netscape story might serve as a cautionary tale to other aspring software superpowers. It seems not. I recently discovered another, more contemporary example of an organization that failed to see the potential of an alliance with a superpower. As part of some research that I was conducting into the economics of SaaS, I had the opportunity to view a keynote given by Josh James, CEO of Omniture, a leader in the web analytics space. While James is clearly a visionary and his company is much admired, it was clear to me from listening to his speech that he is not an asymmetric warrior. “We can take nothing for granted”, he said,”there are many new entrants into our market including one whose name I cannot reveal. Ok, I’ll give you a hint… Their name rhymes with Schmoogle!” The moment I heard James taunt Google, titan of web advertising and burgeoning superpower, I knew that Omniture was not going to be independent for long. In another interview he did with Google for CNBC, James overtly questioned the utility of search in predicting buying trends, a clear challenge to Google’s supremacy in this highly strategic area. Within a few months, Ominiture was snapped up by Adobe for $1.8 Billion.

So what’s the problem? Omniture got a respectable valuation (6x revenues), their investors got paid and Josh is probably now driving a Porshe 911 up the winding road to his 60 room mansion and plotting to buy the Utah Jazz, or something. Still, I can’t stop myself from wondering if they might not of had an opportunity to be a massive SaaS aggregator in their own right, had they only taken the time to situate themselves in the software superpower continuum. Their technology is rock solid, often described as the ultimate instrument panel for internet marketers. They not only have an excellent engineering organization but also made several astute acquisitions over the years, leading to the deepest product portfolio in the space. The only thing they lacked was the kind of momentum that could result in the ultimate prize: true cross category leadership. Some folks, myself included, might be inclined to contend that it was there for the taking.

Hypothetical situation: suppose, sometime earlier in their history (just after the IPO, say) Omniture had taken the time to identify the superpower on whose strategy they were most likely to have a tangible impact. I feel pretty confident that this investigation would have led them to Google (after all, how many true superpowers are their in internet advertising and analytics?). I also feel it is likely, given the then complementary nature of Omniture and Google’s offerings, that there would have been sufficient synergies to support the formation of an alliance. Such a partnership would have essentially put the Google marketing machine and distribution channels at Omniture’s disposal. Talk about co-opting momentum from within! Imagine a bundled co-branded Google/Omniture service inclusive of click acquisition, monitoring and optimization! Sounds like a winner, doesn’t it?  Instead Google, feeling that their core business was threatened, decided to release their own analytics service and the threat of co-optation proved to be to much for Omniture who sought out the safe embrace of another giant of the internet: Adobe.

As I type this, I can hear the outraged backlash in my head. “Netscape was a pioneer, the Mosaic browser changed our lives permanently! You idiot!”, “Omniture was an awesome company, man! You know nothing!” Look, I know all about these companies’ respective pedigrees. I’m a massive fan of both organizations. I love ’em, really, I do! However, I also sometimes wonder if these businesses had recognized from the start that single category leadership fundamentally imperiled their independence, if they had seen that there was possibly enormous capacity and momentum at their disposal were they were prepared to partner instead of go it alone, might they not have ended up as something more than mere acquisitions?

 
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Posted by on October 3, 2010 in Technology

 

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Formlessness

In the early nineteen eighties, technology superpower IBM decided to enter the personal computing market, despite the fact that they weren’t particularly convinced that PC’s were going to be a needle moving product category (their projections called for sales of a mere 100,000 units per year). It is probably safe to say that, at that juncture, PC manufacture was not seen as a particularily strategic undertaking for IBM! So much so, in fact, that they couldn’t be bothered to dedicate their own internal resources to the development of an operating system. They decided instead to OEM a third party system. They looked at a few companies who might have the necessary software (Digital Equipment was in the mix for awhile) and ended up choosing a small software company that had recently relocated from Albuquerque, New Mexico to Bellevue, Washington, called Microsoft.

Microsoft didn’t actually own the operating system that they pitched IBM on (it was the property of a local company, Seattle Computer Products. Microsoft effectively entered into negotiations to deliver a technology that wasn’t theirs). Once the deal was done they acquired the system and changed its name from 86 DOS to MS DOS and the Microsoft legend was born. We all know what happened next. PC’s went on to become an absolute phenomenon with annual unit sales in the tens of millions. Many companies have entered the PC market since then, but there is still only one hegemon on the OS side: Microsoft.

This is asymmetric warfare at its finest. Microsoft identified a product category that had real momentum but that was not seen as strategic by their superpower partner. They co-opted IBM’s marketing momentum to drive sales of their software through IBM’s own partner community. By the time IBM realized the PC category had legs and that the demand  for Operating Systems was substantial, it was too late. They could neither co-opt the market by developing an alternative OS (they actually developed their own product, OS2, in partnership with Microsoft, not a great idea) , nor could they acquire Microsoft which had by then become one of the fastest growing technology companies in history.  Microsoft went on to release Windows in 1985 and went public in ’86. Since then the stock has made four billionaires and 12,000 millionaires.

The question is whether this was all a stroke of good luck, serendipitous timing or a conscious act of asymmetric warfare. The answer, to my mind, is that Gates and Co. knew what they were doing from day one. Think about it: they never sold out to IBM! If this was just good fortune, why didn’t they get when the getting was good? The fact is that they knew that PC consumption was going to go nuclear and that there would ultimately be many entrants into the space that they could sell their operating system to. They knew there was a market beyond IBM, and they consciously exercised creative symbiosis (driving adoption of  IBM technology) while co-opting their momentum from within and, ultimately crushing IBM’s own offering (parasitic symbiosis). Breathtaking, isn’t it?

Aspiring Asymmetric marketers would do well to pay close attention Microsoft’s incredible discipline. Although they were knowingly working on a plan to exercise parasitic symbiosis, to build and dominate their own market, they did not breathe a word of their ambitions to anyone outside the company. Instead they were an IBM partner through and through, even helping them to develop an OS that might have put them out of business. This kind of discipline is what Benzel refers to as formlessness. The term comes from Sun-Tzu’s book ‘The Art of War’. In Sun Tzu’s world a smart warrior not only never reveals his plan of attack to his enemy he even even goes as far as to look weak to lull them into a false sense of security. Software startups that plan to build and lead a market by forging an alliance with a software superpower should strongly consider keeping their long term aspirations to themselves. They should appear in all ways to be wholly aligned with their superpower’s strategic objectives. This posture should underpin all front facing sales and marketing efforts and must be maintained right up to the point when the superpower is no longer likely to be a source of market co-optation. Then the true market leader can emerge.

Formlessness. A critical weapon in the asymmetric marketer’s arsenal.

 
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Posted by on September 29, 2010 in Technology

 

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Channel Colonization

During the second year of my tenure at my last employer, a decision was taken to back away from our sales strategy, which up until then was largely focused on selling directly to end customers, and begin working with resellers. The ostensible objective of this strategic shift was to leverage the vast sales resources and client relationships of the channel to drive volume and cut our customer acquisition costs (CAC). What we were in fact doing was spending millions of dollars learning a lesson that we could have learnt by spending twenty bucks on Joe Benzel’s book: we were entering a superpower ‘no-fly zone’, the Microsoft channel.

Once we landed we discovered that Microsoft had completely ‘colonized’ the channel, in Benzel’s parlance. The systems integrators that we attempted to partner with had all made massive investments in obtaining (& maintaining) Microsoft certification. Their consultants and reps were glassy-eyed evangelists for all things Microsoft. Most significantly, their revenue projections were almost 100% Microsoft based. As you can imagine, they were not delighted to work with us. We only managed to sign a handful of partners, most of whom required special ‘early adopter’ rebates and lots of ‘sales mobilization’ (which basically meant embedding sales resources with their sales teams 24/7). The net result was that our indirect sales strategy  substantially increased our CAC! In all fairness things did improve some, as the company’s brand became more prominent, customers began to ask their advisers about the technology and that in turn resulted in some fairly respectable organizations approaching us with offers to partner on our terms.

In hindsight it might have been a lot more sensible to identify Microsoft as our strategic superpower before attempting to engage their channel. We could have then evaluated Microsoft’s strategy and made the appropriate adjustments to our own before proceeding. We might have tweaked the technology to drive adoption of one of their strategic systems or platforms, for example. We would then have been ‘co-opting’ Microsoft’s own momentum from within’ – leveraging their marketing might to drive sales through their channel.

 
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Posted by on September 29, 2010 in Technology

 

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