Many iconic technology companies began with concepts that were new to the industry. In hindsight, the narrative goes something like this: Founder built thing X. Y bought it. Then all of a sudden Z started using it. Next thing you know, the world of computing was changed forever… history was made!
The reality is far less magical, linear, or smooth. One of the biggest myths founders have is that people will immediately see the value of the product they built, whether in understanding what it is or in paying for it. This is especially true in “pre-chasm” markets, where you might have a few early adopters who totally get it — but there’s also a deep chasm between them and later, more mainstream users. Most startups fall into this chasm instead of successfully crossing it. I know, because I’ve experienced this both directly with my own company, and indirectly as an investor.
In fact, it’s not unusual for even the most magical products developed by world-class teams to suffer from years of little or no growth before eventually taking off. So how do you know that you’re in this kind of market-readiness or market creation situation — that you “need more time” — as opposed to, say, not having product-market fit? Unfortunately, there’s no simple answer here, but there are some common mixed messages and guideposts that I believe can help founders seeking early validation, just like I was, that their startup is on to something.
#1 Getting stuck in the ‘innovation-friend zone’
Ten years ago, I had just completed a PhD and started a company, Nicira, with two professors (Scott Shenker and Nick McKeown) based on that research. The foundational concept was simple: Why not use software-defined networking given how difficult, expensive, and time-consuming to change most networking was back then? Moving much of the functionality out of hardware would not only make it much more user friendly and allow more sophisticated functionality, but companies would also be able to innovate more rapidly due to it all being in software.
Easier, cheaper, faster — pretty straightforward value proposition, so we assumed building a company around it would just as straightforward. But our efforts to engage the market yielded almost no progress for the first couple years. Even more puzzling was the fact that everyone was excited to talk to us, and many even paid for proof of concepts (PoCs) and/or fees for conducting pilots.
Surely people paying you money for expertise is a strong signal you’re heading towards product-market fit?
That was the #1 mixed message, because surely people paying you money for expertise is a strong signal you’re heading towards product-market fit? The twist is: In much-hyped new technology areas, before there’s a big market, it’s not uncommon for startups to close high dollar PoCs and even some large contracts simply because companies are happy to be educated by startups.
Why would these companies pay so much just to learn? The answer is that what’s expensive for a startup is actually cheap for big companies seeking to experiment, learn, and place multiple bets outside (compared to the structural costs of doing so inside). Similarly, many large companies set up corporate venturing arms and other internal entrepreneurial (intrapreneurial) divisions — often including the words “innovation” “lab” “digital” “transformation” “incubator” in the organization name or business card titles — which seem like an appealing entry point into the broader company. But most of these corporate labs don’t succeed as a vector to sales, since they don’t have a central influence on the business. I would advise startups to be skeptical about engaging (for sales reasons at least) with a company department or organization that isn’t a well-established buying center — like core IT — or the line of business itself.
So how do you know you’re in a situation where people are just learning but not biting? It’s actually not that easy to tell. One common manifestation of this in pre-chasm startups is being overloaded with seemingly positive, productive meetings — but there’s little or no clarity on when someone will pay to put it in production (that’s the “tell”). Or the contracts are for services while discussions for a license deal are continually postponed. The key is to be very honest with yourself about the reality of an engagement turning into a sale — it’s ok for you to learn too, but large companies can keep startups engaged for years by dangling the possibility of a seven-figure deal. So be ready to walk when you’re no longer learning or getting other value from the engagement.
#2 Even when customers are ‘sold’, they still can’t buy
In the early days of Nicira, it felt like we were constantly “just one quarter away” from our product really taking off. We had the pipeline, we had excitement from the sales team, we had clearly expressed interest from customers. Yet each quarter deals would slip or downsize, our internal champions would leave the organization, operations would throw up roadblocks — budgets would fail to emerge.
Our first impulse was to scrutinize sales. After inspecting every significant costumer engagement, we saw that in most cases, the company was very interested but not ready to absorb our technology. What’s the difference between this interest and the flirting-to-learn I described earlier? The difference was that these companies would have bought if they could. However, no amount of sales savvy and inherent product value is going to close the deal unless the organization — from the top to procurement to production — is willing and able to work with you to overcome the typical anti-immune response of companies adopting a disruptive new technology.
It felt like we were constantly ‘just one quarter away’ from our product really taking off. We had the pipeline, we had excitement, we had clearly expressed interest…
At Nicira, we addressed this by inverting our approach. We had been throwing as many opportunities into the top of the funnel that we could and letting the winners emerge, but it was saturating our sales teams for months (sometimes years) on accounts that didn’t yield. Once we flipped this from selling to better up-front qualifying, however, the situation changed dramatically. I think we winnowed the pipeline down by almost half, by combing the industry for a handful of the right customers and saying no a lot otherwise. And then instead of selling those few target customers hard on all the ways we could change their lives, we made sure to tell them in the first few meetings all the things that could go wrong. Both forecasting and closed deals started to pick up.
But this isn’t only about sales. In marketing, pre-chasms startups tend to be too lead-gen focused as well. And since many tech entrepreneurs don’t have marketing experience, they hire a field- or events-marketer or even an outsourced marketing firm to start generating leads. Field marketing is far more effective during the post-chasm growth phase (after establishing product-market fit) than early on, because the function is optimized for acquisition at scale, to feed a hungry sales force. In a pre-chasm market, marketing outreach has to be much more targeted and educational (which is therefore harder to outsource as it’s grounded in deeply understanding the product). Done well, education can draw the market. So my recommendation is for pre-chasm startups to focus on product marketing — particularly sales enablement and technical content marketing — because it not only helps sales qualify prospects, but helps everyone tell the right story to move the deal, and company, forward.
#3 Your biggest competition isn’t another company… it’s the status quo (or is it?)
Nicira had a head start, we thought, since we’d written papers about our solution, given talks, developed specific features, and run multiple trial deployments. Yet we often found ourselves in the position of explaining the problem, not the solution to customers.
We often found ourselves in the position of explaining the problem, not the solution, to customers.
One of the reasons we weren’t prepared for this was that we’d been trained to differentiate our solution with every single investor, advisor, and recruit. Inevitably they would ask — “why is your solution better than everyone else” — orienting us around explaining why we were better, not on justifying why the problem was worth solving in the first place. By the way, something similar happens with the competitive quadrant slide in pitch decks: Feeling compelled to make one, founders fill it in with a comparative set that’s often populated with so-called competitors that aren’t likely to be included in an actual sales bake-off. This focus on competition is often very misleading in early markets, because the reality on the ground is that the customer may not even be aware of the problem — so what you’re really positioning against is the status quo.
On the flip side of this, some founders will claim that there are no direct competitors. Even if that may be generally true, there are always competitive headwinds. You may face pivots (even purely marketing ones) from other startups responding to the noise you’re creating. Or you’ll have to go up against a pastiche of in-house band-aids over the company’s problem, or fears around “not invented here syndrome” (and the belief that they can build it themselves). And if there’s truly no competition (status quo or otherwise), then it’s more likely that the market — and even the problem — doesn’t exist.
The customer may not even be aware of the problem… sometimes, you’re really positioning against the status quo.
The bottom line: In pre-chasm markets, competitive positioning is hard. Those who are too lazy to actually learn what you do will look for a large “competitive” incumbent so they can map you to something they know. Others who haven’t been thinking of the problem like you have, are unlikely to be aware a problem exists. And if you’ve had some modicum of success here, other companies will start to claim they do what you do, even if it isn’t remotely true.
So what to do then? Understand it through how the customer sees it: Are you solving a known problem for them? If yes, position against current efforts to address it (and be careful not to explicitly de-position a potential internal stakeholder during the sell). If not, describe why the problem exists (which is effectively positioning against the way they’ve always done things). This is yet another reason that I prefer to double down on product marketing in the early days. While it’s always temping to launch quickly, do a bunch of press, and start branding, positioning a new product is tricky. For pre-chasm in the enterprise, early traction comes down to very nuanced discussions with a handful of customers. Focus there first.
#4 The paradox of pricing when you know what the value is… but not what people will pay for
In our case, there was a large existing market. However, it was a market that bought hardware, priced based on hardware, and most valued the criteria of performance and reliability. Here we were, trying to sell software that we knew offered better features, faster innovation, and lower cost… but it was like we’d stepped into a foreign country where we didn’t speak the language, know the customs, or understand the values. Over the next decade, we not only had to painstakingly learn all of those things from scratch, but we also had to try to teach Nicira’s language, customs, and values to this market.
So what does that mean for pricing in a pre-chasm market? It’s a bit of a chicken-egg problem; on one hand, it’s hard to do market research because the market doesn’t exist. On the other hand, it’s very hard to know how to price without actually engaging the market and having pricing discussions first. But setting the wrong price can be incredibly damaging to your market-making potential. And in many enterprise businesses, pricing directly affects margins because over time, the greatest variable cost is sales.
The common advice in cases like these is to look for comparables (comps) or calculate ROI. But in my experience, if what you’re doing is really innovative, there isn’t a suitable comparison. And because most comps come from mature markets, they’re already facing price pressure such as commoditization. Not to mention the fact that those comps are for seriously lacking products, which is why you came up with the new solution in the first place. No matter what, matching existing prices automatically underprices your product from the get-go. Yet it’s also difficult to convince a customer of ROI because taking in a new product is hard, risky, and comes at some short-term cost — and the benefits of doing so are abstract, unknown, and distant. Hard to measure.
If what you’re doing is really innovative, there isn’t a suitable comparison!
For now, I’ll just share these two rules of thumb: One, don’t discuss pricing until you’ve actually shown the value of the solution — and the best way to demonstrate that value is through a PoC and then running a pilot using their systems/ data. Once this is done and the costumer is aware of the value (aka getting the account to “technical close”), then you’re better armed for a value-based pricing discussion. A second rule of thumb to keep in mind here is that many enterprise customers expect discounts given traditional procurement processes, so keep your list price high, but discount as needed for early customer traction — though be sure to limit the discount by duration, scale, geography, or use case.
#5 No startup is an island, and there’s no ocean of partners around your platform
A lot of enterprise purchasing is done via value-added resellers (VARS), not directly from vendors or managed service providers (MSPs). Over time, most enterprise product strategies require such an ecosystem — spanning resellers to professional services to third party vendors — to scale. But in Nicira’s early days, I kept holding out hope that somehow that ecosystem would accelerate our sales with little effort and cost from us. We even tried juicing sales by bundling slimmed-down versions of the product with technical partners, training VARS and distributors, and working closely with OEMs. It took a long time before we got qualified leads from that effort — and as I was leaving almost a decade later, those partner channels were still unable to sell our product without one of our sales team involved in the account. So it didn’t really save us money on sales reps, as I’d hoped.
I see this play out in new markets again and again: Pre-chasm enterprise startups throw time and resources at indirect sales channels (including OEMs, etc.) in the hopes that someone else’s sales team can do a better job than your own. Or, assuming it will accelerate sales, they will spend a lot of time with technical or channel partners — but big technical partners are spending that time since they like collecting logos to make their initiatives look more significant than they are. In some cases of course there’s a new, disruptive product whose value is self-evident and can be carried by the channel. But more often, it doesn’t work out that way, because rarely will indirect channels for enterprise devote real resources to help push someone else’s product to market. As for VARs, they typically only provide fulfillment in the early days (and if you’re really lucky, deal registration for qualified leads) because they aren’t structured to carry pre-chasm products — i.e., pitching, educating, hiring the right sales force. They’re good at distributing things where there’s already an educated customer base.
In fact, the majority of the go-to-market ecosystem around enterprise software and hardware — VARs, resellers, distributors, OEMs — is geared towards large, existing markets. No amount of business development meetings, relationship touch-points, cross-logo posting, or integrations will create the behavior you want from a partner as much as dangling a big market in front of them will. Pre-chasm companies have to create a pull-based market — not a push based one — before they can truly engage the benefits of such partners. To be clear: It’s still important to foster these ecosystem relationships early on, as strong business goes hand in hand with strong partnerships. But it’s important to know that this is stage two of the rocket’s trajectory and in most cases you can’t bypass stage one.
Going to market early changes everything about building a company
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At Nicira, our belief in our idea, our product, and our company paid off. But it took years before we saw real progress, and the steps were incredibly non-intuitive to a technical founder like me. Not to mention that the advice I got from many advisors then was wrong, as it was drawn from mature markets. Even today, much of the founder folklore and resources out there are focused on more mature or post-chasm markets — but going to market early changes everything about building a company. In the end, it was insights from Steve Mullaney who took the role of CEO, and board members Ben Horowitz and Andy Rachleff, who helped us figure it out. We ultimately built a large business that continues to grow today: last year, the product line that resulted from our work (combined with internal work at VMware) surpassed a billion dollar run rate and counting. But that’s the view from 10 years later… because 10 years ago, we weren’t quite sure where we were.
This article originally appeared in Forbes.
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