Peter Rip has a very good post about the value (read: tangible equity value!) of focus. In my view, his point is as applicable to growth-stage companies as it is to start-ups. His basic premise is that focused, single-product, single-market companies are worth more -- dollar for dollar -- than visionary but unfocused businesses chasing broad markets. What surprises people is HOW MUCH more valuable such focus can be (in Peter's case: double). Worth a read.
[For an experienced entrepreneur's view on the same topic, read Dharmesh Shah on the Phenomenal Force of Focus.]
But this analysis creates an interesting conundrum in our favourite corner of the market: bootstrapped growth companies. By definition, bootstrapped teams are scrappy, opportunistic and flexible. That means they get customers any which way they can, they don't often say no to special requests, and they tend to see all revenue as good revenue so long as it refills the tank. They may have vision, but not usually focus. And they tend to have an overly optimistic view of how many commercially viable applications exist for their product.
This does not scale. And customers don't really like buying Swiss army knives, no matter how clever and modular (see this example from a Web Services start-up in the mid-90s).
If a bootstrapped company is to grow beyond being a lifestyle business, then it must adopt the same rules of focus and speed at the right time. At some point -- perhaps when the base business is generating predictable cash flow, or when the company has raised a small amount of external capital -- it has to establish precisely what product and which market to go after.
At this point, as the entrepreneur, you will have to bite the bullet and say no customer requests that are not on the product roadmap. Typically you will also have to houseclean the existing customer base and drop the long tail of clients that are not "on strategy." You will have to shelve the many additional applications you have thought of for your product and keep everyone in the business focused on just the top 1 or 2.
This transformation often runs counter to the very nature of bootstrapped entrepreneurs, and most will find it difficult. But if you succeed in getting everyone in the company focused around a single, simple operational strategy, you can increase the energy behind your mission by an order of magnitude. And this will increase your chance of success more than spreading yourself thinly across a range of possible strategies. And -- as Peter pointed out -- the value of your equity will directly benefit as a result.
Not surprisingly, this lesson continues to apply throughout a company's life. Anecdotally, public companies that are highly focused also benefit from a valuation premium. Look at single-product Salesforce.com vs multi-product Oracle (OK, so there is a size and growth rate difference too, granted). Other examples?
Correcto - as in "Crossing the chasmm". Another example is Documentum, which focused on pharma compliance, and was acquired by EMC. How's the familia, anyway? G
Posted by: Gerardo Broussi | March 31, 2007 at 00:32