These are all reasonable explanations, yet they ignore the most obvious one: outlandish valuations. Is a startup with $5M in revenue worth a billion?

No…and to think otherwise is outright delusional insanity. However, I do not fully understand the absurd valuation math of Silicon Valley. It seems that if an investor believes a valuation is true, then it is.

Keep in mind, this is the place that minted valuation absurdities like Theranos, Webvan, and (here is an oldie but a goodie) Cue Cat. Yes, that Cue Cat. In fairness, for every Cue Cat that Silicon Valley funded, there are dozens of genuinely innovative companies that contribute to the forward progress of humanity.

Whether it is absurd valuations or the lack of baby formula, a reset for startups seems inevitable. So, what kind of evasive maneuvers can startups take to weather the coming dark times?

Vision

To paraphrase the great philosopher Freewheelin’ Franklin: vision will get you through times of no customers better than customers will get you through times of no vision.

Vision is a description of the future. A well-defined, well-articulated bright future inspires hope. Hope that the company will successfully navigate through the darkness. Hope that rewards are attainable. Hope that all the struggle, toil, and stress will be worth it and have meaning.

To paraphrase Jyn Erso, startups are built on hope.

To promote a brighter future, startup leaders must emphatically promote the company’s vision. To do that, answer four questions:

1. Why does the company exist?
2. What problem(s) does the company solve?
3. What are the values of the company and its people?
4. How can people find meaning and relate to those values?
5. Where is the company going?

Do not make your vision about money — ever. Money is a weak motivator. Moreover, nobody cares about making money for the investors or founders. Vision must be about something people can genuinely care about. Money must be the result of staying true to the company’s vision, values, and mission.

Vision gives people purpose. Without purpose, employees invariably ask themselves “why am I here?” It does not matter how smart you are, or how many big shots you know, or how much money you have in the bank, without purpose people have no reason to stick with the company.

Vision will get you through the downturn. However, words alone will not solve everything. There are some other ways to stay on target.

Automate

One of the many ways we sap meaning from people is to put them into roles with repetitive, boring work. Automate repetitive tasks and promote the people into more meaningful work.

The mere act of shifting people’s focus from performing a repetitive task to automating that task, provides a more satisfying job. Moreover, one a task is automated, your products and services become more reliable, scalable, and valuable.

Put that Coffee Down

Maybe you need Alec Baldwin to yell this at you: Always Be Closing. You need to sell, sell, and sell some more. To do this, you must arm your sales team with the resources they need to effortlessly demonstrate your company’s value.

For example, all salespersons must be able to expertly demo your products at a moment’s notice. If you sell services, you must have a library of sample output (reports, content, etc.) that demonstrate your capabilities and expertise. Demos and samples are effective ways to communicate your company’s competitive advantages.

In my experience, the only way out of a hole, is to sell your way out. There are only so many cuts you can make to staff or spending before the company becomes ruined. Investing in sales and marketing is the ticket out of the dark times.

However, before you charge ahead, be clear with your sales and marketing teams that results are the only metric that truly matters. Effort is expected, but results are what they are measured on.

Product Improvements

You know the next valuation is going to be low(er). So why not actually improve your app and have something more valuable? Downturns are an excellent time to clean up all the crap in your app that is holding you back. Quit dickering around with every dumb customer feature request and go back and fix the big stuff.

Emerge from the darkness with products and services that are more valuable, and therefore can command reasonable valuations.

Repackage

When times are tight, buyers go bargain hunting. They expect every app, service agreement, and subscription to go farther, offer more, and solve more problems. If you are a special little unicorn app that only works in a narrowly defined set of requirements, then it is time to repackage yourself and broaden your appeal.

Build packages that solve entire business problems all in one. Moreover, reprice everything into monthly subscriptions, usage-based billing, or extended terms to make payment easier on customers.

Partner Up

Rather than be a lone sinking ship, partner up with other sinking ships. This also can help with repackaging. If you can bring partners to the table that fill gaps in your offerings, then you have more to offer.

However, before you sign up a bunch of partners, make sure you understand how each partner makes money. Each partner must be able to see how they can benefit, otherwise it is not a real partership.

However, be honest with your scale. A $5M startup is not going to have the market reach of a titan like Cisco or Microsoft. If you partner with a bigger player, then you need to accept the inherent unequalness of the partnership.

Be Brutally Honest

Unfortunately, tough times mean doing more with less people, resources, and time. Layoffs, cutbacks, and delays always feel bad.

Do not sugar coat the unwelcome news. This only makes you look foolish and desperate. Also do not make it about you. Be honest about the changes. Show remorse but show resolve as well.

The intent is to show you care about people, but you are committed to staying the course and seeing the bad times through. This is why vision is so desperately important in bad times. Layoffs and lost deals are the ideal time to double down on the company vision, values, and mission. It pulls everybody back together and recenters them on why the company exists.

Conclusion

Do not give up. Downturns are inevitable. Yet, nothing bad lasts forever. Startups can survive (even thrive) in bad times. Moreover, as the Wired article points out, troubled times can mint stronger companies. The key to coming out of this storm is keeping your eyes on the prize.

To quote one of the greatest philosophers I knew: perseverance furthers.

The post Surviving the Startup Crash appeared first on Zenaciti.

1. What is the Intent?
2. Who is in the Room?
3. What are the Dependencies?
4. What is NOT Being Said?
5. What is the Market?

In this second, and final part we pick up where we left off.

6.      Does it Work?

This question is as obvious as it sounds.  Does the product do what the company claims it does? This is easy to answer if you can rise above the company’s messaging and posturing.

The first part of this question is to have the company’s sales engineers demo the product.  Ideally, I want to see how they explain the product, its features, and its strengths.  My focus with them is the infrastructure of the product; where it is deployed, how it is installed, what third party products does it need, etc.

When time permits, I like to install and use the product myself. I have a rich background in installing technology, so this can be fun. It can also be miserable, like the encryption product I reviewed once that bricked my laptop.

With some hands-on experience under my belt, the next step is to see what others have to say.

7.      What Do the (Real) Users Say?

During most due diligence projects, the company will set up one or more user meetings. These are useful since I can hear how the product performs in the real world. However, it is unlikely they will put unhappy customers in front of me.  As such, I need some “unfiltered” opinions.

Online user groups, like Reddit, can be useful here. While you cannot fully trust on-line sources, they can give you clues to what is bothering users. Many years ago, I was analyzing a web gateway product. I noticed numerous online users complaining about logging capabilities. When the SE’s showed me the product, I specifically had them focus on logging. They got defensive. Eventually, the product manager fessed up that their logging capabilities were weak. Had I not read all those on-line complaints, I might not have thought to dig into the product’s logging capabilities.

However, user groups almost always skew to the negative. Nevertheless, between the handpicked customers the company provides, and the rants of people on the Internet, I can assemble a picture of the product’s real-world usage.

8.      What Problem Does It Solve?

How a product is sold to customers says a lot about its potential. A smooth sales process translates to scale, while a clunky process can hinder a product’s growth. Analyzing a company’s sales processes can be highly entertaining, but it does not give much insight into the product’s technical capabilities. This is because there are plenty of technically weak products that sell well, while innovative ones languish.

However, sales can provide insight into the market for a product, if you look at why people buy it.

This begins with an understanding of the sales personas.  These are the generalized roles at a prospective customer that sales works with to close the deal. There are four sales personas:

• Champion: person who identifies the product and promotes it within the company
• Evaluator: person who assesses the product for use and provides a recommendation for purchase, or not
• Influencer: person who’s opinion of the product holds weight among the other personas
• Decision Maker is the person who makes the final decision to buy the product

While a single person may embody all these personas, that is uncommon.  Even small companies divide the decision maker from the evaluator.

Evaluators and influencers are where this why question has the most traction. These personas are typically tasked with vetting the product for use. If they see something they like, they will recommend the product. Mostly, they will want to solve a problem.

The clearer a company defines the problem their product solves, the more convinced the evaluators and influencers will become. Therefore, when I meet customers of a product, I want to talk to the person(s) who evaluated the product prior to sale.  I want to hear why they bought the product, to determine if the company solves a real problem and they communicate that effectively.

A few years ago, I was performing due diligence on a threat intelligence platform. The sales team complained of losing to competitors when they got into evaluations. I had them walk me through a typical technical deep dive with a customer doing an evaluation. The issue was obvious. They could not effectively define what problem their product resolved.

This also had an impact on product development and marketing. The company kept adding features, trying to out-innovate their competitors. Consequently, the product was a mess of features, that sounded cool, but again did not address specific business problems.

Why companies buy (or do not buy) a product can give you a ton of insight into not only sales, but the entire product development process.

9.      Where is the Data?

This is another deep-in-the-weeds issue, but it is a looking glass into a product’s maturity. Mature products handle data properly. Immature ones do not.

A few years ago, I was analyzing an attractive up-and-coming security analytics tool. I asked about data handling. The engineers fumbled around the question, ultimately trying to convince me that saving the data in flat text files to the file system was an ingenious strategy. It was not. It was a terrible way for a security product to store data. Despite looking attractive and powerful, the product had some serious technical problems under the covers. My questioning about data handling revealed these issues.

For this, I investigate how the data is stored, access controls, encryption, auditing, and distribution of data (redundancy.) I also love it when companies supply their data models. I can analyze the structure of their database(s) and see if they are well architected, or a patchwork of disparate databases.

10.      What is the Vision?

If I had to pick one thing that sets great companies apart from mediocre ones, it is vision. Vision answers the simple question “why?”  Why does this product (or company) exist? Why should I care? The clearer a company is about these questions, the better their products tend to be. However, there is nothing simple about vision.

A strong vision connects the product and company to a genuine purpose. Something that can motivate people to a higher cause. Consider Tesla’s vision, to accelerate the world’s transition to sustainable energy. This is a strong vision. Notice it does not mention cars.

Vision is like an invisible guardrail that keeps a company focused on a higher calling. It gives leaders an intangible push to look beyond the mere function of a product, to how that product can fulfill a higher purpose.  Without a strong vision, companies and their products become mediocre.

I am routinely surprised how few leaders understand the power of vision. I think it makes them uncomfortable. Perhaps its because it seems light and “touchy feely.” Yet vision is what motivates people.  As Simon Sinek reminds us, people do not buy what you do, but why you do it.

I could not tell you exactly what vision needs to be. It is different for each organization. However, I know what it is not.  Vision is not merely making money, dominating a market, or “delivering shareholder value.”  Those things are the result of a strong vision, not a vision itself.

Where I look for vision is inside everything. It should start with the leadership, particularly the C-level suite. However, vision should permeate every level of the company, from the executive office to the janitor’s office.

Conclusion

Reflecting on all my due diligence projects, I realize there is more to them than encryption protocols and marketing presentations.  They are complex efforts with a lot of information. In many ways, I find due diligence work similar to risk assessments. Large quantities of data, which when laid out, paint a picture. That picture may be one of ingenuity, opportunity, and prosperity…or not.  Or something in between.

I wrote this blog as a marketing tool as well as a lesson for companies who are getting a visit from a technical due diligence consultant. Ideally, the ideas I shared here will help you assess your own company and make improvements before a person like me shows up.

I will leave you with one of the more poignant moments from my due diligence work.  Many years ago, I spent months analyzing a company. In the final meeting, we were going over all the findings. After the presentation, the CEO of the acquiring company pulled me aside and asked me, “give it to me straight, what is the largest risk in this deal?”

I thought of all the technical weaknesses in the product, the poor logging, the laughable 10Gb performance, and the lack of a good cloud product.  However, those were not the biggest risk.

“There is no vision here. The leadership is…lost.”

The leaders could speak confidently of the product’s features, but not about the company’s purpose.  The leaders were connected to plenty of important people, but they could not explain why I should care about their products. The CEO of the acquiring company nodded and smiled broadly. I had confirmed what he suspected, but nobody was brave enough to say.

If you want a great product, start with the ten hairy questions, and answer them honestly. That way when the investors are sniffing around and they send in some guy like me, you will be ready.

Also, I am not washing your dishes.

Go back to read Part 1

The post Big Hairy Questions: Strategies for Technical Due Diligence (Part 2) appeared first on Zenaciti.