Sunday, February 9, 2014

Runway needed for new products to come to fruition in the marketplace

These days, there are more software start-ups being funded faster then ever before.

From incubators such as YCombinator to full-service firms such as Kleiner Perkins providing funding. Also, the tools to get products out quick through cloud computing, such as AWS and Rackspace, and programming languages, such as PHP, Python, and Ruby on Rails, we are seeing a factory of minimal viable products come to market at an accelerated pace.

However, once a minimal viable product is released, there is an injection of marketing, quick iterations through customer feedback and adding new features, potential legal complexities, and selling to the marketplace to gain marketshare and customers as quickly as possible. This is where the company truly needs to prove itself.

The challenge is not getting version 1 out, the challenge is getting to version 2 - where there's a need for a hockey stick growth of customers and proving the viability of the company and the idea.

The sad truth is 99% of the companies do not make it to version 2, which is where series A funding generally kicks in.

So, if you are going to do a start-up, from my experiences, it is important to consider the ratio of product development to marketplace acceptance is about 3-1. What does this mean?

Simply, if a product takes 3 months to make, expect an additional 9 months to determine market viability and maturity, or 1 year in total. If it takes 1 year to make a product, expect an additional 3 years, or 4 years in total.

The reason this calculation works is a direct correlation of the features, complexity, and competitiveness of the product itself against how much time will be needed to allow the product to infiltrate in the marketplace.

As a result, it is my recommendation, if you are going to do a start-up and want to succeed with subsequent fundings, growth, it's important to calculate the 3-1 ratio before embarking on a boiler room adventure.

Finally, it is hard to predict if the product will take off in the marketplace, before getting it out. However, it's good to think through the different permutations of the product early, so that there are potential areas to quickly pivot if needed based on the marketplace responsiveness.

That said, go forward and have fun.