Long distance running, icebergs and Sage
I love some of the metaphors people use to describe emerging markets and companies; burn rate, runway funding, exit strategy, hockey stick. These shorthand turns of phrase in particular are helpful in this era of the short attention span, at least in terms of framing where a business sits in a Web 2.0 cultural perspective if nothing else.
But they’re pretty useless when it comes to providing concise and illuminating answers to complex, more nuanced questions like ‘how are you different to the 20 other players in your space?’
So, I’ve developed my own personal set of metaphors and these variably bounce back and forth between long distance running and icebergs.
Long Distance Running
The stage of adoption of cloud based applications like Xero – in the UK market at least – is still early. By early I mean to say that an approximate estimate of the numbers of UK businesses using online bookkeeping is around 20,000 which I estimate to be about 1% of even a conservative addressable market size of 2 million businesses – (there are 4.7 million businesses in the UK, 98% of which are very small and 2.1 million are sole traders, so an addressable market estimate of 2M companies is pretty conservative). By any definition that’s very early.
Classic technology adoption bell-curve pop-science says that innovators and visionaries make up around 5% of a given market before early adopters show up. To counter that, speed of customer acquisition is high so it won’t take long to eat through to 5% market adoption and the much larger community of early adopters, perhaps 2-3 years tops.
So it’s a long race and I’d say we’ve just finished the first lap. And being the first lap, everyone starts at the same point, more or less, and remains bunched together which makes it incredibly hard to differentiate and pick out the ultimate podium finishers.
But by lap two the field begins to open up a little and evidence of strategy, training, stamina and determination begins to emerge and it becomes easier for the audience (market) to work things out as a pack begins to draw a little distance from the original starting line up.
So, we’re definitely on lap 2 and the field is stretching out and I think Xero is in that lead pack in the UK.
As an aside, although they haven’t even found the arena never mind made the starting line, Sage will no doubt finally show up with some Heath Robinson rocket propelled roller-skate contraption and could – if they’re lucky – catch up quickly, if not very elegantly.
This is a variation of an old fake Rolex metaphor I’ve used in the past to describe new technologies that look like the real thing but which are fundamentally lacking in one or several critical aspects, but which still succeed in drawing attention and some market share, if from less discerning customers.
But implying that your competition are all making fake Rolexes is pretty disingenuous and not very cool – so I don’t use that one these days unless it is a genuine counterfeit business plan – and I’ve been pitched a few of those.
When you are building out a new product or business you can take a couple of different approaches, aim modestly low and scale up investment as demand justifies it, or flip that logic and aim high from the beginning and try to create high levels of demand early. Aiming high requires you to make tough early investment based decisions about brand, marketing, architecture and go-to-market strategy on the assumption that you’ll be successful in filling demand.
Initially evidence of those decisions is generally invisible to the outside world, aside from tangible things like branding. This makes it incredibly hard for the market to differentiate between players.
But if you’ve built in scale assumptions from the beginning then it is – if the plan comes together – a tough but critical decision that pays off in the medium to long term as the various stages of customer acquisition begin to take their strain on the business, the product design, architecture and your operational choke points.
In other words building a business that gets to 1,000 paying customers is very tough, but getting to 5,000 or 10,000 and beyond is exponentially much, much harder and more complex, particularly if you have to change course or undo decisions mid-way through.
So, it’s easy to build the tip of an iceberg, much harder to build the whole thing especially when it’s invisible to the market at the surface.
And if new cloud competitors have any hope of putting a fatal tear in the hull of the cruise liner that is Sage in the UK, then they’ll need a bloody big iceberg – not just the tip – fitted out with tracking sat-nav, a means of self-propulsion and a few torpedoes to boot.
We think we’re up for it.
21 July 2010 #