Being the contrarian I am, of course, [...]]]> Several days later and I’m still reacting to the amazing day that was TEDxAustin.  In a day jammed with wonderful ideas, insightful speakers, engaged audience, and some stunning performances, I had the privilege of sharing one of my ideas within the event’s banner “Play Big.”

Being the contrarian I am, of course, my talk centered on the idea of remaining small.  Here’s my case:

Consider the sumo wrestler.  He’s one big boy.  Professional sumo wrestlers – of which there are 700 in Japan’s traditional training centers, or heyas - weigh in from 250 to 500 pounds.  They are very competitive in a decidedly individual competition, and while they are strong and quick in short bursts, they can be cumbersome and slow outside the ring.  Maybe most importantly, they are bound by centuries of tradition.

Now, consider the peloton.  A compact team of athletes, the peloton leverages the strength of individual members to deliver benefit to the whole.  By working together, an well-architected peloton can reduce wind drag by as much as 40% to operate with greater efficiency and greater speed.  Throughout a race, the peloton can react to changing conditions and proactively seize new opportunity.  In a word, pelotons are entreprenurial.

In the world of business, the sumo is a big company, which is resource rich, with strong brand power and great global reach.  With a rich legacy in the market, big companies – like tradition-bound sumo wrestlers – are well rooted, and while that provides great stability, it can also make change difficult for the big company.

The peloton, as you might have now guessed, is a small business.   They may well be resource constrained, but they tend to be on a first-name basis with their customers.  Small businesses have a strong connection to their local community, and yet they often play in global markets. With fewer and thinner layers of decision making, small businesses are adaptive.  They can be risk takers.  And often because of their constrained resource and their close ties with customers, small businesses must be incredibly innovative to serve their markets.

As entrepreneurs, we aspire to be big businesses.  That, after all, is what investors look for and what the public markets reward.  The Fortune 500, we often assume, are the drivers of the global economy.  In 2006, the Fortune 500 had aggregated revenues of more than $9 trillion, with profits of $610B.  With nearly 25 million employees world wide, the Fortune 500 earns $368,000 per worker.  In big energy, that number can reach as high as $1m per worker and in the retail sector it drops to about $200,000 per employee. If the Fortune 500 were a country, it would be the second largest economy in the world.

Impressive.  But let’s consider the other 29,599,500 businesses in America, business employing fewer than 500 people.  Most of these are sole proprietorship; only some 5.7M businesses have employees, but among them they employ nearly 115M workers and generate $22 trillion (yep, that’s more than 2x the Fortune 500 in the U.S. alone.) .  If you’re doing the math, that’s about $192,000 per employee.

We tend to think of big business at the head of the long tail of business.  I’d argue we turn that graph on its side.  The size of the ecosystem swirling around small business and the economic value created by it outstrips the Fortune 500.   In the U.S. alone, small business accounts for nearly half of the GDP.  Worldwide, small businesses in aggregate must certainly stand and the largest global economic force.

The entrepreneurs who start small businesses are arguably the most innovative.  Think of the market-changing, market-making innovations of the last 10 years.  Software as a Service, smart phones, eCommerce platforms and businesses, fundamental Web technologies and security systems, digital media and the DVR.  These, among many others, were developed not in big companies (in fact, many big companies failed to deliver products in these categories), but by small entrepreneurial businesses.

The irony is that the very thing that makes a big business “successful” is that thing that often prevents them from furthering their success.  Big businesses lumber under the weight of  their size, unable to move fast enough on their own.  That’s the good news for startups who become targets of acquisition, as big business consumer young companies like so many calories in order to fuel their innovation engine.

But what if there were a different model?  What if we rewarded companies not for getting big, but for being efficient engines of innovation, employment, and value creation?  Imagine for a moment the rise of the Fortune 500,000, those top small businesses that outperform the markets by performing well together, much like a peloton.

Individually, each small corporation is strong, highly adaptable, capital efficient, and profitable.  These strong businesses remain agile, able to pounce on new opportunities and deliver results without wading through layers of decision making and corporate process.

Best of all, they can easily partner with other strong small enterprises to tackle a market or create one.  Each small enterprise brings its unique and highly-tuned capability to the partnership.  At the risk of mixing my metaphors,  each small enterprise is a free atom that can bond with other organizations in a precise formula to attack a business opportunity.  They can decouple and re-attach to other organizations when new opportunities arise.

Collectively, they can be stronger and more competitive against lumbering large organizations than they ever could be on their own.  And, collectively, they can react more quickly and be more responsive to a changing market environment than large companies can.

With specialization to deliver expertise and collaboration to deliver complete market value, the peloton model of business will drive innovation and create economic value.

Whether today’s capital markets can be as reactive to this coming business change is an entirely different matter.

In that post, I wrote:

At best, free is a marketing strategy, although typically not a well understood one.

Having said [...]]]> In a post written a couple days ago, I took a poke at “free” business models and cited the success of WatchDox launching its  secure file-sharing service with a premium price tag.

In that post, I wrote:

At best, free is a marketing strategy, although typically not a well understood one.

Having said that, I thought it reasonable that I give an example where I think “free” makes a lot of business sense. That example came to me as I was working with Guidewire Group client MyOwnRealEstate.com on its pricing model.

For those of you who missed the company’s product launch at DEMOfall, MyOwnRealEstate is a property management and tenant communications platform offered as a Web-based service.  The product is aimed at the sweet spot of professional rental property owners with 3 to 50 units under management.  For those customers, M.O.R.E. charges a modest per-unit-per-month price that is easily absorbed into the monthly rent.

But what about the million-plus property owners who are renting the other side of their duplex or leasing a second home?  They account for a significant portion of America’s housing stock, but frankly they are the hard-to-find customers who would cost so much to reach that they’d not prove profitable until well into the second or third year of service, a contract term they’d not likely sign on to.

My advice to the company was a seeming contradiction to my “free isn’t a business model” campaign: give them the software for free.  If you own or manage two or fewer rental units, you can use myownrealestate.com at no cost.

The reasoning: While some of these customers might pay – if you could find and market to them, most would not.  However, each of these units touches a few tenants who will be introduced to the product and who may begin to ask about it when they move on to their next rental.  It’s a slow word of mouth campaign, but it is some value exchange.  Moreover, real estate professionals talk and a few champions using the service will begin to lift page rankings and otherwise build awareness of the service within the real estate community.  And, once in a while, little real estate moguls become bigger real estate tycoons, taking their practices and tools along with them.

It’s small stakes, to be sure, but stakes easily given away because the marginal cost of serving these customers is very low and the price of capturing them is extraordinarily high.

Meanwhile, the customers with the incentive and the cash to pay for the service receive the equivalent of a modest discount (first two units manged are free).  It’s a win all the way around.

Good morning, all. How’s everyone out there in peaceful-happy-go-lucky-tech-land? Everyone good? Anyone received a death threat recently? Oh that’s right. We have! Well, I supposed it’s good to be noticed. What is that old saying? If you’re not pissing people off, you’re not [...]]]> WE INTERRUPT OUR NORMALLY MEASURED INDUSTRY ANALYSIS . . .

Good morning, all. How’s everyone out there in peaceful-happy-go-lucky-tech-land? Everyone good? Anyone received a death threat recently? Oh that’s right. We have! Well, I supposed it’s good to be noticed. What is that old saying? If you’re not pissing people off, you’re not doing things right? By that logic, we must be running a hell of a show.

I’m not entirely sure who whizzed in Mike Arrington’s Wheaties but someone at DEMO/Guidewire Group apparently did. From what I hear, we’re in good company; the list of people Arrington doesn’t like is approaching impressive proportions. If I have any advice for folks in the tech industry, entrepreneurs and media alike, it’s to watch your back. Friendly competition is obviously not in Mike’s vocabulary; either you succumb to his will or… DIE!

Calm down, Mike. We’re just talking about tech conferences here. No one’s waging a war against terrorism. We aren’t two points on the Axis of Evil. What we are trying to do – or at least should be – is foster a healthy environment in which startups can grow. And, yes, we’re both in business so we want to make a little profit, too.

Before I go any further, let me be very clear on a few points that have been tossed about in comments without much consideration, or demand for clarity or truth, for that matter:

The DEMO conferences are NOT pay-for-play and that assertion is insulting to every company that’s launched at a DEMO in the past 19 years. As someone who’s relatively new to the screening process (I started helping Chris with the interviews two years ago), I assure you that I would never have attached my name to a process that was anything but integrity-rich.

TC50 can embrace a “free” business model if they like, they can even call it a “merit-based” system, but until they donate all those demo pit and attendee fees to charity, they’re in this game for profit, just as surely is DEMO. To position TC, as so many comments seem to do, as philanthropic is just absurd.

Let’s ask the obvious question here: Where are all those $18k DEMO demonstrator fees going?

They pay for a top-notch production that is unmatched in the conference industry. They pay for media support from some of the best professionals in the business. They pay for a rich media hosting environment that insures that every 6-minute demonstration can reach a world-wide 24/7/365 audience. They go to creating an environment that allows entrepreneurs to be heroes in the spotlight, if only for the 3-days of the event. And let’s be frank, DEMO with all its platinum production values has outlasted virtually every major tech conference. There’s a reason for that, and it isn’t because Chris and the execs at IDG are lining their pockets with filthy lucre. As Chris pointed out in her post, that money goes to extensive coaching on every level, and yep, some of it is profit. Shocking isn’t it: aiming for profit in the business world?

I’ve been advised against this post by PR mavens, and Chris – who is far nicer than I – may blow a gasket here, but I’m saying it: I’m tired of dancing around an ego that everyone seems to agree is over-inflated. Michael Arrington needs to get over himself and realize that the tech industry was thriving long before he came on the scene and will continue to long after he’s gone. Arrington would do well to adopt an attitude of respect and professionalism toward the startups he claims to promote. And the community at large would be wise to demand it of him. . . and of every blogger, journalist, and analyst (ourselves included) covering this great industry.

WE NOW RESUME OUR REGULARLY SCHEDULED PROGRAMMING.