Selling, Educating & Philosophizing
The Declarative Imperative
An early stage company must be able to sell its product
(or service) to a customer with one declarative sentence. The cost of selling
increases dramatically with the length of a company's marketing message.
The Iconnex Philosophy
In the mid-1980s a British engineering society published a
study that claimed that 85% of the life cycle costs of a product are committed
within the first 5% of the design effort. The basic premise of Iconnex was that
making those initial efforts more efficient would be of tremendous value to
companies.
The Iconnex product, the Mechanical Engineering Workbench
(MEW), integrated a drawing window, an equation solver (based upon parametric
modeling), a spreadsheet and a word processor. The elegance of the product was
astounding. Each of the functions was relatively immature and the Iconnex
integration was truly an amazing achievement. Some of the challenges that Iconnex overcame included the
absence of a graphical user interface in the operating system (DOS 3.0, I
believe), the 640K-memory limitation, primitive (and expensive) graphics cards
and color monitors.
At the time, conventional engineering practices limited
the typical mechanical engineer to two or three design iterations before a
design commitment was made. The
Iconnex MEW enabled the engineer to go through 10 or more design iterations in
the same amount of time. The compelling logic of our value proposition, and the
elegance of our product, with a market potential of 414,000 practicing
mechanical engineers, convinced us that we had a real winner. Thought leaders in the industry agreed.
Further confirmation was provided by the fact that another
company, Aries, I believe, had received over $20 million of venture capital
financing to develop a similar product, but on a mini-computer platform. The Aries cost per seat was going to be
$35,000. Ours was less than $3,500.
Long story, short, the company consumed over $6 million of
cumulative venture capital financing (probably equivalent to about $20 million
in todayŐs dollars) over several rounds; never figured out how to sell the
product in sufficient volumes and with adequate predictability; and ultimately
sold its source code for low six-figures.
The reason? We
were in the philosophy business. We were telling people how they should
do business. We were not responding to their Ňtable pounding needÓ (I
think I stole that phrase from Joel Adams to give credit where credit is due).
We had to spend a lot of time, energy and money trying to convince people that
we were right (and, by implication, that they were wrong).
Iconnex did not satisfy The Declarative Imperative.
The NeuralWare Sales Machine
The most impressive example of accommodating The
Declarative Imperative was conceived and implemented by the founders of
NeuralWare.
NeuralWare was founded in the 1980s to take advantage of
the confluence of factors that would allow the commercialization of neural
networking technology. With MooreŐs Law proving to be a real phenomena,
computing power was rapidly approaching the price and performance that would
make this practical. The vision of the founders was to develop a line of neural
network products that could work on desktop computers.
Even today neural networks are not broadly known, so you
can guess what it was like in the 1980s!
What follows may be more myth than fact, but itŐs
necessary context. In the late 1940s and early 1950s, as computers began to
demonstrate their potential, two forms of artificial intelligence were
conceived: expert systems and neural networks. Expert systems can be thought of
as enormous decision trees that attempt to capture the variables and decision-making
process of experts in certain domains. Neural networks mimic the learning
process of the brain, recognizing patterns from within massive amounts of data
and adjusting over time as it absorbs more and more data. Neural networks are
used today in many applications including technical stock market analysis,
credit card fraud detection, process control optimization and electronic fuel
ignition.
As computing power and programming sophistication
improved, expert systems first, and neural networks second, became technically
and commercially feasible. The
Carnegie Group, an early Carnegie Mellon spinout, was one of four, I believe,
prominent artificial intelligence companies based upon expert systems that was
launched in the mid-1980s.
Returning to NeuralWare after that brief history lesson,
you might think that its marketing challenge was even greater than that of
Iconnex and even more philosophical in its market entry, but it wasnŐt!
Why? Because the founders accepted certain realities and
proceeded accordingly.
First, they didnŐt have the resources to develop a
deliverable product.
Second, they didnŐt have the resources to mount a
missionary sales and marketing campaign.
Third, while hundreds of thousands of engineers and
programmers could use neural networks beneficially, by and large, they
had no need to do so. They either didnŐt know about neural networks; or
knew about them, but didnŐt know if they were applicable to their situation;
and even if they were, how the heck did you build a neural network?!?!
BUT out of those hundreds of thousands of potential users,
there were hundreds of people in research labs, in IT departments and in
university labs who were aware of the potential of neural networks. They did
monitor the environment to keep track of advancements in the field. They did believe that it was only a
matter of time before neural networks would be able to deliver very significant
benefits.
For these few hundred people, knowing about neural
networks was important. They had a
need. To that end, the first revenues for NeuralWare were from the sale of a
bibliography of all articles and
publications on neural networking that the founders had compiled as part of
their initial research before launching the company!
Instead of philosophizing to the people who could use
neural networking technology, NeuralWare went to the very small and very
specific market niche of individuals who were already believers and thirsting
for information.
The second revenue stream came from tuition for
seminars in Pittsburgh about neural
networks that they marketed to the purchasers of the bibliography.
Most of the attendees from industry were at the seminars
to assess the current or future applicability of neural networks within their
companies. NeuralWare offered to do feasibility studies for a fee.
When the feasibility studies were completed, NeuralWare
offered to develop a customized neural network system for those companies who
wished to pay NeuralWare for that service.
Note the elegance of the companyŐs evolution. It SOLD
products and services to people who had already been qualified as NEEDING them.
The customers for the current deliverable became the target market for the next
deliverable.
In the meantime, customers were paying NeuralWare to build
the infrastructure and IP that they needed to develop the neural networking
products that were their ultimate vision.
They recognized the power of The Declarative Imperative
and used it to formulate a successful market entry strategy.
NeuralWare went on to be acquired by a firm out of Boston.
ItŐs my understanding it has been taken private again and is still in operation
in Pittsburgh. I regret that I
havenŐt kept in touch with the founders (whom I believe are no longer with the
company), but I am forever indebted to them for showing me a unique and
innovative way to bring leading edge (bleeding edge?) technology to market.
Advice to Entrepreneurs
á
When you first start up your company, slice and dice
your market opportunity until you can identify a group of specific customers
who have an urgent current need for what only you can provide.
á
Quite often going slowly at first is the best way to
realize your ultimate dream.
á
Heed The Declarative Imperative.
ICONNEX POSTSCRIPT: The
prior anecdotes about Iconnex were slanted somewhat for illustrative purposes.
Out of respect to the founders, investors and employees of Iconnex, I need to
note that it was a noble effort that almost made it.
At one time, a major aircraft company had decided to
standardize on the MEW across the corporation. They were about to issue an
initial purchase order for 100 units (at a modest discount to the $3,500 unit
price) and contract with Iconnex to develop client-server architecture. Between
the credibility of this customer and the cash flow it would provide, this could
have made the company.
As these agreements were working their way up the
corporate ladder for approvals, elsewhere in the corporation, a decision was
being made to decentralize purchasing, meaning there would not be any
corporate-wide software standards. The 100-unit order by the corporation became
a two-unit order by one division.
By the way, this is an example of SchwartzŐ Law. What, youŐve never heard of SchwartzŐ
Law? Schwartz said that Murphy was an optimist!
Oh, yeah, I almost forgot.
Six months after Iconnex started, another company based
upon parametric modeling was launched In Boston. Iconnex zigged.
The other company zagged.
That company was Parametric Technology and it has a current market
capitalization of about $1.4 billion.
Damn that Schwartz!
Frank
Demmler is Associate Teaching Professor of Entrepreneurship at the Donald
H. Jones Center for Entrepreneurship at the Tepper School of Business at Carnegie
Mellon University. Previously he was president & CEO of the Future Fund,
general partner of the Pittsburgh Seed Fund, co-founder & investment
advisor to the Western Pennsylvania Adventure Capital Fund, as well as vice
president, venture development, for The Enterprise Corporation of Pittsburgh.