The three risks

By Christopher Lochhead , written on June 13, 2013

From The News Desk

Let’s begin off with some cheery facts. Most technology companies fail. Some research suggests that three out of four venture backed companies don’t make it, and less than 1 percent achieve an initial public offering.

To succeed, an entrepreneur must understand the three main risks facing every technology chief executive:

1) Category risk: Is your market large, valuable, and growing? 

Category risk is the most fundamental challenge facing both startup and large incumbent technology companies. After all, a market must exist for you to be the leader. If you want to sell bibles, there must be Christians. And if you want increasing revenues, margins and earnings over time, you must be positioned in a market that is large and growing. This means that building your category is equally important to building your company. It sounds crazy, but it’s true.

The Segway never took off. Not because it’s a bad product. But in part because the market for “personal electric balancing transportation” didn’t develop past a few use cases. Creator Dean Kamen couldn’t articulate an argument for why the Segway solved a problem that most people cared about. As a result, Segways suffered the fate many breakthrough technologies do: the market category never took off and now it’s niche.

A good example of a potential emerging category is “native ads." Today, there are a handful of companies trying to build native ads as a stand-alone category in the broader Internet advertising space. They are arguing that content-style ads (which used to be called “advertorial”), are meaningfully different from traditional Internet advertising. It’s too early to tell, but I’d wager that advertising vendors will simply position native ads as just another advertising unit, develop new functionality and de-position native as a feature, not a category.

The seminal question developers of new technologies all face is “Are we a new category or a just an add-on feature of an existing one?”

2) Competitive risk: Are you about to be disrupted?

In the technology game, the best market position to own is No. 1. The leader, aka the Category King, usually grabs the lion’s share of the riches. In search, which would you rather be Google or Microsoft? In online retail, would you prefer to be Amazon or Target? In mobile phones would you gain more being Apple, with its iPhone, or Google/Android or Samsung? Okay, bad example, which shows that even the most dominant kings can be dethroned. Here’s a quote by another Apple adversary. Bill Gates famously said, “Success is a lousy teacher. It seduces smart people into thinking they can't lose.”

Right now Dropbox and are beginning to break Microsoft’s death grip on online file management. These upstarts are attacking with a bizumer strategy and inexpensive pricing. It’s a powerful combination.

In 1999 Siebel Systems dominated customer relationship management. Fortune named it the fastest growing company in the US. Then Marc Benioff’s disrupted the category with a new delivery (cloud) and pricing (subscription) model. Today Salesforce has a $22 billion dollar market capitalization, and Siebel is gone.

New technologies, products, and business models can cause major disruption. If a competitor can re-image some meaningful part of your business and attack with something truly compelling, it can cause customers to re-think their usage and purchasing. When that happens, almost over night the Category King can be de-positioned as old news. That’s why the Category King in one era is almost never the King of the next. Disruptions can happen so fast that even the most nimble can be caught flat-footed.

3)    Execution risk: Can you produce legendary results every quarter?

General Patton once said, "A good plan, violently executed now, is better than a perfect plan next week." Legendary companies have an almost military level of execution discipline. They focus on the keys to winning -- people, process, and technology -- and have clearly defined goals. This great execution comes from that elusive intangible characteristic called company culture.

One of the best executing companies I’ve ever been associated with was Mercury Interactive (Acquired by HP for $4.5 billion in 2006). Mercury was a result production machine. While there were no “core values” posters on the wall, you couldn’t walk into the place without feeling how fierce it was. Head of sales Jay Larson used to say, “We have two kinds of salespeople here. Rich ones and new ones.”

On an earnings call, CEO Amnon Landan was asked if an outbreak of violence in Tel Aviv would hamper Mercury’s R&D operations. Landan said, “During Desert Storm when they were dropping missiles on Tel Aviv, we shipped on time, on budget. This is nothing.” At its height, Mercury had more than 3,000 people and the company’s employees acted like Navy Seals.

Performance-based cultures are built around militantly hard-driving executives and employees. There simply is not substitute for that.

Winning over the long-term takes the ability to identify and understand the three sources of risk you’ll face while summoning the balls, brains and bucks to overcome them.

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