Got a Good Idea? Better Think Twice With money flowing freely in Silicon Valley, a good idea just isn't enough. You've got to have something more to make it.
By J. William Gurley

(FORTUNE Magazine) – Only in a country where we regularly pay farmers not to grow crops could a venture capitalist argue that if you have a good business idea, you might want to think twice about moving forward. But that is exactly what I intend to do. The problem is not that good ideas are bad but rather that good ideas may in fact be too good. In other words, the idea may be so intuitively obvious that the playing field becomes crowded with opponents, the message gets overhyped, expectations balloon out of control, and a hot idea becomes a flash in the pan.

Structurally, there has never been a more fertile environment for new companies. Venture capital investments have grown steadily for more than ten years and stand at record highs. The support services that aid in creating a company--lawyers, bankers, accountants, PR firms--all have programs for startups. Some even offer to work pro bono until venture capital is raised. In addition, software companies such as Microsoft offer free development tools if you design programs on their platform. Interest in entrepreneurs is at an all-time high. Magazines tout the successes of the twentysomething billionaires, prompting Harvard MBAs to pass on $170,000-a-year jobs on Wall Street to come and starve in Silicon Valley. Free-agent Valley executives are more than willing to cut loose and try for another home run. The obvious problem with this environment is that too much money and too many people are chasing the same ideas.

It's hardly surprising that startups themselves engage in behavior that exacerbates the good-idea problem. Over the past several years, a four-stage plan has become the standard for launching a business in Silicon Valley:

1. Start a company; define a product or service; begin production.

2. Declare that your product doesn't fit any market that has ever existed but rather is the defining entry of a soon-to-be-hot-and-huge new market. You further legitimize the market by assigning it an arbitrary but prestigious-sounding three-letter acronym, like ERP (enterprise resource planning) or CRM (customer relationship management).

3. Declare yourself the leader and king of this emerging market.

4. Shout from the highest mountain how great it is to be king of this wonderful new kingdom. Get quotes from others saying you are king.

There is method to this madness. By establishing your presence in a new market, you may convince the world that the value you add is not just an embellishment of some old product. By asserting your leadership, you (a) improve the likelihood of forming partnerships with kings in other categories, and (b) differentiate yourself from the competition. This works especially well if your competitors are soon forced to describe themselves as players in your three-letter-acronym market. Also, by waving the flag and shouting, you ensure that everyone knows who you are--a key to success in a three-letter-acronym world.

Let's look at how this process tends to backfire in Silicon Valley today. First, the more intuitively obvious your idea, the higher the likelihood that someone else is working on it as well, so even at step one there may be multiple players. By declaring that you've created a new market and persuading the press to believe you, you encourage other struggling startups to shift their efforts toward this hot new space, thereby attracting more competition. When you declare yourself king, you annoy the really big kings in neighboring lands. Jealous of the attention you're receiving, they redirect their great assets and focus their business development on your space. Before you know it, there are 15 companies committed to the market--and your product is still in beta testing.

The first market where the good-idea problem reared its head was "push." During the 1996 Internet World conference, the Wall Street Journal ran a front-page article that described how push technology would change the face of the world. At the time, the aggregate revenues of push companies were probably no more than $10 million. Nonetheless, Microsoft, Netscape, and a slew of small companies announced their own push initiatives. Today the market we once knew as push is no more, and nobody mistakes a company in this market for the next big thing.

One interesting bit of fallout from the good-idea problem is a phenomenon that might be called buzzword implosion. When an overhyped market begins to disappoint, the kings and queens that helped define it begin to shy away from its moniker like vampires avoiding daylight. Mention "push" around a push-company executive, and you risk physical harm. The once-famous players in this space are now self-declared leaders in "knowledge distribution," "network service distribution," and "active business information."

The interval needed to go from boom to bust appears to be shrinking. Take the case of "marketing automation" software. After watching enterprise-software outfits grow big by helping companies improve human resources, accounting, manufacturing, and sales-force automation, many investors assumed that the next piece of the company to automate would be marketing. This resulted in an infusion of more than $30 million of capital into startups and spurred the redirection of numerous existing companies. Yet before their products could reach beta, ComputerLetter (a newsletter published by FORTUNE columnist Richard Shaffer's Technologic Partners) declared, "We're bemused by the latest example of herd instinct that sometimes causes investors and entrepreneurs to seize simultaneously on the same good idea and proceed to trample it in the ensuing stampede." Six months later, in August, ComputerLetter declared, "For marketing automation, Internet time may be running out." Before even ten customers had signed on, buzzword implosion was already under way.

Another interesting case study is the market for "enterprise procurement automation" software. It seemed intuitively obvious that companies would use Internet technologies to automate and control routine purchases of everyday products such as office supplies and computers. Despite the fact that more than ten startups are working on this technology, powerful market players such as SAP, PeopleSoft, and Trilogy have also entered the market or announced their intent to do so. You have to wonder if the early players wish they had made a little less noise.

Looking forward, a market that appears particularly susceptible to the good-idea problem is "outsourced application services." The concept is that enterprise software applications such as those of SAP, PeopleSoft, and Oracle can be run remotely via the Web, and that customers don't need their own servers or specialized staff to enjoy the benefits of these applications. This is certainly a good idea, but the number of startups attacking this space is remarkable. Most think they can succeed without modifying the prepackaged applications in question. But that may be a problem--these programs were not designed to host multiple companies or scale themselves to millions of users. Service architectures run over the Internet will have to look technically more like the simpler versions run by Yahoo or Amazon rather than the complex configurations that traditionally govern a client-server application. (For more on the enterprise market, see Cover Stories.)

You might ask how a Silicon Valley venture capitalist is supposed to get by in such a world. For starters, expect a shift away from full-volume bravado as the standard marketing plan. Beyond that, smart venture capitalists will need to be more selective. As with stock picking, forecasting correctly gives you no edge if everyone else has the same forecast. You must have a unique angle; the real value is in accurate ideas that defy the consensus. You must establish true barriers to entry, true product differentiation, and true competitive advantage. And you must avoid funding something just because it's a good idea.

J. WILLIAM GURLEY is a partner with Hummer Winblad Venture Partners, a venture capital firm. Except as noted, neither he nor his partnership has investments in the companies mentioned. To receive an expanded version of his column, Above the Crowd, visit www.news.com; to subscribe to the E-mail distribution list, send E-mail to subscribe-above_the_crowd@atc.revnet.com. If you have feedback, please send it to atc@humwin.com.

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