A founder came to see me yesterday to give me an update on how 2011 went and to bounce some ideas off of me for where to take the company next. The company is a small business that is approaching $500,000 in revenue. Their software serves a very narrow market niche currently and has generally been an installed piece of software until the last 12 months or so when they offered up a web-based version. In looking at their market and segments within it, we figured they’d probably landed about 10% of the target customers. And they’ve sold the boxed version of the software to about 3,000 customers and the online version has now been sold to about 200 more.
Their software application, with a bit of investment and a new hire or two, could be adapted to a couple of other niche industries. And the founders love their little application. Their potential new market niches seemed to get the founders pretty excited and they had basically defined their fundraising needs so that they could build the new product and start marketing it to the new customer base.
I asked him why he would want to do that. He said it was because “the application is just so darned flexible.” I told him that I thought his 3,000+ customers deserve more from him than that, and so do the next 3,000 customers!
Now I’ll be honest. Many of the clients I work with have, well, zero clients. So my rather dull eyes immediately focused on all those shiny customers. I felt it was obvious that he was in danger of ignoring the most important asset his business had accumulated over the years…his customers! The first version of the software he built was built on an ancient platform and very difficult to use, as evidenced by the support document which was a 500 page, photocopied, ring-bound tome. And this unsophisticated mess was released not 20 years ago, but in 2003! And guess what…? People were buying it! And now he has managed to begin converting his customer base to the online version of the site, which they’ll have to visit every single day their businesses are open. He landed one of the largest companies in the industry as a client at the end of 2011. And yet, somehow, he was fixated on the software and not the customers.
There are certainly opportunities to pursue the development of other market applications with their platform. However, these should be opportunistic at best and will not likely involve his company directly, but perhaps through some licensed version of the code. Without a doubt, for some other companies, pursuing new niches is a good idea strategically…especially when your current niche ain’t buyin’. So every company is different. But when you’re having the kind of success mining a mountain that this company is having, and you’ve only mined 10% of the gems, why would you go looking for a new mountain?
The end of the story is a long way off. But my advice to him was to build a financing plan that focused on 1) landing the next 3,000 customers and 2) begin exploring additional products and services to sell to the growing, fairly homogeneous customer base. Not only will it require less capital (he was asking for a lot, I think), but the money he does raise can immediately be used to buy additional share in what I think is an increasingly easy market for him to mine.