Ten Deadly Sins

of Startups
by
Bill Baloglu
Silicon Valley Virtual, LLC

www.10DeadlySinsofStartups.com

Copyright 2007 Bill Baloglu and Silicon Valley Virtual, LLC - All Rights Reserved.
Introduction
Bill Baloglu, Founder and CEO of Silicon Valley Virtual, LLC, is a successful high-tech
entrepreneur and twenty-two year Silicon Valley veteran. Bill has founded, co-founded and
played pivotal roles in several Silicon Valley startups:

• Versant Corporation
As a member of Versant’s founding team, Bill played an instrumental role in the company's
growth and success in the U.S. and European markets. Versant Corporation went public
with a market capitalization of several hundred million dollars.

• OpenObjects
As the co-founder Bill successfully launched new European products in the United States
and Japan, which led to the acquisition of IP by a market leader in a multimillion dollar
transaction.

• ObjectFocus
A Silicon Valley, IT services company founded by Mr. Baloglu. Under his leadership and
only four years after conception, ObjectFocus registered a phenomenal 200%, multimillion-
dollar growth rate.

• WorldPages.com
Bill's early work and strategy led to the company's initial funding and launching of its
pioneering online directory service that was ultimately acquired by TransWestern, the
leading independent phone directory publisher in the United States.

Additionally, Bill Baloglu is a nationally and internationally recognized public speaker on topics
like entrepreneurship and high-technology and has been regularly featured in the media. Bill
has chaired user groups and entrepreneurship forums both in Silicon Valley and on the East
Coast of the U.S. He has co-authored monthly columns in publications of the world's leading
software and Internet media group, Sys-Con and is the author of From Zero to the First Million,
due to be released in the fall of 2008.

This eBook, Ten Deadly Sins of Software Startups is written from the transcripts of an eight-day
series of interviews with Judy O'Loughlin of SVX Internet Radio and covers the most common
pitfalls, mistakes, and “sins” that early-stage software entrepreneurs and startups MUST avoid.

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Ten Deadly Sins Program: History
Given his background and the battles he has been through, Bill Baloglu is a strong believer that
the biggest hurdle for early-stage entrepreneurs (ESE) comes during the phase he calls “zero to
a million.” This is the time period when ESEs must turn their ideas and concepts into products
and services. They need to build businesses around those products and services and grow
them from zero to a million, whether that means dollars, users, clicks, etc. This startup period is
the toughest and most treacherous part of the journey.

During this time, early-stage ventures are very fragile,

because they have access to the least amount of available “Their largest obstacles
resources like manpower, money, and time. Their largest still lie ahead, and
obstacles still lie ahead and roughly ninety percent won’t roughly ninety percent
realize success. That is why the Ten Deadly Sins program is won’t realize success.”
so important; it shows ESEs how to use their time more
wisely, market faster, and take advantage of opportunities
while the “window of opportunity” remains open.

People say there are no shortcuts in life – no shortcuts in business. However, Bill believes that
acknowledging these Ten Deadly Sins will help many entrepreneurs avoid dozens if not
hundreds of mistakes that they just don’t have to make.

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Deadly Sin #1: Copy Cat Sin
Many people are driven by fads. When a new craze takes off,
copycats are sure to follow. These entrepreneurs are eager to jump on
the bandwagon and offer the same or similar spin-off services and
products. But what many of these ESEs don’t realize is that the
human mind, in any particular compartment, can hold only two or three
things.

For instance, if I asked you, “Who was the first airplane pilot to fly solo, nonstop over the Atlantic
Ocean?” you would say, “Charles Lindbergh, of course!” But if I asked you, “In what year did
Charles Lindbergh perform his transatlantic flight?” you may not answer so quickly.

Similarly, if I asked you, “Who was the second or third pilot to fly solo, nonstop across the
Atlantic Ocean?” you would most likely fumble for a reply. But if I asked you, “Who was the first
woman to fly solo across the Atlantic Ocean?” you would answer Amelia Earhart.

This concept can be seen within the beer brewing industry. Budweiser was the top American
domestic beer until Heineken came into the picture. But rather than competing with Bud for the
top position, Heineken created a unique subcategory, imported beers, and became king of their
own domain in the minds of their niche market. The consumer could then more easily make a
mental file for Budweiser under “domestic beer” and Heineken under “imported.”

Another great example of ingenuity at work against the Copy Cat Sin is Pepsi vs. Coca-Cola. In
this market, Coke is number one followed closely by Pepsi. But if you were to stop strangers in
the street and ask them who the top carbonated soda producers in the United States were, most
people would name Coke and Pepsi. In the minds of their customers, both soda producers hold
equal footing, regardless of what market analyses show.

Then there is the concept of “disruptive innovation.” A good example of this concept in action is
the MP3 or digital audio file. Until the creation of digital audio technology, all music collections
consisted of eight-tracks, vinyl albums, cassette tapes, and compact discs. Then, someone
came up with the idea of creating a digital music file (MP3) that did not require anything to
“touch it” (e.g., heads, needles, lasers) and produced an exceptional listening experience. This
was a completely new way to listen to music, and sales went through the roof.

Many successful entrepreneurs achieved their success (generally) through disruptive

innovation, like Steve Jobs (iPod). I think what drives many of these entrepreneurs is not the
generation of the product but the feeling that their product or service is something they are
passionate about and with which their segment of the consumer market can use to revolutionize
its way of life.

I would recommend that entrepreneurs be driven and passionate about their ideas. Don’t fall
victim to the Copy Cat Sin like the imitators of social networking Web sites like MySpace. After
the third or fourth copycat surfaces, the consumer will want compelling reasons why they should
not patronize the industry leaders and shop with a lesser-known company that provides the
same services.

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Money should not be an entrepreneur’s primary motivation; that is only a consequence of
business done with passion, drive, determination and honesty. Learn to be original and make
your own rules. You have to be willing to positively change the course of the industry. If you
don’t believe your product or service could hold a top spot in your consumers’ minds – if you are
not going to differentiate yourself in a crowd – no one is going to remember you. And being
remembered by your target audience is really important.

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Deadly Sin #2: Mini Me
Typically, entrepreneurs overestimate the number of people in their
target market and assume that their audience consists of like-minded
individuals. For all intents and purposes, this is a false hypothesis.

Mini Mes believe that everyone watches CNN and reads business
magazines and books and is up to speed on the latest and greatest
technological advances and buzzwords. Typically, ESEs do not
understand the people who might be interested in buying their products and services – people
whose views of the world may be vastly different than their own. Furthermore, target audiences
do not always speak the same language (figuratively and literally). So concepts need to be
presented in a user-friendly way.

Take for example an Ibuprofen manufacturer, whose target audience consists of people who
suffer from pain. In explaining their product, the Ibuprofen manufacturer needs to describe what
their product does, how it relieves pain, and how it is different than other pain relieving
medication. This must be done in layman’s terms so the entire audience can comprehend the
message. If, however, the Ibuprofen manufacturer takes their explanation to a molecular level,
they will lose a vast majority of their audience, because most of these people are not scientists
and chemists, and they won’t understand the message.

The lesson to take away from the Mini Me Sin is that you must articulate your message in a
language that is understood by the target market. These people must be able to relate to what
you are saying. The Ibuprofen manufacturer must fully understand who owns the pain and
target the message to them. Focus on a real and rapidly growing customer base as opposed to
taking on what I call a “cult segment,” which in the end limits the number of customers and
makes it difficult to transition into the mainstream.

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Deadly Sin #3: Shiny, Shiny Sin
First, let me say that a lot of these Sins may seem similar or hold
common denominators. But I want the reader to understand that I split
common “sins” into ten different segments, because over the years I’ve
seen these crimes committed over and over, which wastes resources,
money, and good talent. I don’t want this to happen to another
entrepreneur. So it is my professional and moral duty to share these
ten points, each of which holds very unique nuances and value
propositions.

The Shiny, Shiny Sin is very simple. In essence, this is when entrepreneurs become dazzled by
an idea or concept that seems so superior and interesting compared to what is available in the
current marketplace. They believe this concept will have lasting power. But what they fail to
consider is that the idea is merely a fad, not a trend. Deadly Sin number three is an important
one to atone for, particularly in early-stage development.

As a non-technical example, let’s look at Beanie Babies versus Barbie. Beanie Babies were a
fad; you don’t hear much about them anymore. But when I hear young mothers talking about
toys for their daughters, Barbie dolls almost always enter the conversation. Barbie dolls are a
trend, not a fad.

Technologically speaking, GO Corporation serves as an example of what not to do. They

produced the first Personal Digital Assistant (PDA) device, which was based on new
handwriting recognition software. The innovators and entrepreneurs behind GO Corporation
became so enamored with this “shiny” technology that they predicted the future by saying that
one day everyone will write with styluses on little LCD panels utilizing software that intelligently
converts handwriting into text and characters.

Their vision was great; it was sexy and highly innovative. But GO Corporation failed in their
quest, because at the time handwriting recognition technology was very slow and it wasn’t
practical to hold such a big device in your hands. Their vision preceded today’s microchips and
nanotechnology, which allows devices to be smaller and quicker than ever before. Essentially,
the PDA was a bulky, slow device that just wasn’t good enough to be utilized or remembered.

My advice to GO Corporation would have been to go out and ask their target audience why they
would use a device like the PDA. If they had understood the why, they would have immediately
recognized the need to implement time performance, efficiency, accuracy and practicality into
their product for it to have been successful.

ESEs must be sure that their ideas and solutions have sustainability and substance. If those
are in place, people will want to buy their products beyond the initial buzz. What an
entrepreneur wants to avoid is a cult following, which would make it difficult to enter the
mainstream. They must ask themselves, “Is the technology advanced enough to meet the
needs of my target consumer audience? Does my product or service solve a real problem?”

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Deadly Sin #4: Fox Sin
Deadly Sin number four is what I like to call the sin of being a fox. Lack
of focus is the primary reason why a lot of startups and entrepreneurial
ideas fail; it is the single biggest idea killer.

To me, the idea that an entrepreneur or startup group will do everything

that everyone else does, only better, is more a utopian philosophy than
a business opportunity. No; to be successful, an entrepreneur must
pick one thing that he does well and then do it better than anyone else. I have seen this play
out time and time again. According to Jim Collins’ book, Good to Great, this is called the
“hedgehog strategy.”

In his book, Jim used an analogy taken from the childhood tale about the fox and the hedgehog,
whereby the fox tried to outsmart the hedgehog by using many complex strategies. The
hedgehog, on the other hand, used one very simple, tried-and-true strategy. In the end, the
hedgehog prevailed. As I mentioned earlier, lack of focus is the biggest killer for ESEs and
startup ventures. So I think there is a lesson to be learned here. The fox knew many things but
did not prevail. The hedgehog only knew one thing, but he did it better than anyone else. In the
end, the hedgehog was triumphant.

I have seen many fox-like ESEs who became enamored by the greatness of their ideas and
attracted to the intellectual challenge of devising clever solutions by using mastermind strategy.
I call this “inventors’ syndrome” (IS). They satisfy their intellectual objectives by approaching
the concept as a way of changing and revolutionizing the world, but they don’t focus on the
business aspects of the process. Beyond the creative side of starting a business, one must ask,
“How am I going to make a business out of this?”

Unfortunately, the side effects of inventors’ syndrome can be disastrous if an ESE fails to
narrow his audience and find his niche. If left untreated, IS will cause permanent tunnel vision,
which triggers the ESE into making his products and services a ‘coat for all seasons.’ In his fox-
like bravado, the ESE creates a one-for-all solution and tries to take on the world by solving all
of its problems.

Tale of Two Companies

To use an example, let us look at two companies with which I am very familiar, Benefit Focus
and Benefit Point.

BenefitPoint (the fox) is a company that started in Silicon Valley. BenefitPoint had all the bells
and whistles and top-tier venture capital companies like Sequoia Venture behind them, who
raised over $50 million for the company. As the name implies BenefitPoint wanted to develop
an all-encompassing, comprehensive solution for employers to manage their employee benefits
using an Internet-based software. Mind you, this company started at the height of the Internet
boom.

In essence, BenefitPoint set out to solve all large-enterprise employer benefit problems by
creating software that would envelop all benefits (e.g., 401K, health, dental, life insurance) and
make the process of administering and maintaining them faster, better, cheaper, and easier.
That’s a great idea, but the scope is very, very large.

On the other hand, BenefitFocus (the hedgehog) was created by two very sure-minded
individuals who knew the benefits business very, very well and decided to take a different
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approach, albeit as an underdog. Geographically, BenefitFocus is in one of the most
technology unfriendly places in America, South Carolina. They had no venture funding or top-
tier capital investments behind them. So before they set out on their journey, they went to the
painstaking task of hosting fundraisers and seeking assistance from local investment groups.
Finally, with cash in hand (including some personal funds) they went on about the business of
turning dreams into reality.

Rather than being everything to everyone, BenefitFocus decided to only focus on health
insurance. More specifically, they honed in on a real need within the benefits industry, which is
the employee enrollment problem faced by large insurance carriers. The sights of this company
were focused on employer groups that sign up with particular health insurance companies. And
even though they tackled organizations large and small, they remained constant in their niche
and concentrated on doing one thing better than anyone else.

By 2002, many of the dotcoms were falling apart. Despite this, BenefitFocus sprang like a
phoenix from the ashes and tackled that one problem so well that they immediately attracted
companies like Blue Cross/Blue Shield. In a four-year time span (2003-2007), BenefitFocus
grew its revenue in excess of several hundred million dollars.

Interestingly, the fox in our story, BenefitPoint, did not fail because they had very strong and
shrewd venture capital firms and a lot of money behind them. But, they went through so many
mergers and acquisitions that they eventually found their niche, which was to serve and bring
together employers, large groups, and carriers. In the end, the fox was transformed into a
hedgehog.

The moral of the story is ESEs need to brutally analyze the strengths and weaknesses of their
products, services, solutions, target audiences, and personal attributes, which will dynamically
affect strategies moving forward. They must choose one thing that they do better than anyone
else and execute their programs and services with a singular focus, like the hedgehog.

I am not suggesting a concrete, end-all, be-all focus. But I believe you must devote at least
three to four months to your initial strategy and push it out to the market to see what happens.
The market will be the litmus test that defines where refinement should occur.

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Deadly Sin #5: Disconnected Dots Sin
In a value chain (or distribution chain), many ESEs forget that there is a
value chain, and within that value chain there are different nodes, value
providers, service providers, distributors, etc. More often than not they
will skip these “dots” while making connections and that could lead to
trouble.

A value chain has two sides. Side A consists of goods and services
while Side B houses the users and consumers. Sometimes, there is a direct line between Sides
A and B, whereas goods and services are sold directly to the consumer – no “middleman.” In
other cases, there are several intermediate “dots” between Sides A and B like distribution
channels and salespeople.

I think for an entrepreneurial idea to be successful, the owner of the idea must decide and
expound upon how his particular product or service will revolutionize a new chain or fit into an
existing one. To reach an educated decision, I suggest rapid, preliminary market analysis
through various channels, starting with the correct value chain. If the tested chain is not
optimal, fine tune it until it is right or find a new one.

The Story of Webvan

Webvan was an online ‘credit and delivery’ grocery business that came out at the height of the
Internet boom (around 1999 or 2000) and went bust in 2001. Their concept was to eliminate the
grocery store (supermarket) in this value chain and save a lot of money, because they wouldn’t
need to pay store rent, electricity, staff, etc. Webvan decided to deliver grocery items directly to
the consumers’ homes via van or courier services like FedEx and UPS.

However, this short-circuited one of the components of their chosen value chain – the
supermarket, a location that the general public regarded as a social place where they could
commune with like-minded citizens. The vast percentage of Webvan’s target audience actually
liked to touch and smell the products they were buying. They use the grocery shopping
experience as a time to bond with family members. They wanted to select their own produce or
talk to the butcher about what type of steak is best on the grill.

As such, Webvan developed a “cult” following of people who had heavy demands upon their
time and liked the convenience of having someone else do the shopping. But even though their
cult passionately loved and admired what Webvan did for them, the company failed to build a
bridge over the cavern toward mainstream. Additionally, they spent billions of dollars
purchasing vans and warehouses before they had a firm grasp of their target audience’s needs
and desires. As a result, they ran out of cash and shut their doors.

I think this example really illustrates how not analyzing the individual components of the value
chain and not testing it before growth begins is a sure way to fail. That being said, there are
some successful grocery delivery companies like Pea Pod and Simondelivers.com. These
businesses expanded slowly and tested their market each step of the way. Another great
example is the Toronto-based Grocery Gateway, who partnered with an existing component of
their value chain, a supermarket organization called Longo’s, who eventually acquired Grocery
Gateway.

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How to Avoid Disconnected Dots

There are three important points that I would like to leave you with.

1. Fully understand the current value chain for your intended product or service. Always
ask, “What are the components of my value chain? Who is involved? How is the money
going to flow back to me? How many people are going to take a cut of the profit and
what is their value?”

2. Brutally identify the gaps in your value chain and decide what you can and cannot
overcome in this value chain. Ask, “What are the components and nodes and can I
perform all of them or will I need other people?”

3. Ascertain the entire value chain on the basis of the gaps you have identified. Ask, “Who
am I going to partner with? Who am I going to ‘war’ against and who are my allies?
What is my chain going to look like?” Again, an ESE needs to know how the goods and
services are going to flow and how the money is going to flow back from the consumer
to the startup venture.

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Deadly Sin #6: Grass is always Greener Sin
Deadly Sin number six is what I call the “Grass is always Greener Sin.”
This concept was born from two groups of people. One group lacks
originality – the other, inspiration.

The unoriginal group holds trailblazers like YouTube and MySpace in

high regard and wants to be just like them. Those companies
capitalized on the online social networking phenomenon by thinking
outside of the box and changing the rules of the game by changing the rules of engagement.
An unoriginal ESE might say, “Hmm. The grass looks greener over there, because YouTube
and MySpace did it. Look at them! They built a huge customer base in a matter of months.”
So, rather than coming up with an original idea to solve an identifiable problem, the ESE may
simply try to imitate what has already been done.

As for the uninspired, we’ll call them the give-up group. This is a faction of people who start
with their own unique ideas, identify a problem, believe it is unique, and really want to shake
things up in its particular target market.

This group may not do everything right. Perhaps they won’t correctly articulate their message.
Maybe they will botch their value chain. These trials and tribulations cause a company to lose
its grip on the market. So rather than digging in, the give-up group says, “This is too damn
difficult. We have been at this for the last six months and we’re not getting traction. So what IS
making money right now? Gee. EBay is a great auction model. MySpace is a great social
networking model. Wow! The grass looks greener. Let’s just copycat what’s already been
done.”

Allow me to share another example in the form of a personal experience I had about five years
ago during the height of the Internet boom. I was at a Silicon Valley seminar, which featured a
terrific high-tech speaker named Charles, who gave a lot of great tips and advice. Toward the
end of the presentation, a brief Q and A ensued. One gentleman stated that he wanted to get
into the bagel and coffee business by opening his own coffee shop. Charles replied, “What is
your background?”

The audience member responded, “I just retired from IBM where I served as an executive for
twenty years. Now, I’d like to have a nice, relaxing profession that would allow me to directly
interact with my customers. I like the social aspects of that.”

In turn, Charles said, “Do you know where to buy the donuts? Could you effectively utilize your
former IBM contacts in your new value and distribution chains? Where would you buy the
bagels and coffee? Do you know how to make coffee?” Essentially, he asked all the right
questions, for which the audience member had no immediate answers.

The moral of this story is that starting a business is very time-sensitive. An ESE must learn how
to focus, take aim, and executive his business during a brief window of opportunity, because if
this ESE’s idea is good enough, you can count on the fact that there are many other people out
there who will bring the concept to fruition, thus beating the procrastinators to the punch. And
although speed is important, a wise ESE will not rush into anything without first studying his
market and formulating his leverage through what is unique to him: background, know-how,
and personal/professional networks.

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Essentially, an ESE must stick to what he knows best and use his unique experiences and
networks to succeed. Deviation from this concept by starting new, foreign ventures is like tying
your hands behind your back just before a marathon; you would be severely handicapped and
likely not win the race.

In order to be successful, you must leverage your expertise, existing support and professional
networks, and experience. Identify the things you have done well in your life. Have you been
professionally recognized? What is your vocational background? What educational degrees
and accomplishments have you realized? What prestigious people exist within your personal
and professional networks? Then, hone in on a particular segment within a particular industry
where you can shine and capitalize on opportunities that arise therein.

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Deadly Sin #7: All by Myself Sin
As the name implies the All by Myself Sin is committed by those who
say, “I can do it all by myself.” But, in my opinion, this Sin goes way
beyond that. ESEs are smart, brilliant people. Otherwise, they
wouldn’t be entrepreneurs. These people have a lot of self-confidence.
They know they are smart and creative, and because they know so
many things, they have a natural tendency to rely primarily on
themselves for everything, including raising enough money to obtain
100% of his stock options or shares. These ESEs may say, “Why share my profits with
investors? Why have partners when I already know everything? What would an outsider know
about my business?”

Many ESEs fall into this trap and continue to do so in large numbers. So my advice to them is,
“Yes. There is a lot of prestige, glory and wealth creation possibility associated with a
successful business. But there is no I in TEAM, and teamwork is what it will take to truly be
successful.” No one person, no matter how intelligent and innovative they are, can
independently take a product to market and then build a business around it that will grow from
zero to a million.

For example, let’s look at Microsoft. Bill Gates is a brilliant man. So why did he partner with
Alan and Steve Ballmer? Alan was the real technical guru behind Microsoft’s initial solutions.
On the other hand, Bill is a tremendous visionary and trendsetter who has the innate ability to
envision the future of consumer patterns and trends.

Another perfect example is Apple Computers. Steve Jobs is a tremendously successful, driven
individual who is one of the best marketing and salespeople in his industry. Steve does not hire
expensive marketing consultants to tell him what his customers need. Instead, he personally
talks with his customers, listens to what they have to say, and then creates desirable products
like the iBook, iPod and the new iPhone. Why, then, would Steve Jobs need Steve Wozniak to
create Apple Computers? Because despite Steve Jobs’ interpersonal talents, ego, and drive,
he knew he needed the technical talents of someone he trusted, his high-school friend, Steve
Wozniak.

As exampled above, building a synergistic team is vital. An ESE must brutally identify and
analyze his own strengths and weaknesses and then assemble a dynamic team whose
members complement each other. So if you are a technical entrepreneur, you need to partner
with marketing-minded people. Similarly, if you are a marketing and sales guru, you need to
partner with technical-minded people who can build and deliver those products and services to
the consumer.

When two minds come together, a third one is created.

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Deadly Sin #8: Something from Nothing
I also refer to this Sin as the ‘immaculate conception of business.’ A lot
of entrepreneurs feel that they have a great idea – so great, so
powerful, and so compelling, that they don’t need to worry about the
business aspects of it - business will happen magically. If they build the
best, people will come to buy it.

I think every entrepreneurial idea should be based on a clear vision of

who the first person will be to walk in, buy your product, and pay that first dollar of revenue.
There are some critical questions to ask and understand in order to build a scalable, repeat-
business model, which will scale and sustain the company.

• Who is the customer?

• What will they buy?

• Why will they buy it?

• Why will they pay for it?

• Where will they buy it?

If you don’t have an answer to those questions, you will not succeed no matter how good your
products, services and technology are. ESEs fail to understand that business is not magical
and it is not always the best product or most superior technology that wins the battle.

Ingres and Oracle

In the mid 1980’s, a war was being waged – the relational database war between two top
contenders, Ingres and Oracle. Ingres was conceived by Michael Stonebraker and Eugene
Wong of the University of California – Berkeley. Stonebraker is the founder of relational
technology, who, along with his team of investment partners and colleagues, started Relational
Technology, Inc. (RTI) and subsequently created Ingres.

“In the know” technical people always felt that Ingres was a superior database. Its language,
QUEL, was a very elegant and clean database query language and was preferred over their
competitor’s product, Oracle.

Ingres received phenomenal acceptance and became very popular in technology, academic,
and research environments, particularly in Europe, where large corporations look up to
technology standards, particularly at major European universities. So with Ingres’ stronghold on
the market, why did Oracle eventually win the game? Oracle wasn’t necessarily a technology
company. Their core language and product were less superior. But in the end, that didn’t
matter.

At the time, Larry Ellison, Chairman and Founder of Oracle, had a strategy. He couldn’t have
the most superior product, but he could solve the fear of preservation of investments. In other
words, his target audience needed to invest in a database system, but they also needed to
know that this database would be able to integrate and communicate with other database
systems. Ellison’s solution was to create a compliance standard (SQL standard), which
preserved their customer’s investment in the Oracle product. The consumer knew that Oracle
would be compatible with most other database systems.
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The common theme here is this. You may have the greatest product, but without focusing on
the “business” aspects – without building a scalable, repeatable business – you are not going to
be successful.

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Deadly Sin #9: Theory vs. Reality
In theory, there is no difference between theory and practice. The
reality is, you must take innovative solutions and apply them to clear,
existing problems. On the solution side, be innovative, but don’t try to
invent a problem that does not really exist. This is very, very important.

As I see it, one of the biggest contributing factors to the dotcom bust
was the overexcitement of companies who predicted the future, came
up with perceived problems, and tried to capitalize on them by applying innovative solutions to
those futuristic perceived problems. It was like putting the cart before the horse.

Webvan, eToys and Planet RX

All of these companies put together a theory that they could forgo a brick-and-mortar storefront
for a virtual one. On paper, the idea seemed fantastic. They all decided to utilize distribution
centers to deliver products to their customers. Webvan used vans to deliver their products,
while eToys and Planet RX utilized the Postal Service as well as other couriers like FedEx and
UPS.

In theory, this would be a great way to conduct business. But the reality was that there weren’t
a large number of online-only buyers to sustain in scale such business ventures. All of them did
the same thing; they built and grew rapidly to meet an anticipated demand that didn’t really
exist.

In contrast, my advice would be to apply new, innovative solutions to old problems. In other
words, if it isn’t broken, don’t fix it.

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Deadly Sin #10: Humpty Dumpty
The final sin is Humpty Dumpty. If a market is highly fragmented, there
is usually a reason for it. But many ESEs make the mistake of thinking
they can do it a better way and put Humpty Dumpty back together
again. But let me assure you, if all the king’s horses and all the king’s
men couldn’t put him back together, one can safely assume that no
strategy or execution will do any better. Don’t attempt the impossible.

In many cases, ESEs will try to enter markets with established leaders or alternatively into
markets that have no leaders and are split into smaller, “granular” companies. In this case
(going back to our Lindbergh and Earhart examples), consumers are not going to be able to
focus on a particular leader in that segment. The ESE will be focusing on a crowded market in
which their ventures will go nowhere.

A couple of years ago, I met several bright, hardworking entrepreneurs who put together a
company in the healthcare industry. This company had a great Web-based product known as
practice management software that was used by small medical practices to manage their
businesses – everything from patient scheduling and billing to invoicing and insurance claims.

The ESE had been around for several years and had built a loyal customer base that swore by
the product and gave it rave reviews. The company’s software was groundbreaking and
featured a fantastic user interface. However, the company did not realize growth. There was
no scale, no repeatability, and no scalability. Unfortunately, this ESE fit the fragmented
syndrome very, very well.

Perform a Google search on keywords “practice management software” and you will receive
several million results. This doesn’t mean that there are several million companies or solutions,
but it does mean that there are an awful lot of companies doing the same thing, just in slightly
different ways. But in the end, they are all doing the same thing in the customers’ minds.

Initially, there were a handful of companies that offered practice management solutions using
DOS–based PCs. Then, several new companies arrived that developed solutions based on
Windows operating systems, which made interfacing with the software more user-friendly.
Then, a newer generation of companies sprang up that made the process even easier by
implementing Web-based software and offering their services on the Internet. Essentially, this
made the software accessible by any one, anywhere, at any time. More importantly, customers
no longer needed to purchase special hardware and software, which lowered costs and
preserved resources that were dedicated to maintaining the now obsolete systems.

The Web-based software was just what the doctor ordered, and many consumers began
switching to the more efficient, practical software application. Consequently, the market
became very fragmented because everyone wanted to carve out a piece of this particular pie.
As a result, none of the companies could build sustainable, scalable sales or revenue models.

So many companies do the same things with little or no differentiation. An ESE needs to ask
himself, “Is there an established or perceived segment leader? What is the age of the market?
Is this an emerging market or has it been around for at least two years? Are there any big
players entering this market?” The answers to these questions will determine if your target
market is fragmented or crowded. If the market is broken into too many pieces and has been
around for a number of years, there is no good reason to venture in with the intent of
reassembling all the broken bits.

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Although the possibility always exists for a company to come in and emerge as the obvious
leader in a fragmented industry, only in cases where the company has deep pockets and
unlimited access to the necessary resources will they have a fighting chance. Companies with
existing resources, an established customer base, and carved niche within a market segment
may develop an exit strategy that would position them for acquisition by a bigger fish. However,
this is not the optimum method of starting a business for most ESEs.

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Ten Deadly Sins Program: What’s Next?
Thank you for following this 10 Deadly Sins series. I hope that you've found the sessions highly
insightful and informative.

Now that you've had an opportunity to read or listen to the series, you may have some
questions, or you may wonder how these sins really relate to your own venture.

I've got great news for you...

I want to give you the chance to participate with me as I answer the most frequently asked
questions about start-ups. And you’ll have the opportunity to submit your own questions along
with all of the other participants of this program.

Don’t worry…there are no surprises, nor is there any money involved.

To participate in the next tele-clinic, please visit 10DeadlySinsFAQ.com, and follow the online
instructions.

I look forward to seeing your questions and to hearing you there!!

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