Friday, January 23, 2009

The readers respond!

Wow. One well placed post and my readership increases 6x. There has been a lot of interest in my Type I/Type II characterization, and some interesting comments.

Some of the things that I've seen from the discussions I've recently had relate to competition. Type II companies may have a lot more competition than a Type I company would, and this is seen in the case of, and various social networking sites. However, the key to making a Type II company work is to find other means, other than technological, to lock in a barrier to entry. Since there is bound to be lots of competition, other means can still establish a single market leader.

For example, there was a time that Hotmail ruled the roost. While there was no barrier to switching, Hotmail's viral marketing established them as the dominant web-based email solution by far. Had Hotmail continued to provide good quality service (rather than getting suffocated by ads and spam, as what happened), they could have held that position for some time. Nevertheless, the position of a Type II company can be precarious. Hotmail lost to Yahoo and GMail, Friendster lost to Facebook, etc. It does appear, though, that a Type II company that has succeeded in being the market leader, only relinquishes the title when they stumble. Otherwise, the market is happy, and actually prefers, to reward a dominant leader. I can't say that eBay has yet to stumble, and barring Craigslist (which, I believe has some relation to eBay anyway), there isn't another trading/auction site that has similar reach.

At any rate, thank you all who contacted me. Interesting discussions.

Monday, January 19, 2009

Type I vs Type II companies

I've spent a reasonable amount of time thinking, over the Christmas break, of what types of startup companies succeed, what types raise funding, what types are capital intensive. It's also been interesting to compare cleantech companies to IT companies, because in some ways there are similarities, and in other ways, the two sectors fall in distinct camps.

So, without further ado, here are my two categores:

Type I Companies
- Value based on a technological breakthrough (Technology Push)

ie: "cure for cancer" type companies.

Examples (based on my observations):
Various Biofuels companies
Sunpower (and other solar companies)
Ballard Power Systems

I call these companies "cure for cancer" companies, because the main importance is the technology, not the marketing. If someone shows up with a cure for cancer, investors aren't necessarily going to say, "wait a minute...what's your marketing strategy?". The market is huge and obvious and the marketing plan isn't as important. I have to put a small caveat here - because X1 struggled due to marketing reasons, and Google only became a money machine once they figured out how to monatize search. But the main point is that the technology drives the value and thus the company.

Type II Companies
- Value based on a marketing breakthrough (Market Pull)

Examples (based on my observations):
Most internet companies

Here, the value of the company is not based on discovering a technological breakthrough, but rather it is from developing a clever business plan. Dell didn't really do much more than assemble commodity computer parts, but it does so with very low supply chain costs. Facebook is "nothing more" than a large database with various pointers, but it's genius has been how it has executed brilliant viral growth and user lock-in. YouTube has some technology in its video compression through Flash, but mostly it succeeded through opening up its comments, allowing videos to be posted on blogs, and basically out-marketing, virally, any other video site.

These companies are started by looking at the market and saying "what is the market need here", and then building the software. I recently came across It's a great idea - take Screenwriting software (which has existed for ages), put in on the web with a SAAS model (a la Google Docs), charge nothing for it, and try to monetize the community. This idea didn't come about because of a technological breakthrough - heck Google Docs and Desktop screenwriting software proved it could be done. This idea came out by seeing a need and building a business to meet it.

So, which is better? Well, back in my days in the auto industry at Visteon, they would have said Type II is better. Visteon was forever inventing technology looking for a home, and was wanting to assess the market need and create products to meet it. True enough...however, technology push companies tend to be easier to get funding for (walk into any VC with a technology proven to produced zero-carbon energy at a lower cost than coal and you will almost certainly get a check). A type II company can be harder to sell the vision for (can you imagine the initial pitches for eBay? - "So...people are going to be selling used Smurf dolls and old socks online and you think that's a business?") Type II companies can be easier, technologically, to start, but can have a harder time getting traction and funding.

In my opinion, neither is better. Facebook is on one list - Viagra is on the other. While Type II might be easier to start; if you are finishing your PhD with a killer area of research, Type I might be an obvious fit. I'm now putting serious effort into seeking out fantastic opportunities, and I noticed that this framework seemed to be an interesting way of categorizing where your business falls.