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Positioning – The High Order Bit

January 16, 2010

In computer science, the high order bit is the binary bit with the greatest value.  In technology company strategy, the high order bit is positioning.  A CEO can create or destroy more shareholder value through positioning than through any other management lever.

Positioning a company means deciding how you want prospects to think about your company – what business problem do you solve? As a venture capitalist, this was my favorite question for startup CEOs.  Nine out of ten CEOs fail this question by talking about their product and what it does:

  • We’ve developed the most scalable Java application server
  • We provide LED lighting systems with software controls
  • We created the first social network for doctors

They leave it to customers (and investors) to figure out how their technology might relate to a customer with a problem and a budget.  Unfortunately they also burn millions of dollars on a trial-and-error approach to getting market traction.

There’s a better way.

The best positioning is based on a serious and expensive problem.  If you convince customers that you have a solution, you’re going to get a meeting even before they know anything about your new technology.

  • We lower transaction costs for web commerce businesses by integrating web orders with back end systems
  • We reduce the cost of commercial building lighting by an average of 30 percent with a 9 month payback
  • We help doctors solve unusual medical problems by giving them access to a community of peers

If I were to create a new business, I’d use most of my seed funding to find a problem I could solve with new technology, in a market big enough to support a large company.  I’d spend time talking to prospects to understand how they describe the problem, the economic benefits of solving the problem, and how much they could afford for a reliable solution.  Unfortunately, most startups start writing code and building prototypes in the hope they can create something that a few pilot customers will fall for.

I learned the hard way as the CEO of Novera Software.  Before I joined the company its team had build the first J2EE compliant application server with a built-in LDAP directory and an object-to-relational data mapping utility.  Who wouldn’t want that?  The Home Depot had paid $1M for an unlimited right to use license.  The problem was who else to sell it to?    It took me 6 months of talking to customers, engineers, analysts and investors to find a problem we could solve.  During this time, I was unable to raise money or hire badly needed sales and marketing executives.

Then came the positioning breakthrough.

I was interviewing an IBM sales executive who wanted to join Novera.  I asked how he thought about our product.  He said it offered a way to integrate e-commerce applications with back-end systems – he called this web application integration.  As soon as he said this I knew we had our positioning.  Within the next quarter we were oversubscribed for a Series C financing, hired strong Sales and Services executives, and noticed strategic buyers showing up for our webinars.  Nine months later we were acquired for 20X revenues.

I’ve often imagined a shareholder value meter that allowed you to gauge shareholder value based on company positioning.  The same company with the same product would be positioned one way and register $1B in shareholder value, or another way and not move the shareholder value needle.  If only it were that easy.

Follow Dave on Twitter: @WDavidPower

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