MAKING WAVES

(so you want to start a high tech business)

by Ken Jacobsen & Victor V. Vurpillat

Copyright 1996, Ken Jacobsen & Victor V. Vurpillat

Table of Contents
Introduction 1. The Quest for Newness The Novell Story

2. Parameters of Newness What is this thing called love (newness)? 3. Paradigm Shifts in Computerization Shifting sands in silicon 4. Applied Dynamics: Novell Debriefed Opportunities Abound... 5. ...In Emerging Paradigms: Field Automation The wonderful wireless world of tomorrow 6. ...In the Wireless Revolution The shot heard around the world 7. ... In Emerging Paradigms: Home Automation Home sweet home will never be the same 8. ... In Evolving Paradigms New Wine in Old Bottles 9. The Business of Success Building a better mouse trap isnt success 10. Paradigms of Business There is more than one way to skin a cat 11. The Evolution of the Channel Growing pains

12.The Parameters of Success

What is success anyway?

Preface:
This book began as two separate projects. Ken Jacobsen was writing a book about emerging paradigms in computerization. Victor Vurpillat was writing a book about creating successful start-ups. They reviewed each others work. Victor said to Ken, so what? How do you make money from that knowledge? Ken said to Victor, you cannot build a successful company unless you understand where the emerging markets are developing. Ken was a market analyst type with a creative grasp of the high tech market place. Victor was an old soldier who had served as a co-creator in over fifteen start-ups. Together, they pooled their knowledge and experience to guide fellow entrepreneurs in the start-up process.

From Ken Jacobsen: Most of my ideas were formed through my association with SRI, International and the Pocket Intelligence Forum that I helped create together with Mark Cummings. The intellectual stimulation of that experience shaped my concept of the high tech market place. I also need to share my appreciation to Don Spalinger, at Dataquest, who is always helpful with advice. Winners and losers are not determined by Lotto numbers or random chance, but by doing the right thing at the right time in the right place. Could I describe the loci of those vectors? Where would success most likely strike next? From Victor Vurpillat: I have had the good fortune of participating in the creation of more than $10 billion of shareholder wealth. As an observer of my environment, I have learned both from the successes as well as the failures. I was fortunate to participated in the creation of wealth mostly through Safeguard Scientifics, serving as Vice President of R&D and facilitator for many of its successful ventures including Novell, Compucom and Coherent. I see that it is not what you know that makes a person successful. Its what you do with it and paradoxically success often comes from failure How you fund your company, how you organize and launch for success, are the critical factors and there are no simple single answers. Most successful entrepreneurs rarely have more than one success. As soon as an entrepreneur hits a home run he rarely ever has the courage to risk his winnings or his psyche on a new start up. I leave it to the psychiatrists to figure out why. Most books about success in business trace the history of one or more successful companies without ever discussing the failures. The implication is that if only you could follow the same steps, you too could be successful. Not True! This book is about the map of success in the high tech start up business. We will show you the highways, byways and dead ends but you will have to select your destination and the route to your dreams

Introduction
An old joke identifies three life scripts: those who make it happen, those who it happens to, and those who say, what happened? Our goal is to help business management make it happen. The audience for this book is those seeking the big winner in the high tech business arena. Most have found success by accident. But it is the premise of these authors, that if you understand where the market is going, and the dynamics of its movements, it may be possible to put yourself in the middle of the next wave of success. Eighty-seven percent of all new business fail. Yet we still keep butting our heads against the walls, starting new ventures. New businesses proliferate every day. Is it possible to initiate a high tech start-up and improve the odds of success? We know why companies fail. Clearly, there are five reasons that a company fails: 1. It was undercapitalized 2. It has an inept team 3. The product doesnt work 4. The market wasnt there. 5. Government/conspiracy/unnatural acts One would think that since it is so simplistic to define the causes of failure, success would result merely by addressing each of these issues. But success is more than the absence of failure. It is multifaceted. It shows many faces. Many companies exist without success or failure. They simply ARE. They live from day to day; they float on the cutting edge of either success or failure, and sometimes both. Sometimes, they are that way by design. Some business people do not want SUCCESS. The principles want to make a living without hassles and be happy, or be fulfilled, or do other things. And they are content with this life/business style. Success is more than the absence of failure. It is multi-directional and has n-dimensional modalities. Any single metric is insufficient to analyze success. Well capitalized companies fail. Undercapitalized companies sometimes succeed. Management teams with long success records sometimes fail in a new startup. Success is more of an emergent property than a calculable or predictable outcome. Consider hydrogen and oxygen atoms. Two violent gases, when combined, form harmless water molecules. Physics cannot calculate from the properties of hydrogen and oxygen our perception of wetness in the emergent property we call water. There is nothing in the properties of either hydrogen or oxygen that would allow the prediction that they would produce the feeling of wetness. Success often appears to be like an emergent property whose attributes cannot clearly be predicted. Observing and analyzing both winners and losers results in some interesting conclusions. First of all, stories about success are redolent with myth about how and why it happened. None the less, certain rubrics emerge as duplicable axioms.

This book offers an analysis of these patterns for success in high tech startups. We rely heavily upon the concept of paradigm shifts and disruptive technologies as keys to success. For it is when there is a changing of the guard, that there is an opportunity for new players to emerge. The basic premise of this book is that it is imperative that entrepreneurs understand the big picture before they write the business plan and launch a company. Too often a finely detailed idea is the basis of a business plan. We propose that by taking a snap shot of the big picture, paths to success can be optimized. Success, we contend, is largely a function of cybernetic feedback, or course/course correction.1 That is, the identification of a target market, coarsely defined, then narrowly focused, is a necessary aspect of the successful company. It is looking at the big picture as a necessary function of focusing on the specific target. You get in the approximate vicinity of the destination and then you refine the map. It is only with the ability to see the larger market and roughly understanding the dynamics and market directions at that level that one can successfully focus on a specific product and market. The prima facie question must be asked whether the idea that brought the entrepreneur to the point of launching a venture was to create a product or a company. They are two separate goals A product is not necessarily a business. A company is not necessary to build a product. This book is not about building products. The simple advice is that if a product is envisioned, build it, and then license it to a company that has a market for such products. Developing a product is easier than building a company. Selling a product is easier than funding a company. Often, creating and owning a product is a lot more satisfying than trying to manage a company. Many ventures would be more profitable if the entrepreneurs realized that they should peddle their concept to an existing company, rather than attempting to fund both a product development and a business infrastructure. Such an approach greatly reduces the amount of capital required. But may also drastically reduce the reward If, however, a company is envisioned where a product idea is merely the germ of a complete product line, then the ideas and concepts explored in this book will be helpful. The TEST? Can you identify what a complete product line would look like in five years? How would the company expand with related products and technology? Depending upon these answers, there is justification for a company. That is what this book is about. This book is not a treasure map. It is an atlas. It includes some of the rules of the road and points out some of the hazards along the way. It identifies where one destination is in relationship to others, but does not say that one is easier or nicer than the other. The book begins with an explanation of where (what territories) success is likely to occur. Successful companies will emerge out of newness. While someone may create a successful
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Aiming a gun at long range requires a sighting scope to get into the general target area, and then a fine focus scope to narrowly target the instrument. Gunnery requires azimuth as well as vertical aiming, and then, fine tuning before a target is hit. Course/Course correction is our term to conceptually describe the process of looking at the broad picture first, and then focusing on the fine control issues.

company with an old idea-- lets make a notebook computer! it is more likely that SUCCESS will happen to a company that does something new. We offer an example with the story of Novell. It serves as a model that we analyze for understanding why some companies succeed and others fail. Assuming that the entrepreneur starts with a new idea, our atlas helps puts that idea into the context of emerging markets and enabling technologies. But a good product concept and an understanding of its relationship to market trends and evolutions do not guarantee success. The number one cause of company failure is under capitalization. While capitalization alone does not guarantee success, the lack of adequate funding probably guarantees failure. So our atlas tackles the issue of financing and organizing for success. But the prevalent models seem woefully inadequate. If 87% of new ventures fail, something is wrong. We explore these dynamics as we analyze the Business of Success. We use Safeguard Scientifics as an example of a company that has funded high tech start-ups and some of their successes. Finally, we draw out the maxims for success that seem to operate in our economy. We recognize that these are dynamic maxims, valid in the late 1990s for high tech business in the United States. They probably would not have been valid thirty years ago, or 30 years hence. While analogous rubrics may be helpful in other economies, our peculiar mix of free market enterprise and stock market financing creates some unique opportunities. By giving the big picture, we hope to enable entrepreneurs to adopt the discipline of the course/course correction as a necessary part of the startup process.

Where to Find Success?

The place to make the investment for a new business is in the areas of growth. In real-estate, one buys in appreciating neighborhoods, not in stagnant growth areas. Many stock traders recommend trendy or fashionable stocks... to go with the flow.2 Innately, many entrepreneurs do the same. Investment in new technology should be the same. An emerging technology is released and the entrepreneuring individual notes, I can do that! I could make money in that market! And a business is launched. Just note the proliferation of WEB oriented companies emerging at this time. It should be generally acknowledged that it would be foolish to create a business circa 1996 to build and market a new brand of automobile-- competing with Detroit and Japan. Or building a new television set-- competing with Sony and Samsung. Those industries, their channels and branding, are too mature. Such ventures would necessarily require subsidization of billions of dollars before there was any payoff and it might still fail. However, WHEN alternative fuel vehicles become practical, there is an opportunity for a new automobile manufacturer. When Interactive TV is real, new players can emerge. The right time, the right place, the right team, could catapult a new player into success. The barriers to success would be astronomical for such a neophyte. Alternative fuel vehicles would be disruptive not only to the motor suppliers, but also to the infrastructure. Gasoline distributors, service mechanics, auto supply dealers, as well as the automobile distribution channel will all be negatively impacted by such a vehicle. High tech startups are on a much
2

There are also the contrarians who make money going against the market.

smaller scale, but the dynamics are the same. Broadcasters, cable companies, advertising agencies, retail distributors all have veto power over new TV companies. The secret is finding and recognizing the paradigm shift and taking advantage of these market forces. Mature companies have Compound Annual Growth Rate (CAGR) of 10% or less, depending upon the economy. When you hit just right companies have a CAGR exceeding 100%.. Is a better search engine going to be home run today? Or another Quad core based notebook computer? It is doubtful. Only a disruptive technology can produce a big hit. And even this is not guaranteed. It will only work if the product resonates with the market. Resonating means taking a little energy and producing an enormous result. Pushing the swing at the right time makes it go higher, with little energy. Pushing at the wrong time messes up the rhythm. The phenomena of trends is almost mystical. Movements, fads, and trends, all seem to come in waves, whether focused on fashions, political or philosophical concepts, or technologies. The American revolution came in a wave of revolutions for independence. The breakup of the Soviet Union came in a wave that collapsed communism. The telescope and analytical geometry each had multiple, simultaneous inventors with separate claimants to the technology. The overreaching paradigms become the titles of text books: The Age of Discovery, The Industrial Revolution, and now? The Information Age. But these macro-movements contain collections and clusters of other trends and movements. The focus of this study is the interaction of trend clusters and their resulting creation of success. Within these trends, which seem to come and go as the wind, paradigms emerge for interpreting reality and making value judgments. Paradigms are fractal.3 Each paradigm includes an infinite progression, and simultaneous regression, of paradigms. They exist is synaptic relationship to each other. On their cutting edge, they appear as chaos, but create an orderly understanding of reality. Technology Paradigms: Certain external conditions must exist before a technology can explode! Up until the 1950s we were dependent upon muscle for survival. An agricultural society requires manual labor. The machine age requires mental power... machines to augment the mind as other machines augment the hand. The turnover happened when machines produced more of our products than our hands. In 1956, for the first time, white collar workers outnumbered blue collar workers.

Fractal geometry is the basis for the interdisciplinary study known as ''chaos research,'' Despite its name, the new science is not the study of total randomness but rather of processes that are, as one scientist puts it, ''uncertain but not unpredictable.'' That applies not only to the growth of most natural structures, from clouds to tree bark, but also to the graphics that appear on computer screens.. The definition of FRACTALS was coined by an IBM Think Tank scientist, Benoit Mandelbrot. It is the "new geometry of nature that describes many of the irregular shapes and fragmented programs around us." The geometry is a "set theory"- the sets are called Mandelbrot sets. Traditional geometry describes objects as squares, cubes, circles, etc. Fractal geometry describes ferns, etc. It reduces chaos to a formula. A dynamic of fractals is that the formula that described them is valid at both the micro and macro levels. The same formula describes and generates the minutia of detail and the macro overview. A fractal map of the US coast line generates both the satellite view, and the San Francisco bay.

Many of the seeds and technologies employed by nascent paradigms have been commonplace for eons. They lay fallow until the time is right. The mechanical technology for a typewriter existed with the invention of the piano and moveable type. It could have been invented in the 16th or 17th centuries. It waited until the late 1800s to be invented. Disruptive technologies can also be introduced at the wrong time. The community must be ready, or the products will not resonate. It wasnt until the 70s that society was ready for computerization. Proto-computers existed conceptually for centuries. Functional prototypes-mechanical devices existed since Charles Babbage invented his analytical machine in the mid1800s. Conceptually, the computer was first described in the 1930s and 1940s by A.M. Turing and John von Neumann. But the acceptance of a technology follows a pattern. The most obvious example that many of the more mature readers will relate to is the acceptance of television. In the period soon after WW II, (1947-49) Television was released in various parts of the country. First one family bought one. Entire neighborhoods gathered at the Vurpillats to see this WonderBox. About a year later, a second family bought one, and then a third. But sometime in 1950, it exploded. Everyone had one. It was an overnight phenomenon. What kicked into place that made this occur? It was a clear example of a definable paradigm shift. Business Paradigms: Success requires more than the right technology. The business models and paradigms of success must also be in resonance with society. The way businesses are organized, financed, distributed, and the way they create wealth are all part of the prevalent business paradigm. Together, the right business paradigm with the right technology, companies are successful. Whenever there is a paradigm shift, there is the opportunity to create new success and new wealth.

The Dynamics of a Paradigm Shift

fig 1.

Guidance through these processes is useful in high technology. Only 7% of franchise businesses fail, but only 13% of new technology businesses succeed. Franchises succeed because they have a formula for success. Startups face an unknown series of independent variables and decisions. The success paradox is that some people make it. The synaptic relationship between the right technology and the right business model is almost mystical. The word serendipity seems most appropriate. The Success Paradox: Success requires resonance between technology and the business paradigms that evolve for each point in time and space. Success is multidimensional. There are many ways to be successful, and even more ways to fail. There is an overlap of successes and failures based upon any singular metric. Undercapitalized companies can succeed. Borland and Novell are good examples. Well capitalized companies can fail. Next, Solyndra and A123 Lithium Batteries are perfect examples Some consider the previous experiences of the management team as an indicator of future success. Again, Steve Jobs second startup at Next did not succeed. Ray Norda was a failure at General Automation, but a success at Novell. The focus on a business plan as the determinator of success is also fallacious. The original business plan for Lotus envisioned first a Visible Programming Language which was a 4GL report writer for CP/M machines. They then changed to the idea of producing a multi-function integrated software program with spread-sheet, word processor and database.4 Novell began with the idea of producing IBM 3270 replacement terminals. On the other, Intel has not wavered since its inception. There is no intention of inferring that ONLY new paradigm companies using emerging business paradigms can or will be successful. Most change in the industry is evolutionary rather than revolutionary. Evolutionary change is more likely to be dominated by existing market leaders. The benefits of evolutionary improvements can be trivialized by domineering market leaders. In Fall, 1991, prior to its acquisition by Novell, Digital Research Incorporated (DRI) produced DR DOS 6.0 with substantial evolutionary upgrades to DOS. Just weeks before it was to be released, Microsoft preempted DRI with an announcement that they would incorporate every feature announced by DRI in their own 6.0 version which was released over fifteen months later. Evolutionary improvements are not a guarantee of success. The establishment can (and will) try to dismiss them. As presented in fig. 1 above, often multiple paradigms-- sometimes even conflicting paradigms co-exist. They do not necessarily replace each other. This is the case, we believe, with the various computer paradigms that have operated on our society. It is likely that companies can and will be successful in the established paradigms as well as in emerging paradigms. But their business models will differ. Dissonance occurs when paradigms are mixed. It is the contention of this book that success is more likely to occur IF the entrepreneur is aware of their relationship to todays technology mix. There is still the issue of serendipity. But the adage has some wisdom, if you run around on enough golf courses in the rain, you will get hit by lightning. There are two models for success: the first is the spaghetti on the wall approach:
4

Thus, the name 1-2-3

playing the odds, diversifying risk. The latter is to predict where lightning will strike and stand there. We advocate this approach. This book is an exploration of these phenomena; the technologies and players who have capitalized on them. To the extent that lessons can be learned, the insights offered can help discern new paradigms and enable businesses to respond appropriately to the opportunities before them.