Question: What does a VC mean when he says your product is “a feature and not a company”?
This (usually) means that the VC believes the opportunity you are pursuing isn’t a big enough opportunity for them to invest in. In other words, what you are building should be a feature to something else already out there, instead of a stand-alone company that will generate the type of returns that the VC is looking for. For instance, assume you are building something that fits inside an email client that does X. (Perhaps “X” translates languages). While super helpful to some folks, a VC may take the postion that this should be a feature or tool within the email client, but not an opportunity to build a large company with paying customers around it. Of course, we can debate whether this is a correct statement, but in the eye of the VC this is how it is.
One thing always to consider with VC feedback to your company, however, is whether or not you are getting transparent and honest feedback. In our experience, few VCs actually give feedback like this, so always have your skeptic brain alert. One never knows what the real reason for investing might be. Perhaps the VC is out of money and can’t even make an investment, but doesn’t want to admit that and thus the feedback. This is just a general comment and not one particular to your question.
Question: In your experience, how targeted should an IT Security software start up be in terms of focusing on vertical markets in specific geographies when first launching?
Answer (Brad): There are three constraints to this question: Product (IT Security), Market (Specific Vertical), and Location (Geography.) There are two key questions to ask.
1. Market: Is your product a horizontal one or does it lend itself to specific vertical markets? If you are a student of Geoffrey Moore and have carefully read Crossing the Chasm then you know you should start with a specific bowling pin (e.g. vertical market), dominate it, and then move on to the next one. However, this assumes you are a student of Geoffrey Moore.
2. Location: Is your product sold via a direct sales force (e.g. sales dudes / SE’s need to travel to the customer) or is sold via telesales / downloads?
In my experience, overconstraining yourself too early is a mistake. Most IT Security products that I’ve encountered lend themselves to a horizontal sale (e.g. not the strategy advocated by Moore.) Many of them require dedicated direct sales activity. In general, if you take a vertical market approach or a geographic market approach, you are buying into the other (e.g. verticals and geography go hand in hand.)
However, look for the early adopters in specific markets and go after more customers in those markets – especially if you can find verticals that are linked to geography (e.g. NY-banking; Delaware-credit card; NY/Boston/SF/LA–legal; DC-govt.) If you start off a little more flexible, you might find the best vertical markets via customer adoption (rather than ponderous and usually inaccurate market research) which can result in you more effectively targeting specific vertical markets.
In contrast, if your product is more lightweight and can be sold via either a web download model or telesales, geography matters a lot less. In this scenario, you should consider having more focus on specific vertical markets since you won’t be limited by geography.