May 2021 - Crossing the Chasm by Geoffrey Moore

This month we take a look at a classic high-tech growth marketing book. Originally published in 1991, Crossing the Chasm became a beloved book within the tech industry although its glory seems to have faded over the years. While the book is often overly prescriptive in its suggestions, it provides several useful frameworks to address growth challenges primarily early on in a company’s history.

Tech Themes

Technology Adoption Life Cycle. The core framework of the book discusses the evolution of new technology adoption. It was an interesting micro-view of the broader phenomena described in Carlota Perez’s Technological Revolutions. In Moore’s Chasm-crossing world, there are five personas that dominate adoption: innovators, early adopters, early majority, late majority, and laggards. Innovators are technologists, happy to accept more challenging user experiences to push the boundaries of their capabilities and knowledge. Early adopters are intuitive buyers that enjoy trying new technologies but want a slightly better experience. The early majority are “wait and see” folks that want others to battle test the technology before trying it out, but don’t typically wait too long before buying. The late majority want significant reference material and usage before buying a product. Laggards simply don’t want anything to do with new technology. It is interesting to think of this adoption pattern in concert with big technology migrations of the past twenty years including: mainframes to on-premise servers to cloud computing, home phones to cell phones to iphone/android, radio to CDs to downloadable music to Spotify, and cash to check to credit/debit to mobile payments. Each of these massive migration patterns feels very aligned with this adoption model. Everyone knows someone ready to apply the latest tech, and someone who doesn’t want anything to do with it (Warren Buffett!).
Crossing the Chasm. If we accept the above as a general way products are adopted by society (obviously its much more of a mish/mash in reality), we can posit that the most important step is from the early adopters to the early majority - the spot where the bell curve (shown below) really opens up. This is what Geoffrey Moore calls Crossing the Chasm. This idea is highly reminiscent of Clay Christensen’s “not good enough” disruption pattern and Gartner’s technology hype cycle. The examples Moore uses (in 1991) are also striking: Neural networking software and desktop video conferencing. Moore lamented: “With each of these exciting, functional technologies it has been possible to establish a working system and to get innovators to adopt it. But it has not as yet been possible to carry that success over to the early adopters.” Both of these technologies have clearly crossed into the mainstream with Google’s TensorFlow machine learning library and video conferencing tools like Zoom that make it super easy to speak with anyone over video instantly. So what was the great unlock for these technologies, that made these commercially viable and successfully adopted products? Well since 1990 there have been major changes in several important underlying technologies - computer storage and data processing capabilities are almost limitless with cloud computing, network bandwidth has grown exponentially and costs have dropped, and software has greatly improved the ability to make great user experiences for customers. This is a version of not-good-enough technologies that have benefited substantially from changes in underlying inputs. The systems you could deploy in 1990 just could not have been comparable to what you can deploy today. The real question is - are there different types of adoption curves for differently technologies and do they really follow a normal distribution as Moore shows here?
Making Markets & Product Alternatives. Moore positions the book as if you were a marketing executive at a high-tech company and offers several exercises to help you identify a target market, customer, and use case. Chapter six, “Define the Battle” covers the best way to position a product within a target market. For early markets, competition comes from non-consumption, and the company has to offer a “Whole Product” that enables the user to actually derive benefit from the product. Thus, Moore recommends targeting innovators and early adopters who are technologist visionaries able to see the benefit of the product. This also mirrors Clayton Christensen’s commoditization de-commoditization framework, where new market products must offer all of the core components to a system combined into one solution; over time the axis of commoditization shifts toward the underlying components as companies differentiate by using faster and better sub-components. Positioning in these market scenarios should be focused on the contrast between your product and legacy ways of performing the task (use our software instead of pen and paper as an example). In mainstream markets, companies should position their products within the established buying criteria developed by pragmatist buyers. A market alternative serves as the incumbent, well-known provider and a product alternative is a near upstart competitor that you are clearly beating. What’s odd here is that you are constantly referring to your competitors as alternatives to your product, which seems counter-intuitive but obviously, enterprise buyers have alternatives they are considering and you need to make the case that your solution is the best. Choosing a market alternative lets you procure a budget previously used for a similar solution, and the product alternative can help differentiate your technology relative to other upstarts. Moore’s simple positioning formula has helped hundreds of companies establish their go-to-market message: “For (target customers—beachhead segment only) • Who are dissatisfied with (the current market alternative) • Our product is a (new product category) • That provides (key problem-solving capability). • Unlike (the product alternative), • We have assembled (key whole product features for your specific application).”

Business Themes

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What happened to these examples? Moore offers a number of examples of Crossing the Chasm, but what actually happened to these companies after this book was written? Clarify Software was bought in October 1999 by Nortel for $2.1B (a 16x revenue multiple) and then divested by Nortel to Amdocs in October 2001 for $200M - an epic disaster of capital allocation. Documentum was acquired by EMC in 2003 for $1.7B in stock and was later sold to OpenText in 2017 for $1.6B. 3Com Palm Pilot was a mess of acquisitions/divestitures. Palm was acquired by U.S Robotics which was acquired by 3COM in 1997 and then subsequently spun out in a 2000 IPO which saw a 94% drop. Palm stopped making PDA devices in 2008 and in 2010, HP acquired Palm for $1.2B in cash. Smartcard maker Gemplus merged with competitor Axalto in an 1.8Bn euro deal in 2005, creating Gemalto, which was later acquired by Thales in 2019 for $8.4Bn. So my three questions are: Did these companies really cross the chasm or were they just readily available success stories of their time? Do you need to be the company that leads the chasm crossing or can someone else do it to your benefit? What is the next step in the chasm journey after its crossed and why did so many of these companies fail after a time?
Whole Products. Moore leans into an idea called the Whole Product Concept which was popularized by Theodore Levitt’s 1983 book The Marketing Imagination and Bill Davidow’s (of early VC Mohr Davidow) 1986 book Marketing High Technology. Moore explains the idea: “The concept is very straightforward: There is a gap between the marketing promise made to the customer—the compelling value proposition—and the ability of the shipped product to fulfill that promise. For that gap to be overcome, the product must be augmented by a variety of services and ancillary products to become the whole product.” There are four different perceptions of the product: “1. Generic product: This is what is shipped in the box and what is covered by the purchasing contract. 2.Expected product: This is the product that the consumer thought she was buying when she bought the generic product. It is the minimum configuration of products and services necessary to have any chance of achieving the buying objective. For example, people who are buying personal computers for the first time expect to get a monitor with their purchase-how else could you use the computer?—but in fact, in most cases, it is not part of the generic product. 3.Augmented product: This is the product fleshed out to provide the maximum chance of achieving the buying objective. In the case of a personal computer, this would include a variety of products, such as software, a hard disk drive, and a printer, as well as a variety of services, such as a customer hotline, advanced training, and readily accessible service centers. 4. Potential product: This represents the product’s room for growth as more and more ancillary products come on the market and as customer-specific enhancements to the system are made. These are the product features that have maybe expected or additional to drive adoption.” Moore makes a subtle point that after a while, investments in the generic/out-of-the-box product functionality drive less and less purchase behavior, in tandem with broader market adoption. Customers want to be wooed by the latest technology and as products become similar, customers care less about what’s in the product today, and more about what’s coming. Moore emphasizes Whole Product Planning where you can see how you get to those additional features into the product over time - but Moore was also operating in an era when product decisions and development processes were on two-year+ timelines and not in the DevOps era of today, where product updates are pushed daily in some cases. In the bottoms-up/DevOps era, its become clear that finding your niche users, driving strong adoption from them, and integrating feature ideas from them as soon as possible can yield a big success.
Distribution Channels. Moore focuses on each of the potential ways a company can distribute its solutions: Direct Sales, two-tier retail, one-tier retail, internet retail, two-tier value-added reselling, national roll-ups, original equipment manufacturers (OEMs), and system integrators. As Moore puts it, “The number-one corporate objective, when crossing the chasm, is to secure a channel into the mainstream market with which the pragmatist customer will be comfortable.” These distribution types are clearly relics of technology distribution in the early 1990s. Great direct sales have produced some of the best and biggest technology companies of yesterday including IBM, Oracle, CA Technologies, SAP, and HP. What’s so fascinating about this framework is that you just need one channel to reach the pragmatist customer and in the last 10 years, that channel has become the internet for many technology products. Moore even recognizes that direct sales had produced poor customer alignment: “First, wherever vendors have been able to achieve lock-in with customers through proprietary technology, there has been the temptation to exploit the relationship through unfairly expensive maintenance agreements [Oracle did this big time] topped by charging for some new releases as if they were new products. This was one of the main forces behind the open systems rebellion that undermined so many vendors’ account control—which, in turn, decrease predictability of revenues, putting the system further in jeopardy.” So what is the strategy used by popular open-source bottoms up go-to-market motions at companies like Github, Hashicorp, Redis, Confluent and others? Its straightforward - the internet and simple APIs (normally on Github) provide the fastest channel to reach the developer end market while they are coding. When you look at Open Source scaling, it can take years and years to Cross the Chasm because most of these early open source adopters are technology innovators, however, eventually, solutions permeate into massive enterprises and make the jump. With these new go-to-market motions coming on board, driven by the internet, we’ve seen large companies grow from primarily inbound marketing tactics and less direct outbound sales. The companies named above as well as Shopify, Twilio, Monday.com and others have done a great job growing to a massive scale on the backs of their products (product-led growth) instead of a salesforce. What’s important to realize is that distribution is an abstract term and no single motion or strategy is right for every company. The next distribution channel will surprise everyone!

Dig Deeper

March 2020 - The Hard Thing About Hard Things by Ben Horowitz

Ben Horowitz, GP of the famous investment fund Andreessen Horowitz, addresses the not-so-pleasant aspects of being a founder/CEO during a crisis. This book provides an excellent framework for anyone going through the struggles of scaling a business and dealing with growing pains.

Tech Themes

The importance of Netscape. Now that its been relegated to history by the rise of AOL and internet explorer, its hard to believe that Netscape was ever the best web browser. Founded by Marc Andreessen, who had founded the first web browser, Mosaic (as a teenager!), Netscape would go on to achieve amazing success only to blow up in the face of competition and changes to internet infrastructure. Netscape was an incredible technology company, and as Brian McCullough shows in last month’s TBOTM, Netscape was the posterchild for the internet bubble. But for all the fanfare around Netscape’s seminal IPO, little is discussed about its massive and longstanding technological contributions. In 1995, early engineer Brendan Eich created Javascript, which still stands as the dominant front end language for the web. In the same year, the Company developed Secure Socket Layer (SSL), the most dominant basic internet security protocol (and reason for HTTPS). On top of those two fundamental technologies, Netscape also developed the internet cookie, in 1994! Netscape is normally discussed as the amazing company that ushered many of the first internet users onto the web, but its rarely lauded for its longstanding technological contributions. Ben Horowitz, author of the Hard Thing About Hard Things was an early employee and head of the server business unit for Netscape when it went public.
Executing a pivot. Famous pivots have become part of startup lore whether it be in product (Glitch (video game) —> Slack (chat)), business model (Netflix DVD rental —> Streaming), or some combo of both (Snowdevil (selling snowboards online) —> Shopify (ecommerce tech)). The pivot has been hailed as necessary tool in every entrepreneur’s toolbox. Though many are sensationalized, the pivot Ben Horowitz underwent at LoudCloud / Opsware is an underrated one. LoudCloud was a provider of web hosting services and managed services for enterprises. The Company raised a boatload ($346M) of money prior to going public in March 2001, after the internet bubble had already burst. The Company was losing a lot of money and Ben knew that the business was on its last legs. After executing a 400 person layoff, he sold the managed services part of the business to EDS, a large IT provider, for $63.5M. LoudCloud had a software tool called Opsware that it used to manage all of the complexities of the web hosting business, scaling infrastructure with demand and managing compliance in data centers. After the sale was executed, the company’s stock fell to $0.35 per share, even trading below cash, which meant the markets viewed the Company as already bankrupt. The acquisition did something very important for Ben and the Opsware team, it bought them time - the Company had enough cash on hand to execute until Q4 2001 when it had to be cash flow positive. To balance out these cash issues, Opsware purchased Tangram, Rendition Networks, and Creekpath, which were all software vendors that helped manage the software of data centers. This had two effects - slowing the burn (these were profitable companies), and building a substantial product offering for data center providers. Opsware started making sales and the stock price began to tick up, peaking the attention of strategic acquirers. Ultimately it came down to BMC Software and HP. BMC offered $13.25 per share, the Opsware board said $14, BMC countered with $13.50 and HP came in with a $14.25 offer, a 38% premium to the stock price and a total valuation of $1.6B, which the board could not refuse. The Company changed business model (services —> software), made acquisitions and successfully exited, amidst a terrible environment for tech companies post-internet bubble.
The Demise of the Great HP. Hewlett-Packard was one of the first garage-borne, silicon valley technology companies. The company was founded in Palo Alto by Bill Hewlett and Dave Packard in 1939 as a provider of test and measurement instruments. Over the next 40 years, the company moved into producing some of the best printers, scanners, calculators, logic analyzers, and computers in the world. In the 90s, HP continued to grow its product lines in the computing space, and executed a spinout of its manufacturing / non-computing device business in 1999. 1999 marks the tragic beginning of the end for HP. The first massive mistake was the acquisition of Compaq, a flailing competitor in the personal computer market, who had acquired DEC (a losing microprocessor company), a few years earlier. The acquisition was heavily debated, with Walter Hewlett, son of the founder and board director at the time, engaging in a proxy battle with then current CEO, Carly Firorina. The new HP went on to lose half of its market value and incur heavy job losses that were highly publicized. This started a string of terrible acquisitions including EDS, 3COM, Palm Inc., and Autonomy for a combined $28.8B. The Company spun into two divisions - HP Inc. and HP Enterprise in 2015 and each had their own spinouts and mergers from there (Micro Focus and DXC Technology). Today, HP Inc. sells computers and printers, and HPE sells storage, networking and server technology. What can be made of this sad tale? HP suffered from a few things. First, poor long term direction - in hindsight their acquisitions look especially terrible as a repeat series of massive bets on technology that was already being phased out due to market pressures. Second, HP had horrible corporate governance during the late 90s and 2000s - board in-fighting over acquisitions, repeat CEO fiirings over cultural issues, chairman-CEO’s with no checks, and an inability to see the outright fraud in their Autonomy acquisition. Lastly, the Company saw acquisitions and divestitures as band-aids - new CEO entrants Carly Fiorina (from AT&T), Mark Hurd (from NCR), Leo Apotheker (from SAP), and Meg Whitman (from eBay) were focused on making an impact at HP which meant big acquisitions and strategic shifts. Almost none of these panned out, and the repeated ideal shifts took a toll on the organization as the best talent moved elswehere. Its sad to see what has happened at a once-great company.

Business Themes

Ill, not sick: going public at the end of the internet bubble. Going public is supposed to be the culmination of a long entrepreneurial journey for early company employees, but according to Ben Horowitz’s experience, going public during the internet bubble pop was terrible. Loudcloud had tried to raise money privately but struggled given the terrible conditions for raising money at the beginning of 2001. Its not included in the book but the reason the Company failed to raise money was its obscene valuation and loss. The Company was valued at $1.15B in its prior funding round and could only report $6M in Net Revenue on a $107M loss. The Company sought to go public at $10 per share ($700M valuation), but after an intense and brutal roadshow that left Horowitz physically sick, they settled for $6.00 per share, a massive write-down from the previous round. The fact that the banks were even able to find investors to take on this significant risk at this point in the business cycle was a marvel. Timing can be crucial in an IPO as we saw during the internet bubble; internet “businesses” could rise 4-5x on their first trading day because of the massive and silly web landgrab in the late 90s. On the flip side, going public when investors don’t want what you’re selling is almost a death sentence. Although they both have critical business and market issues, WeWork and Casper are clear examples of the importance of timing. WeWork and Casper were late arrivals on the unicorn IPO train. Let me be clear - both have huge issues (WeWork - fundamental business model, Casper - competition/differentiation) but I could imagine these types of companies going public during a favorable time period with a relatively strong IPO. Both companies had massive losses, and investors were especially wary of losses after the failed IPOs of Lyft and Uber, which were arguably the most famous unicorns to go public at the time. Its not to say that WeWork and Casper wouldn’t have had trouble in the public markets, but during the internet bubble these companies could’ve received massive valuations and raised tons of cash instead of seeking bailouts from Softbank and reticent public market investors.
Peactime / Wartime CEO. The genesis of this book was a 2011 blog post written by Horowitz detailing Peacetime and Wartime CEO behavior. As the book and blog post describe, “Peacetime in business means those times when a company has a large advantage vs. the competition in its core market, and its market is growing. In times of peace, the company can focus on expanding the market and reinforcing the company’s strengths.” On the other hand, to describe Wartime, Horowitz uses the example of a previous TBOTM, Only the Paranoid Survive, by Andy Grove. In the early 1980’s, Grove realized his business was under serious threat as competition increased in Intel’s core business, computer memory. Grove shifted the entire organization whole-heartedly into chip manufacturing and saved the company. Horowitz outlines several opposing behaviors of Peacetime and Wartime CEOs: “Peacetime CEO knows that proper protocol leads to winning. Wartime CEO violates protocol in order to win; Peacetime CEO spends time defining the culture. Wartime CEO lets the war define the culture; Peacetime CEO strives for broad based buy in. Wartime CEO neither indulges consensus-building nor tolerates disagreements.” Horowitz concludes that executives can be a peacetime and wartime CEO after mastering each of the respective skill sets and knowing when to shift from peacetime to wartime and back. The theory is interesting to consider; at its best, it provides an excellent framework for managing times of stress (like right now with the Coronavirus). At its worst, it encourages poor CEO behavior and cut throat culture. While I do think its a helpful theory, I think its helpful to think of situations that may be an exception, as a way of testing the theory. For example, lets consider Google, as Horowitz does in his original article. He calls out that Google was likely entering in a period of wartime in 2011 and as a result transitioned CEOs away from peacetime Eric Schmidt to Google founder and wartime CEO, Larry Page. Looking back however, was it really clear that Google was entering wartime? The business continued to focus on what it was clearly best at, online search advertising, and rarely faced any competition. The Company was late to invest in cloud technology and many have criticized Google for pushing billions of dollars into incredibly unprofitable ventures because they are Larry and Sergey’s pet projects. In addition, its clear that control had been an issue for Larry all along - in 2011, it came out that Eric Schmidt’s ouster as CEO was due to a disagreement with Larry and Sergey over continuing to operate in China. On top of that, its argued that Larry and Sergey, who have controlling votes in Google, stayed on too long and hindered Sundar Pichai’s ability to effectively operate the now restructured Alphabet holding company. In short, was Google in a wartime from 2011-2019? I would argue no, it operated in its core market with virtually no competition and today most Google’s revenues come from its ad products. I think the peacetime / wartime designation is rarely so black and white, which is why it is so hard to recognize what period a Company may be in today.
Firing people. The unfortunate reality of business is that not every hire works out, and that eventually people will be fired. The Hard Thing About Hard Things is all about making difficult decisions. It lays out a framework for thinking about and executing layoffs, which is something that’s rarely discussed in the startup ecosystem until it happens. Companies mess up layoffs all the time, just look at Bird who recently laid off staff via an impersonal Zoom call. Horowitz lays out a roughly six step process for enacting layoffs and gives the hard truths about executing the 400 person layoff at LoudCloud. Two of these steps stand out because they have been frequently violated at startups: Don’t Delay and Train Your Managers. Often times, the decision to fire someone can be a months long process, continually drawn out and interrupted by different excuses. Horowitz encourages CEOs to move thoughtfully and quickly to stem leaks of potential layoffs and to not let poor performers continue to hurt the organization. The book discusses the Law of Crappy People - any level of any organization will eventually converge to the worst person on that level; benchmarked against the crappiest person at the next level. Once a CEO has made her mind up about the decision to fire someone, she should go for it. As part of executing layoffs, CEOs should train their managers, and the managers should execute the layoffs. This gives employees the opportunity to seek direct feedback about what went well and what went poorly. This aspect of the book is incredibly important for all levels of entrepreneurs and provides a great starting place for CEOs.