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Tuesday, March 10, 2009

Don Dodge and the story of Shawn Fanning and Napster

Don Dodge is a veteran of five start-ups including Forte Software, AltaVista, Napster, Bowstreet, and Groove Networks. Don is currently Director of Business Development for Microsoft's Emerging Business Team. He writes a daily blog, Don Dodge on the Next Big Thing.
You can read his full bio here

Don Dodge favorite entrepreneur story is the story of Shawn Fanning and Napster. And what is interesting is that this is a story of too much success too fast.
Napster grew from being an unknown startup to being a major threat to the major industry with over 50 million users in about 7 months time. Don was VP of Product Development during this time.
Don draws a few lessons from what happened, some of which really resonates with my own experience:
- having great vision does not help, if the market is not ready you will go nowhere. And if you are too early chances are the next guy in line is the one who will succeed. I have seen several examples of this. I met an entrepreneur who had an iPhone equivalent 5 years before Steve Job showed up on stage with the real thing. He had investors, customers, but the big Telcos did not care. I talked to these same Telcos after the iPhone was announced and they were still considering the product like a niche that would not go too far too fast. But we are seeing what happens now.
- you need to stay close to your customers, and understand what they are willing to pay for, rather than try to convince them that your solution is going to make a difference. In simple terms, listen. I have seen entrepreneurs show up with a solution, talk to their customers: they had sensed a need, but the solution was not exactly on target, and they came out of the discussion with another solution that the customer was willing to pay for. It works, probably this is the standard process most of the time.
- "test your assumptions before spending a lot of money". This one is always true, but I would add that in the case of Napster they were probably not helped by the fact that VCs got involved. The idea was big, the potential to change the world real, so it was the perfect play for VC investors. But once you get into the VC process, things are different: no need to worry about the money, so you push for the goal as hard as you can, and you have no real incentive to take it slowly, because VCs are on a timeline (need for the biggest possible exit within so many years). If you had no money, you would not spend anything unless you are sure there is a customer in front of it to pay for it. Which takes us back to the previous point.
A current example of this for me is Twitter: this is another world changing idea, powerful enough that it has become a verb (people "twit") but VCs just poured another $35M into it and are happy to say that they do not care about revenue now because they know how to make some when they decide to do it, and until then they want to go for marketshare. Well, how much is Twitter leaving on the table doing this? Are we sure the assumptions on the revenue model are good until we have actually tested them?
- "Provocative challenges make good headlines but don't make good business". This is the bad news with hype, and we see a lot of it in Silicon Valley. Another way to put this is that you should not bother making the headlines until your competition starts doing it. I have seen several "hot" startups make the front page of Business Week, Forbes or other magazines to then blow up in mid-air because they were not selling much and ran out of cash trying to look bigger than they were. For me the key to buzz is to use it only when you start competing with others in front of customers. Then trying to look as big as possible and talking to newspapers or magazines as a way to differentiate yourself from competition makes sense. Before that all you are doing is educating the rest of the world, including potential competitors, but it does not really help close deals and therefore it is a waste of time and energy.

The full Shawn Fanning and Napster by Don Dodge is here

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