A sign of doom: failing to listen to customers

Do entrepreneurs and venture capitalists get it? That there's more to starting a technology business than an idea and someone else's money? That you actually have to understand and serve customers?

The venture capitalists, it would appear, are getting the message. As for the entrepreneurs, I wouldn't bet the farm that they have.

On December 2, I attended a conference sponsored by Massachusetts Institute of Technology's venture capital club. I'm told it lacked the exuberance of previous years. Too much money has been lost and too many dotcom start-ups have folded for anyone there to feel irrationally exuberant. Nevertheless, the hallways were crowded with the 40 venture capital partners and hundreds of students and alumni who had turned out on a Saturday morning to speak, listen, recruit and network. Many of them attended a session on issues for newly funded companies.

The moderator put the first question to the three panellists, all general partners with venture capital firms that invest in technology start-ups: What are your key considerations when you decide whether to invest in a new company? I expected to hear them talk primarily about the management team; instead, they mostly talked about customers. Is the new company offering a product that they're sure customers will buy? Have the entrepreneurs identified a problem worth solving? Do they understand the would-be customers' pain?

And in this age of dotcom disillusionment, just how do they validate a business model? By talking to many entrepreneurs, in order to get a feel for how well they understand the customers, said Duncan McCallum, a partner at OneLiberty Ventures in Massachusetts. Part of the formula for getting results, he said, is to "pick the right entrepreneurs and surround them with customers". What about operations? Start-ups focus so much on marketing that they're blind to operations issues, said George Zachary, a partner at Mohr, Davidow Ventures in California. "We hit them on that."

OK, I wondered, but if they're so serious about customers, do they actually involve CIOs or other high-ranking executives at these companies? I waited until the end of the Q&A session, after giving the future entrepreneurs in the room a chance to ask their questions, to pose mine. All three panellists talked about the customer advisory boards they set up to counsel them and the entrepreneurs they've invested with. These boards are critical, they all said, to identify those pain points and understand whether a product makes sense. "The worst problem for us is building a product that no one wants to buy," said Charles Lax, a partner at Softbank Capital Partners in Massachusetts. Do CIOs participate? Yes, they do. Lax named two who work with his firm: Robert Walters at John Hancock Mutual Life Insurance and Charlie Feld, the famous former CIO of Frito-Lay and Delta Airlines.

I wish I could say I left the conference feeling that these smart, energetic entrepreneurs heard the clear message about customers, but I can't. For not once during that session - or any of the six sessions I attended - did I hear any questions about customers or see any sign that they got it. Could that be why so many IT managers wind up so disappointed when they buy products from emerging companies? And a reason why so many high-tech entrepreneurs fail?

* Allan Alter is editor-in-chief of the MIT Sloan Management Review and a former US Computerworld editor. Contact him at alter@mit.edu

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