cdixon blog

Business development: the Goldilocks principle

Background: At Hunch, we switched our focus (“pivoted“) about 14 months ago from B2C to B2B. Over that time, we pitched over 500 potential partners, trying to get them to use and eventually pay for our recommendation services. This process had its ups and downs, but eventually ended well when – after 8 months of grueling diligence – eBay decided to acquire Hunch in what I expect will be a successful outcome for both companies. During this time, I got a crash course in B2B sales/business development. Here is the first in a series of blog posts based on what I learned.

Somewhat counterintuitively, the biggest problem we encountered when pitching Hunch technology to potential partners wasn’t that it wasn’t interesting or useful to them, but that it was so interesting and useful that they considered it “strategic” or “core” and thus felt they needed to own and not rent it. The situation reminded me of the “Goldilocks principle” sometimes referred to in scientific contexts:

The Goldilocks principle states that something must fall within certain margins, as opposed to reaching extremes. It is used, for example, in the Rare Earth hypothesis to state that a planet must neither be too far away from, nor too close to the sun to support life.

Basically, if your technology is “too hot” – or, in business-speak, “strategic” or “core” – then there are three likely outcomes:

1. The potential partner turns you down because they decide to build a similar product themselves. This happened to us a number of times. I think part of the reason was that there was a lot of market buzz around “big data” and machine learning which lead to the perception – rightly or wrongly – that those capabilities needed to be owned and not rented.

2. The potential partner says yes because your assets are so defensible they can’t replicate them. I’m sure Zynga considers the social graph strategic but at least for now they have no choice but to partner with Facebook to access it. It is very rare for startups to have this kind of leverage, but ones that do are extremely valuable.

3. The potential partner wants to own what you do, but thinks you have a sufficiently superior team and technology that acquiring you instead of replicating you makes more sense. This is only possible if the partner is large enough to acquire you and has a philosophy consistent with acquiring versus building everything in-house. (A common tech business term is “NIH” which stands for “Not Invented Here”. It refers to a set of companies that consider anything developed outside of their offices technologically inferior).

At the other extreme, if your technology is “too cold” – perceived as not useful by potential partners – you’re going to have a lot of frustrating meetings.  In this case, it is probably wise to reconsider whether there is actually demand for your product.

To build a long-term sustainable business, the best place to be is “just right” – useful to lots of partners but not so strategic that they are unwilling to rent it. This is where I wanted Hunch to be but we never got there.  Most companies I know use externally developed products (commercial or open source) for databases, web servers, web analytics, email delivery, payment processors, etc. These are often highly competitive markets but the companies that win in these markets tend to become large and independently sustainable. These “just right” companies – to extend the astronomy analogy – are the planets that support life.