The difficult second album
Question: what do Nirvana, Led Zeppelin and the Beastie Boys all have in common? Answer: they had brilliant sophomore albums. Nirvana released Nevermind. Led Zeppelin dropped Led Zeppelin II. The Beastie Boys delivered Paul’s Boutique. These are classic albums that have stood the test of time. They were much, much better than their first albums. They were artistically accomplished and refined.
The sophomore slump, as it is often called, is a make or break situation for new artists. A first album may have been years, if not a whole life, in the making. The second album must be made with the burden of a record deal that may contractually require a new record being made every 2 years. The pressure is on to deliver something as good, if not better, in a shorter timeframe with higher expectations. Does this sound familiar at all? If the second album is a knockout then that’s proof of a successful artist. Success begins to grow exponentially. If it’s mediocre, well, let’s just not talk about the Second Coming by The Stone Roses.
If your company has been a success due to a stellar first product and growth is beginning to slow, then people will begin to ponder whether it’s time for a second product. Can the company have the same success all over again? The notion can generate a great deal of excitement for the business: salespeople will have something new to sell to a potentially untapped market, and some of your engineers may finally get that greenfield project that they’ve been waiting for.
However, the reality is that launching the second product is extremely hard.
- High expectation of success: There is probably an implicit expectation that anything new that gets created will be just as successful as your first product. After all, it’s the same successful people making it, right?
- Underestimation of effort: Your existing product has probably gotten to a stage where it has had enough time, thought and planning to have a clear roadmap that is releasing at regular increments, and all of the under-the-bonnet infrastructure, tooling and frameworks are already there. Starting from scratch gives you none of these force multipliers: it may actually take longer than expected to get something off the ground.
- Umpteen existing processes: Your engineering and company processes have been created around your existing product. How is this going to work when there is a new product being made, potentially addressing a different market, with a different release cycle and different revenue model?
Doing something new is risky and it might fail. Think about how many startups fail every year. Your second product might suffer the same fate. How do you proceed in such a way that allows the best chance possible for your new product to survive?
Let’s consult the literature.
The Innovator’s Dilemma
The good news is that this is not a new problem. It was written about extensively way back in 1997 in a book called The Innovator’s Dilemma. This article isn’t meant to serve as an in-depth book review, but it is easy to distill the principles. I would highly recommend reading it regardless; the book is as relevant now as it was when it was written.
It addresses how successful companies can ultimately fail in the face of disruptive innovation. Imagine this: given you have a successful product which is selling well and iterating through a sensible roadmap with positive feedback from your customers, how can it be the case that a small competitor’s offering, which is seemingly worse-looking, slower and with more bugs, is beginning to eat away at more of your deals?
The answer is that the smaller, disruptive company is better focussed on satisfying the future needs of your customers rather than their current needs, which is what your own product is serving. An idea for a niche market may be dismissed because it doesn’t appear to be worth the time and money when compared to further developing a current product. This thinking, left unchecked, can be similar to the market shifting from Blockbuster to Netflix. Given a few years to simmer, this can turn into a world of pain.
This situation that is described so well in The Innovator’s Dilemma is exactly the reason that new products have difficulty growing from companies that have an existing successful offering. Two things can happen:
- The no-starter: After identifying a cool new product idea that will serve a new market, it is dismissed because the current product is already making a healthy revenue and the decision is that resource is better utilized on that instead. Why would the company take a whole team and risk building something that might fail when everything is currently going well?
- The premature failure: A new product is developed and launched, but at the end of the year, when the revenue is compared to that of the main product, it is seen as too small of a percentage to be worth the continued effort. It is sunsetted and the team returns to working on the main product.
Both of these situations are inherently bad. For every excellent idea that is not started, or not given enough time, there is a gap in the market for a competitor to break through. One of these ideas, with time, could be bigger than your entire company.
Giving your second product room
How can a new product be given the space to potentially succeed?
Let’s think about a start-up. A small group of people, with full creative control and a passion for their idea, usually raise some money. With that money they’ll either:
- Succeed by breaking even and take their financial destiny into their own hands.
- Run out of money but have growth that attracts further investment.
- Run out of money and quit if it’s not going to work.
When contemplating a new product, you can untangle it from unfair comparison with your existing offering by treating it as if it were a separate company. This new product simply becomes a finite investment of time and money. But how do you decide whether it’s worth doing?
Here are some decisions that you and the business should consider carefully.
- Decide on the financial investment. If your existing company was going to place a bet on a new market and a new product, how much would they be willing to part with? £250K? £1M? £5M?
- Set a growth target. What is an acceptable growth rate for a new product? Is it 150% year on year, or 50%? What would look attractive to an investor if this really was a start-up?
- Decide on the allotted time. With all of the above taken into consideration, how much time is the company willing to commit to making this a success? How long are they willing to wait for this product to break even? A quarter, a year, three years?
- Build a financial model. Given the investment and amount of time allowed to break even at a certain growth rate, what does that mean for the amount of money available every month for CapEx, OpEx and salaries? A quick spreadsheet can help you derive these figures.
You can now all look at the data and make a call. Is this worth pursuing? If not, then that’s fine. You’ve analyzed it quantitatively and can back up your decision not to proceed. If it is, then get planning.
If the business is happy to “invest” in this new idea, then it’s time to start thinking about resources.
- Form a cross-functional team. Taking into account how much money the company would be willing to bet on this investment, how big should the team be? Think about the salaries of the engineers that you are picking. Is this a team of 3 or 6? What current projects may slow down or stop as a result of transferring staff on to this initiative? Who is your product owner going to be? They’ll need to be self-starting and have a good understanding of what it’s like to be a “mini CEO”.
- Get buy in from other parts of the business. It can be extremely motivational to have a dedicated salesperson and marketer who can work directly with the team to bring their product to market. It doesn’t mean that they need to begin selling to brand new customers, but they could perhaps upsell the new product into existing deals. Leverage what you have.
- Make them fully accountable for P&L. Here’s the powerful bit: tell the team that you don’t mind how the product is built, as long as it is built to a level of quality they are happy with. That team will report back on their profit and loss, and the rest is down to them. Full autonomy drives creativity.
- Let them know it’s OK to fail. The business has outlined how long they’re willing to run with this initiative until the money runs out. If it doesn’t succeed after that, then that’s OK; not everything will be a success. Your staff will still have a job too! However, if it does succeed, they’ll be the owners of their new domain. They’ll have a product and revenue stream that they have created themselves, and they’ll have learned a huge amount about running a business along the way.
This may seem like overkill. A financial model? A completely autonomous team? Surely it would be easier to just define the new product and treat it like a new feature, funneling it into an existing delivery team? Well, you could do that, and it might work. But The Innovator’s Dilemma suggests that you will face a much higher chance of failure. Your existing processes, people, ways of working and choices of tooling suit your current, mature product. A smaller, hungrier product needs more nimble and self-directed ways of working, just like your company did right back at the very beginning.
Giving a new product complete autonomy aside from reporting on P&L allows staff to rethink how they work. It allows them to try new things with no risk of upsetting the status quo. It allows room for hustle and camaraderie and the ability to go through a brand new experience together. You’ll be surprised at just how fast things can happen with a small group of motivated people with autonomy. It’s exciting.
How does your own company spin out new products? How well does it work?