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Summary:

In 1999, half a dozen venture capitalists turned me down for financing because the business plan for my company, BlueTie, put me in direct competition with Microsoft. There simply was no point, they said; between its desktop monopoly, ranks of talent and outsized bank account, Microsoft […]

In 1999, half a dozen venture capitalists turned me down for financing because the business plan for my company, BlueTie, put me in direct competition with Microsoft. There simply was no point, they said; between its desktop monopoly, ranks of talent and outsized bank account, Microsoft was a guaranteed startup-killer. Instead, they advised us to “pick a market Microsoft doesn’t care about.”

Fortunately my team and I did not listen, and went ahead with our plan. BlueTie is an SaaS company with two revenue streams: We host customized email and collaboration software for enterprises; we also have an ad platform that pushes third-party services and promotions into your email, calendar, or social networking application, so you can make dinner reservations or book travel without interrupting your workflow (see the screenshot below).

BlueTie eventually did get funded. Today we have 3 million users and 250,000 business clients, and we’ll exit 2008 with a revenue run rate of more than $20 million. We’re undoubtedly benefiting from a new reality; the revenue model for web-based applications is advertising, not subscriptions. Online advertising is forecasted to climb to more than $100 billion by 2011 from $43 billion in 2007. It’s a prize too big to ignore.

Despite our growth, as we talk to investors about expanding into new markets, I hear the same warning I heard back in 1999, only this time it’s not about Microsoft, but Google. One Sand Hill VC recently told me not to enter a market “because Google will own it in nine months.” Indeed, today Google is the Goliath, so big that it’s awarded victory before the battle is even fought.

But we all know how the fight between David and Goliath turned out. So if you’re the David, here are three ways to swing the pendulum in your favor:

1. Be a spoiler. Companies consistently make poor strategy decisions when they’re busy trying to defend existing revenue streams. But just because you’re small doesn’t mean you can’t squeeze the market. Create a product at a tenth of the price of Goliath’s. This forces all vendors, including Goliath, to cannibalize their own revenues to stay competitive. And while it will shrink the dollar size of the overall market, you will end up capturing share.

For example, we built our software largely on open source, so we were able to offer BlueTie’s email and collaboration products at a 90 percent discount to Google Apps or Microsoft Hosted Exchange — and still make money. If we cut prices further, it will hurt Google and Microsoft far more than it hurts us (or other, less-entrenched firms like us).

2. Change the yard stick. Advertisers ultimately care about revenue, not eyeballs, page views, or clicks. Today’s ad measurement tools are a long way from giving advertisers end-to-end transparency. Advertisers want to see how spend translates into revenue. You can argue you are providing brand advertising until you are blue in the face, but in a recession, marketers are going to look for results. Even brand advertising has the goal of enhancing the brand to drive long-term customer preference and revenue.

If you create a new way to measure the flow from ad spend to revenue that reduces advertisers’ risk, they will flock to it, and force your competitors to change as well. Even Google will be ultimately forced to adopt the model that advertisers demand.

There is a huge need for better yard sticks to measure advertising effectiveness. If you can raise the bar, you will force everyone else to change focus to match you.

3. Obliterate the business model. There is nothing that is more painful to a market Goliath than a shift in the underlying business model. Selling your product at only a marginal discount is not a new business model. Forging a new distribution channel is, and Blockbuster has yet to fully recover from Netflix. Can you change the product strategy to commoditize the market and make money on add-ons? Think Go Daddy. Can you change the distribution model? Think FriendFeed.

Competing in a David vs. Goliath battle is the most interesting of chess matches. Speed of execution is important, though, as Goliaths will eventually catch up to you. Unless of course, you changed the game so much that there’s nothing to catch up to.

David Koretz is a serial founder. Prior to BlueTie, he founded Network Marketing International, an early web-based sales lead provider. Read more from David on his blog.

(“David vs. Goliath” photo credit: http://www.funnyjunk.com.)

  1. Great post!

    Congratulations on surviving through the 2001 – 2003 nuclear winter. Best of luck during the next phase of growth.

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  2. Going up against a goliath doesn’t always have to be a chess match. I think some companies spend too much time focusing on what other competitors are doing and not enough time focusing on being innovative with their own product(s). While it’s important to know what’s going on in the industry overall, goliaths shouldn’t be a distraction. Too many startups tend to rationalize the need for a feature because another company has it and not because it serves user needs and follows the company/product vision. Positioning is extremely important to go up against a goliath. The chess match is really against yourself as you evaluate opportunity costs (i.e., decisions) that will make you more competitive in the long term.

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  3. BIG PUFF

    how do you claim to have 3 million users and yet your site gets 16-17k unique hits per month? what happened to the other 2,983,000 so called members or clients, don’t they use your services? specially a SaaS like enterprise email where you have to check it everyday, every hour!

    now, i like what you have to say about going against the Goliath, but come on be honest here… this was just another lame attempt for publicity to save something that has been on a sharp decline for a while!

    you want to go against the Goliath and win? then be honest!

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  4. What recession? I thought you guys were above the sensationalism of other media outlets.

    Yes, there is an economic slowdown. No, it’s not a recession (negative growth in GDP) yet.

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  5. @BAM AZIZ

    good questions. where are you getting your 16-17K numbers?

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  6. I’d add one more point to this post:

    Its not a zero-sum game.

    You don’t have to be #1 or even #2 (or #3…etc..) to make a successful, highly profitable, large business. The market is very large.

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  7. BlueTie is a hosted email company with several dozen ISP customers (who, I would assume have 100-200k+ users each)…those folks never hit the BlueTie corporate site. I’m with PapaSmurf…where did you get the 16-17k numbers…and be honest.

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  8. here you go,
    http://siteanalytics.compete.com/bluetie.com/?metric=uv (16,373 unique hits)

    this one is even lower: http://www.quantcast.com/bluetie.com

    Compete.com is more reliable since i have a few sites and the numbers they give is pretty close ( +/- %3-5)

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  9. @PapaSmurf

    here you go: http://siteanalytics.compete.com/bluetie.com/?metric=uv see for yourself

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  10. @PapaSmurf you can get the info from compete.com or Quantcast

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