Treetop Companies With Weak Sales Rule the Online Video Ecosystem
It’s common knowledge that most companies in any industry, over time fail. In the digital media space in the last 20 years literally hundreds of companies, many with VC funding, have risen, faltered and ultimately failed.
Companies have many different challenges: they are underfunded; their products can be underwhelming; they are mismanaged; they started in the market at the wrong time; they fail to take advantage of sea changes in the market; or just simply fail from a myriad of other problems, many of which can simultaneously happen.
On the other hand, some companies succeed like rocket ships and really hit it out of the park. News outlets love to talk and write about Akamai, Pandora, Netflix, or any unicorn company that is leading their category. Their top executives, people like Reed Hastings, make for a lot of clicks; their personalities and stories are inspirational, and they are a beacon for many entrepreneurs.
However, there is a cohort of companies that rarely get talked about. In fact, this group makes up the vast majority of companies in the digital media space or otherwise.
These are companies that are off-the-ground but treading water and going nowhere. Their revenues are flat or feebly increasing, the market leader is far, far ahead, the team tends to be paid below market, and they can’t get close to an exit. Often the team and their investors who have been with them for too long are tired and want out.
The people involved have poured their hearts, bodies, and finances into something, but can’t quite figure out how to move it forward beyond a certain point.
We call these companies “tree-top” companies: Think of a helicopter that’s floating right above the trees and you’ll have the correct visual.
Tree-top companies are always at risk for dropping into the trees and crashing. They struggle and occasionally catch an updraft, but never really fly free.
What Causes Companies to Tree-Top?
There are many factors that can cause tree-topping to occur, but the primary issue is often that the tactics the company used to get it off the ground aren’t necessarily the same things that will carry it forward and expand growth. The category could have attracted many new competitors, and the market is now crowded with undifferentiated products. It’s now a race to the bottom.
It’s one thing when the team is very small, the product is narrowly focused, and the market is expanding for all players; it is quite another when you suddenly have to put a real marketing plan in place, raise significant institutional capital to accelerate growth, and then manage sophisticated shareholders and complex product planning, as well as build and execute on go-to-market strategies. And this gets even more difficult as markets mature.
Another reason might be that the company’s existing management team itself may have topped out, talent-wise, but many people lack the introspection and proper feedback channels, or recognize they need new blood with more experience. Founders are often and understandably loyal to the people that did the early heavy lifting.
Third, it may also be that the primary product for the company isn’t really that compelling. “Me-too” products don’t dominate markets and earn super high valuations. I once worked with a company that told me they wanted to be “not technically as good as Akamai, but a lot cheaper.” This company did have an IPO and a multi hundred-million-dollar market cap, but Akamai’s market cap at the same time was 50X larger. That’s a non-trivial difference.
Lower valuations limit capitalization opportunities and cost existing shareholders troublesome levels of dilution which may in turn limit a capital raise which in turn limits the company’s ability to grow.
Not becoming the category leader in your market also makes it harder to hire the best people, as the flywheel motion hasn’t kicked into gear to drive momentum forward.
What Can Be Done?
Face reality and pick your heads up and look around. For many leaders, this is easier said than done.
Check status and get help. First, company leaders should seek advice from people who know the industry but don’t have a direct, vested interest in the company. This should include financial as well as technical advisors. Are you different and well-resourced and funded enough to lead your category? In essence, the company needs to understand where it stands before it can figure out where to go. Is the company generating $1 million in a $10 billion market?
Understand team dynamics and capabilities. Maybe the team is tired and has reached the limits of its abilities. The team has already accomplished something in launching and growing a business which is no mean feat. Starting a company and managing one are two different skill sets; the team needs to evolve or move on. Consider bringing in management with more experience for that stage in the company.
Reevaluate required resources and funding.Accelerating growth rarely happens without significant financial resources. Once a company is in treetop mode, it disincentives new investment. This is a double whammy and a tough situation to be in. Without fundamental changes in product strategy, market growth, and management approach it will be extremely difficult to raise required funding. This is often why treetop companies that raise funding end up raising it from existing investors and in small increments.
Make tough decisions and execute the new plan. Sometimes companies need to take desperate action to get out of their slump. There is no magic bullet to do this, but often it’s a combination of team, product redefinition, and updated market segmentation to regain a leadership position.
For example, at Abacast, the company started out selling a live peer-to-peer streaming product.
When the price of bandwidth plummeted in 2008 with the recession, the value of the core peer-to-peer product rapidly diminished. When I took over as CEO in late 2010, the company had an ad platform that wasn’t core; rather Abacast was relying on bandwidth sales.
We quickly realized that there was no way to compete on bandwidth and it was clear that ad monetization was finally going to take center stage. So, even though bandwidth still made up a significant portion of our revenue, we stopped calling ourselves a CDN, and instead changed our story to reflect monetization via our ad platform.
This major change allowed us to gain key strategic financing, which in turn enabled us to focus our development resources towards a massive ad platform update.
In addition, we revamped our team to bring in new resources who were experts in ad monetization to complement the core team. We also revamped the board of directors with industry experts who helped to guide us in the new world.
These drastic changes in team and shift to ad monetization brought us several key customer wins, and eventually our company was acquired by WideOrbit, an industry leading ad solution provider.
Take the time to analyze the best possible course required given the current stage, and know that this may be comprised of not a perfect answer, but a set of choices each with its own positives and negatives. Take a comprehensive look at the changing market, competitive situation, new opportunities, and how your team maps to the new reality.
Regardless, when the time comes to take action, do it.
Commit the company and your team and see through whatever decision you make together. Good luck.
[This is a contributed byline from WorksMachine.com. Streaming Media accepts vendor bylines based solely on their value to our audience.]