Managing in the Incubation Zone

The zone management framework resonates with most of the management teams I engage with, but that by itself does not lead to success in onboarding next-gen disruptive innovations.  When it comes to execution, we know that what gets measured gets managed.  We should also keep in mind that what gets mismeasured gets mismanaged.  And that, sadly, is the curse that haunts the Incubation Zone.

Take revenue targets, for example.  When it comes to Incubation Zone revenue per se, we need to embrace Bill Murray’s famous chant in Meatballs: “It just doesn’t matter!  It just doesn’t matter!”  Regardless of the amount, it will be a rounding error in the quarterly earnings report.  So why then do we persist in setting revenue targets in the Incubation Zone?  Because we want to have some metric to which we can hold its fledgling business units accountable.  This in itself is legitimate.  They need to be held accountable because of the opportunity cost entailed in missing the next big thing, as well as the scarce and expensive talent they consume.  The question is, if not to revenue targets, then to what?

The short answer is power.  We need our fledgling enterprises, small as they are, to win a series of power battles, where a victory testifies to their increasing competitive advantage and potential market valuation.  Each battle represents an Incubation Zone success metric.  They are the milestones venture capitalists use to determine which companies in their portfolio warrant further investment and which do not.  When management uses Performance Zone metrics like revenue attainment instead, they act as millstones around the necks of our Incubation Zone GMs, slowing them down and encouraging them to major in minors. 

So, the call to action is simple.  Examine the metrics you are holding your Incubation Zone initiatives to and replace any millstones you find with milestones.  Here’s how it plays out.

Replace revenue metrics with target customer acquisition metrics

In the early market, the power play is to win a visionary marquee customer who takes your technology to the max, showing the world what good could look like, the way OpenAI’s ChatGPT did for Nvidia.  That puts you on the map.  To capture the market’s attention, it has to be a Big Hairy Deal (BHD), so deal size is relevant.  At the same time, however, in the early market, it is important to avoid SLDs—Shitty Little Deals—because they consume just as many resources as BHDs but give you no power.  Unfortunately, when you make total revenue the metric, SLDs are precisely what you will incentivize.

Once you are on the map, the next big milestone is to cross the chasm.  That means winning a dominant share in a single industry with respect to a single use case.  This is a major power play because it secures a high-value customer base that will not churn, creates a reference base that can be used to win sales in adjacent segments, and makes a market for a fledgling ecosystem that, as it grows, will further cement your power as a market maker.  Conversely, acquiring customers at random, while creating revenue, attains none of these power goals.

Replace hitting the forecast with target customer traction

Early on in the development of a market life cycle, sales are simply not forecastable.  None of the prospects has budget for your new thing, and every sales cycle entails a boatload of education before one can put a proposal on the table.  What matters instead is ensuring customer success with the ones you do get across the finish line.  Such success is not measured based on just going live.  Rather, it is a case of confirmed value realization.  You need your early customers to be not just referenceable but evangelical.

Replace geographical sales coverage with target market sales coverage

Geographical sales coverage is key to winning market share in fast-growing categories and defending market share in mature ones, but it makes no sense when it comes to emerging categories.  There are no RFPs to respond to.  There is no customer base to defend.  Instead, there is just a handful of SLDs that consume resources while conferring no power.  When you play for power, you need to be laser-focused on those power-conferring target customers where you have the maximum chance of winning and not waste resources anywhere else.

Replace sales participation with restricted distribution

Because established enterprises already enjoy broad geographic coverage, and because Incubation Zone GMs are incented to make their revenue targets, fledgling offers get put into general availability way too soon.  This results in R&D roadmaps that are stretched way too thin, reducing power rather than increasing it.  What is needed instead is a rifle shot approach to a specified target customer, combined with executive help in closing pretty much every sale.  In the early market, this may need to be the CEO, as the visionary prospect is taking a very big risk and wants assurance from the very top that the vendor is all in.  When crossing the chasm, it needs to be an executive with domain expertise in the target industry, ideally someone who has worked in it or even sat in the chair of the prospective buyer.  In any case, it is never a general-purpose account executive with a Performance Zone quota to make.

Replace vendor tradeshow participation with customer trade show participation

This is part of the Crossing the Chasm playbook.  When you show up at your own industry’s trade show as a newbie, you just get lost in the noise.  Your booth is far from the main floor, and only curiosity seekers come by.  In contrast, if you show up at your target customer’s trade show, you are somewhat exotic.  What are you doing here? people ask.  To which you answer, “We’re here to rescue you from one of your worst nightmares.”  The conversation can then focus on the challenging use case that they are struggling with and how your new approach is a game-changer.  They enjoy it, and the leads you get are highly productive.

Replace partner-initiated sales cycles with partner-assisted implementations. 

The role of partner management when you are playing for performance is to extend sales reach to customer segments one would not otherwise cover, be that for reasons of size, cost, or complexity.  When you are playing for power, by contrast, you want partners who can help your target customer successfully achieve value realization.  These companies are the first seeds of a future ecosystem of partners who make a living implementing and amplifying the technology you are bringing to market.  Eventually, they will indeed bring new sales opportunities to the table, but in the early days, lead generation is too heavy a lift, and you cannot expect anyone but yourself to take it on.

Replace churn reduction with adoption acceleration

In any “as-a-service” business model, we know that churn is the curse that drags down performance regardless of how well we are doing on the top line.  That’s why leading companies are changing their sales compensation from ACV (Annual Contract Value) to NNAOV (Net New Annual Order Value).  But that is a Performance Zone tactic.  In the Incubation Zone, pivoting is part of the ongoing search for product-market fit, and thus churn is inherently part of the game.  You don’t want to waste time trying to hold on to past customers who are not part of your newly determined target market.  Unfortunately, that is what revenue targets will incentivize.  Instead, you want to double down on those customers who are getting value from your new offer, even in its current immature state.  By adjusting your roadmap and investing in additional customer success resources like forward-deployed engineers, your goal is to get your target customer to material value realization as quickly as possible and leave the rest behind.

Replace profitability with referenceability

This one is pretty straightforward.  If revenues are a rounding error, profits are truly de minimis, if they exist at all.  Any VC would much rather plow them back into power plays instead.  In that context, referenceability is the currency of power, and it is mission-critical.  Lose it, and you lose your place at the table.

Replace market share & brand recognition with mindshare & segment share

Prior to the tornado phase of the Technology Adoption Life Cycle, market share is meaningless, and brand recognition has no value.   Mindshare, on the other hand, does have value.  It cannot be monetized as yet, but it does open doors, especially to visionary buyers.  The key power play is crossing the chasm, meaning you gain dominant share of a single use case in a single industry to the point that you are now the default standard.  At this point, for the first time, your line of business is a going concern, meaning a part of the world sees you as key to securing their success and will intervene on your behalf to keep you in business.  That is what buys the time needed to prepare for the tornado market to come.

Net net

There is nothing magical about executing the substitutions we have been reviewing.  Using the right metrics doesn’t guarantee success, but using the wrong ones ensures failure.  So, if you are going to get the ROI on those skunk-work projects and tuck-in acquisitions, mind your metrics!

That’s what I think.  What do you think?