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The Proposition Is Clear
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
August 17th, 2001


By Brent Holliday
Greenstone Venture Partners

" I went out to see if I could live forgotten days
That was my mistake, that was my mistake."
Split Enz, My Mistake

Look at the mess technology markets are in today and think how obvious the signs were that the big crash was coming. Looking back they seem pretty obvious. Did we all drink the proverbial Kool-Aid? Were we all getting high on our own exhaust with this New Economy stuff? I mean, really, theglobe.com went public with a few hundred thousand in revenue in December 1998 and a couple of barely pubescent kids at the helm. And we bought it... hook, line and sinker. With the benefit of 20/20 hindsight, you could have a lot more money today in your personal investments. If you are a technology business of any kind, public or private, you could have prepared better and be surging ahead today if you had just read the tea leaves correctly. In some ways, we kind of deserve this pain now, don't we?

The experts tell us that we are doomed to repeat the mania again some time in the future. A guy named Charles MacKay wrote a book called Extraordinary Popular Delusions and The Madness of Crowds to describe how manias develop and eventually crash, leaving people destitute and bewildered. It eerily describes what we just went through with the Internet and dotcom craze. He wrote the book in 1841. Guess we are slow to learn from our mistakes, eh?

Here's a short aside so that you don't feel so bad about your worthless book4golf.com shares or your $10 Nortel shares: Sir Isaac Newton, easily one of the most revered minds in human history, lost his entire fortune in the South Seas Bubble of 1717 to 1720 in England. He was Master of the Royal Mint from 1696 to 1708 and made quite a fortune for himself. In 1717 he invested in the South Seas Trading Company, which had been given a monopoly on trade with South America by the English government. The stories of the infinite wealth of the Peruvian and Chilean gold mines swept through Europe and, despite news that Spain was not going to honour the monopoly, the shares soared in value. Isaac sold his shares and quadrupled his fortune only to buy more shares at a higher price because the damn things refused to lose value. Then it all crashed because there was no gold and Spain and England started a war. Newton lost it all. Sound familiar? Doesn't that make us all feel a bit better?

In a roundabout way, I am trying to make a simple point. We should learn from our mistakes and not make them again. Rather than focus on your personal stock gains, I want to focus on not repeating the mistakes that technology companies (and their investors) made in the mania.

One of the mistakes made most often was that many Internet companies failed to create products or services that people would pay for. Well, duh. Seems kind of obvious that an entrepreneur would come up with a good value proposition for their customer, right? I mean, right after the flash of inspiration that gives you an idea for a new product the very next though would be, "Why would anyone pay me money for this?" Seems we forgot that eensy-weensy detail (Think of all of the hare-brained businesses that were giving away their product for free on the Internet).

The value proposition is critical to the commercial success of your product/service and, therefore, your company. Simply put, it the reason that customers will part with their money and give it to you instead of:
- all other competitors (inherent competitive advantage and/or uniqueness of what you have to sell)
- all other substitutes (it solves a real pain that makes the customer want to change the status quo or just solve the problem another way)
- from you, whoever the hell you are (because you are not IBM and I'm not sure you will be around in a month)

While there are many different value propositions specific to the various businesses out there, all of them boil down to one of three fundamental descriptions of "value" to a customer: 1) lower cost/better efficiency 2) higher revenue 3) more utility (i.e. the emotional sale). Think about any product in technology markets today and look at why customers are buying it. When you strip away the marketing spin, the reason you or your company buys is for one of those reasons. A lot of product or service solutions actually deliver two or all three of the core values to customers.

A classic mistake made by entrepreneurs is to think that their technology, because it has utility for them, must have a value proposition for many, many others. Before you spend the big bucks or even seek the big bucks from investors, you need to test that theory using a prototype, mock-up or even a description of what your product will do. Will people buy this thing?

What is your company's product or service value proposition? Think very hard about that and then let me throw a big wrench into the works. You may have created a product with a value proposition for the end user that is very different than the value proposition for your actual paying customer. Another way of saying this is that you need a value proposition for the end user and one for the channel to that end user. In some cases, you may have a great proposition for the market, but your distribution channels will not see the value for them.

Well, after some thought and a little research, your company can come up with a value proposition and avoid the mistake of the Internet mania, which was that no one appeared to even think about generating revenue and profits. Certainly, investors today are looking for crystal clear value propositions and evidence that it is working… revenue. Sounds straightforward, but it is definitely not. And this is where it gets really, really hard.

You may have what you think is a great value proposition, and it may very well be the best, ever. But, the customer has to find you and in the blink of an eye, understand what is so compelling about your product/service. Far too many companies have died with a great product because they couldn't explain why customers needed it. This is where the experienced marketing executive is critical. There is a process to creating a killer message based on value proposition. There is a process to selecting the most likely market to enter to find the customer that needs the product most. There is a process to pricing the product accordingly with its value proposition (the naïve entrepreneur always prices lowest and gets killed). There is a process to go about selecting the best channel to market and/or right mix of channels to be successful. There is a process to positioning your company's product most effectively against the competition to help people see the value proposition more clearly. The process is second nature to the experienced executive. The process, when done right, leads to effective decisions and greater likelihood of success. Don't leave any of this to amateurs or first-timers.

If there was one great mistake made during the last mania, it was to believe that suddenly, with all of this investment money and all of these companies, there would be an equal swell of business savvy and experience to make all of these companies a success. What were we thinking? There is a dearth of people that really, really know what they are doing in marketing. It is far too few that can recognize a great value proposition and finesse it into a market leadership position.

So let's not make the mistakes of the past. Focus your development on what the customer wants (what "value" they see) and will pay for. Create a product with a value proposition that is unique. Hire only the very best, most experienced people that can turn that value proposition into rapid revenue growth. Good luck.

Random Thoughts -

- No Stinkin' Handouts - The BC Liberals started their march towards killing direct business subsidization this week with the death of the Industrial Development Incentive Fund. I support the end of direct government subsidies because they often base their decision to fund on politics and not business sense (Skeena Cellulose, for example) Two points that I'd like to make are that 1) once on the cutting trail, they might go too early in the funding cycle and start to cut valuable commercialization and R&D funding agencies like Science Council of BC. I learned a long time ago in Economics that governments should only step in where there is "market failure". In other words, private sector companies will not invest adequately to support an important social value that we need (think health care, education and very early efforts to commercialize a technology). We need the Science Council to continue to dole out small amounts of money to very early R&D in many areas of applied science. It's just too damn early for others to invest and see a return. 2) The BC Liberals need to realize that tax cuts for people and business are not the only way to stimulate growth of the tech sector. There are in-direct ways for them to help grow the sector (think tax holidays and no red tape incentives for large technology companies to set up shop here in BC) and direct ways to invest in the industry (matching funds raised in the private market by VCs to add more capital to invest in technology; match funds raised for new R&D facilities or manufacturing facilities (fuel cell, compound semiconductor and other next generation technologies)). To sweep their hands and say no stinkin' handouts is fine, as long as they mean directly into companies. They do need to invest directly and indirectly in the infrastructure to enhance the industry.

What Do You Think? Talk Back To Brent Holliday

 



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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