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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