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Once a product is designed and a strategy is outlined, then comes the execution phase. But how long will that take before other competitors take wind of the same idea and can execute faster? I therefore believe in Speed to Market.
Decades ago, a company would roll out a product locally, then regionally, and then expand nationally. Then came the international markets. Chains like Payless Shoe Stores built such distribution model and were able to establish decent footholds even in the international markets but after 10 or more years. Takes a while for a potential competitor to establish a manufacturing center, distribution, and sales. There are taxes, raw materials, logistics, and foreign regulations to worry about. The cycles were in years. And Payless could take its sweet time in entering those markets.
But let us look at Netflix: selling its products in over 190 countries (with worldwide 192 recognized countries.) Many technology products don’t encounter such barriers. In the case of Netflix, wherever the country had some telecom infrastructure with enough bandwidth, it chose to enter that market with a popular product line. It executed this strategy in less than 2 years, in what took Payless to do in 10. It is all about transmission of content, most of which is of U.S. origin, that would attract consumers.
However, as easy it is to transmit content, other competitors could do the same while noting the Netflix success and just replicating the process. In China, even with reluctance to pay for anything on the Internet, already there are entrenched competitors charging a monthly access fee for digital content. Even in China, Uber found strong competition with the local Didi.
Between the Internet and international travels, anyone can see a business and easily replicate it in their own borders. Once a business idea takes some form and gains some traction, one should expect to face competition in whatever form. Speed to market is the only solution to preempt that potential market loss.
In silent acknowledgement of this economic reality, digital companies such as Uber and AirBnB seek substantial funding in billions of dollars for their early stages to attack their markets. And dedicate some of that capital to knock out their incumbents or retain market share. In between this process, branding is critical. Where the model can be easily replicated, something about the company and its service must stand out to consumers.
Even old style brick-mortar companies can face the new reality of speed to market. With the Internet, anyone can get any information to manufacture any product. And the secret formula for today is “know-how” plus “capital” equals manufacturing and exports. Many developing countries have governments with enough generosity to underwrite new products to export. And their financing cost is certainly lower than the private sector. Just look how China became such a powerhouse in manufacturing and exports.
Yet, the basic definition of economics even predicates that capital is a limited good. So, in view of the speed to market environment, how does one go attacking markets with the speed to market philosophy. Well, the first desirable market should be local and then regional. Finally, then one develops a national rollout.
But what about international? I would prefer the biggest markets first. Last month, I was contacted by a Chilean IT company needing some assistance in expanding internationally. I first remarked that their ride sharing app, however successful in Chile, can be easily replicated. Its easiest but largest markets in CALA should be Argentina, Brazil, and Mexico. Why? Those three countries represent 80% of the CALA GDP. To focus on smaller markets would be distracting and might not generate enough revenues, while ignoring the largest markets would impact severely the bottom line.
In one former employer, there was a legal challenge that would lock out the potential revenues from Argentina, representing over 30% of the revenues. I knew the importance and responded quickly so as to not lose that market.
In another technology project, I discovered that the largest market would be Asia, essentially China. But my concerns about how quickly that region can replicate technologies, I suggested expansion in tandem to other international markets with sufficient demand in order to defend any international market share challenged by a Chinese startup. In other words, do a preemptive strike in key markets or lose that market.
Again, the speed to market philosophy is derived to the new competitive realities on how competitors can jump in so quickly. In a recent RSA conference, I noted hundreds, if not thousands, of companies selling cyber-surveillance products. The competition was so keen that various swags and contests were being offered within each booth. In 18 months, most will not survive. And the remaining ones will consolidate into one handful. The only successful ones will be the ones with enough capital and best strategy to survive. Software products are just the results from programming teams.
Therefore, speed to market is a newer philosophy to seize market share quickly and raise capital to effect such strategy. Focus on key markets and execute. Note the billions of dollars Uber has raised. This unprecedented approach is needed to acknowledge the new economic and technology realities in business competition. To quote from the comedy movie Talladega Nights, if you are not first, might as well be last.
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The co-founder of Twitter, Jack Dorsey, in a TV interview, remarked that the right approach to establish an Internet company is to apply its information technology and adapt it to some consumer need. I do believe that part of that process is to identify those transactions that accumulate cash flows without being a major dint to consumer wallets. For example, Google earns millions of dollars every month by charging pennies, an amount so little to advertisers, but makes it up in terms of volume. That is the basic Internet business model.
In a recent business development for a consumer product, I had to develop a business model for a physical device representing a one time purchase. Yet, I kept researching on how I could apply the Internet model on what would have been a single transaction – the sale of the physical device. Instead, I racked my brain to identify some additional service or product that would generate cash flows. So every time that the device generated information, what would be appropriate Internet business model that generates growing cash flows after the initial transaction?
Let’s look at Pokemon Go as an example. The first transaction is downloading the app. In this case the initial transaction is cash free. But as more and more people interface with this app, in what manner can the app generate cash flow? The key to this strategy is create large volume of users. Just recently, the Pokemon Go rolled out in Japan and this app was downloaded over 10 million times. There you have the first step in building an Internet business model: focus in building large quantity of users — and fast. Then, the app will sell various extras at such reasonable pricing. Even if the platform priced an additional product at $0.99 in one month, the app can generate no less than $10 million — a huge payday. But is this strategy so new?
I am reminded of the single edge shaving razors used decades ago by virtually all mature males to maintain a clean face. Those razors were sharpened frequently and maintained for years. With a fixed price of less than $20, it represented a long term investment to a clean shaved face. However, someone thought of the disposable razor model. Practically give away the razor body, and sell the disposable razor. And does this sound familiar? Just last week, the 5 years old Dollar Shaving Club, with decent marketing, had been acquired for about $1 billion. This company has a slight variation of established shaving razor companies like Gillete. But the Dollar Shaving Club model had been attractive enough to acquire a company that received less than $100 million in financing.
In the telecom world, cellphones also pursued this model: by providing reduced costs for its phones, while generating its lion share of revenues through the voice and data services. The wireless companies own towers and switching operations that are generally fixed and the incremental costs for additional calls become marginally attractive and profitable.
In today’s World, you find the valuations for these new digital models hitting the stratosphere. Why? The underlying costs to transmit information are fractions of a penny. Between 2 wireless carriers, the interconnection price is less than a penny. With data storage costs dropping, setting up racks to store information also cannot cost more than a penny per transaction. And once an app is developed, usually at several hundred thousand dollars, you amortize the total costs to all transactions, that also cost only pennies.
Therefore, today’s businesses must take into account, as someone characterized it, of the “Uberization” of business: software platform, digital transactions, emphasizing volume over pricing, and speed to market in any strategy. And, like Google, the company must use the data to continue to respond to consumer needs. And expand the services in such a fashion that maximizes long term revenues.
So in terms of my actual application to a particular, real world device, I could not ignore any digital strategy, as I believe that long term survival of any consumer product demands that a digital strategy must be included in ecommerce. Now that provided a diverse revenue stream model that allowed the company flexibility to control its costs and continue to innovate with new consumer data. And created a more profitable model dependent on data products, not simply the device. So what are data products? actionable information, a digital service – Google search engine, or a Pokemon icon. Again, the key is to use the Internet platform, identify data products, and apply speed to market. Otherwise, the strategy will fail.
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During a bat mitzvah in New York, I had the privilege of meeting Arnold Kopelson, a noted Hollywood film producer and financier of various movies with Steven Segal, the actor, and well known movies such as Platoon, Fugitive, Outbreak, among others. His academic training like many film producers in Hollywood was in law, as a New York law graduate. The bat mitzvah sponsor was his former legal partner in entertainment law. I asked Arnold directly, how do you initially finance production of your movies? And he answered that he sells the international distribution rights prior to production, but with the script ready (of course, with protected IP) and a cast. That is when I realized that, when one can link IP with distribution rights, you can create value. This approach is not restricted to the entertainment industry – it can apply to any other IP related product in other fields for a startup.
I found out a similar approach in the pharma world. A startup pharma company developed a male hormone pill undergoing extensive and expensive FDA clinical trials in the millions. I met this company’s CEO, who revealed that his company sold some international distribution rights to continue to finance its FDA trials and operations. Those pre-sold geographic regions were smaller markets, but garnered at least $80 million in distribution rights.
Unfortunately, many startups believe that the traditional road to financing their companies are limited to VCs, Friends and Family, or SBIR grants, etc. Yet I also use Hollywood approaches that apply other strategies – from pre-sold distribution rights, local urban grants, etc. One similar approach I employed in the telecom industry was selling franchise rights defined geographically by country. One has to have the right international contacts, some experience, and be able to set up the right kind of deal, both legally and financially. Again, it pays to use the right advisors and team members.
A movie is not much different from technology in the sense that both revolve on unique IP assets. And, where a technology team plays an important role, so do the names of the actors signed up for the movie. (In case of Kopelson, it could be the actors, Harrison Ford or Steven Segal.) And, like anything else in any industry, previous track records help. It helps that Arnold’s films have won academy awards. So his credibility is higher than a unknown individual. Kopelson had sufficient reputation to pull these muli-million dollar financing packages. And Arnold's legal experience pointed out the appropriate legal documentation.
Now I thought of Arnold’s approach again when I met with a NorCal startup group developing biotech organisms to use in the oil industry. Of course, this startup is going through the usual financing routes of VC firms and SBIR grants. But to me, this company could have sought financing in the Middle East through preselling the distribution rights to regional oil companies. It had the right kind of product lines to attract foreign companies. And by selling the distribution rights for the EMEA region, they could attract financing much cheaper and faster than the conventional approaches. Unfortunately, it is a different strategy and does require a certain expertise to close on such deals. You encounter different cultures and legal frameworks. However, I do believe it can be a source of cheaper capital. And money is money wherever you get it. All parties benefit from such a transaction.
Yet, I see some resistance in the NorCal industry. QB3 companies, a biotech group, recommends two solutions: grants or VC money. It might include corporate investment, but nothing else. In fact, the QB3 program has instructive programs for grant applications. But like any quasi-governmental approach, grant applications are time consuming with considerable paperwork. Secondly, I find that many of these biotech companies do not walk away from that comfort level – and to their detriment. I have noted that, when that quasi-governmental source taps out, they struggle to find private money.
Again, the concept of financing can benefit by looking at other industries on how they find capital for their initial projects such as the entertainment industry. I find it interesting that many startups in Silicon Valley seek the same old, traditional routes. Maybe it pays to visit SoCal and see how do they do their financing models. Again, both focus on IP. A film has its copyrights. So their assets are no different.
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What are the 3 criteria measured by the investment community in evaluating investing behind technology IPOs?
A seasoned panel from Wall Street made the comment on what criteria they observe for an investor to be attracted to a technology company’s IPO. One panelist summed it up nicely – Growth (Potential), the Path to Profitability – and Risks (how are they addressed).
I keep jumping back to “growth” and how it must be demonstrated through traction. Institutional investors are not running non-profit programs. Retirement funds need to grow their portfolio’s values. Individual investors need a higher return than a common commercial bank’s savings rate. The company must achieve double digits.
Recently, an acquaintance related to me the frustrations in attracting $10 million investment. I asked what sales do you expect to achieve in 5 years (with current sales only hitting $500k). He related to me $20 million. So they are shopping around for investors to put in $10 million and expect to attract them. Now, if $20 million is returned in 5 years, the ROI would be 20%. But that is unrealistic—that a company would forgo all net revenues to pay back the investors and it is also unlikely. It is my understanding that the $20 million would be total revenues, not net income. If so, we are looking at a much longer time span than 5 years. The ROI drops to single digits. Since these investors are knowledgeable, they are not attracted by the story line.
The other factor – path to profitability – really relates to the strategy. How does the company intend to expand? Where will it achieve economy of scale? Where will it reduce its costs?
I have an example of a company in the health field that relates to live support to patients. The average phone lasts 15 minutes per patient. But as the model suggests, the more patients one brings in, the more trained phone responders the company must hire. That road to greater profitability is not possible with this model – unless one builds a software program that simulates a human voice and can interact with the patients.
Finally, every investor places a premium on return when risks are higher. What do they mean? I recently heard the business process description for a way to move personal items internationally. For example, if you need to purchase a purse in France, this person would bring the product back. The risks are several – whether the item would be purchased. Whether declaring the product purchased would bring about a duty being charged by the authorities. That some of the products would be illegally be brought in. Hence, higher risks mean higher return demanded by the investors.
Some of these risks are competitive in nature. For example, how do you intend to handle a direct but very large competitor? IP rights might help, but not always. Again every investor has been burnt in one form or another. If the company cannot directly analyze and counter each risk, the investor will go away.
For example, going back to the $10 million seeker, the company holds patents for a specific semiconductor gas sensor. During a meeting, the founder had not bothered to look at other patents in the same space. And that alone was costly, since it would reduce the risks if they had compared those patents in the same space.
Again – every company must respond to the following elements to attract any investor - growth, path to profitability and risks. And these ingredients make common sense.