So to recap; we are trying to build a valuable business. Not a cool product, but a business that has real value and to do this we have learnt we have to build a profitable business. It must either generate profits now or have the reasonable prospect of doing so in the future.
We have also learnt the need to sell immediately to validate our market opportunity, as well as build a team and a strategy to maximise our chances of success.
I would like to briefly touch on a couple of sales issues before we consider a checklist. The ability to make sales is the one critical function we must have to survive. It’s the oxygen we need to simply breathe, because it generates the cash we need to survive.
We previously looked at distributor models and noted they were almost always unsuccessful. However, that is one channel to market only and along with the obvious direct channel there are many other possibilities.
These can include joint ventures, licensing arrangements, OEM or white label offerings and more. Even better, many of these channels can be used concurrently.
We need to keep in mind the lesson from the book Crossing the Chasm. The largest group of customers, our mainstream market, will buy primarily on the basis of trust in the vendor rather than the product.
So, we can use some of our sales channels to help build our market. For example, licensing our product to a larger and more established company might give us a better path to the conservative mainstream market, than by trying to sell to them directly.
We might be able to sell directly to the technology enthusiasts, who will buy primarily on product features, and also sell to the mainstream customers via another party.
This is a strategy I have used personally on many occasions and it has generally worked very well.
The UK company I chair is presently operating this strategy in reverse. Clarity is looking for new companies with innovative products to take to its established customer base.
Aside from the obvious issue of profitability, building sales and particularly market share is a key influencer on company value. If we look ahead 20 years it is inevitable that whatever we are thinking of as a new product today, the market will have been saturated by then.
As high-tech markets develop and saturate, a recurring pattern is that many initial vendors consolidate down over time.
At maturity, the market leader typically has 40% or so of the market, the next two vendors have around 20 to 25% each and the remaining vendors have to fight for what’s left (typically 10% or so). Initially you may see 10 or 20 companies fighting it out to the death here (literally).
So to maximise our value we need to ensure we will be not only a survivor, but we need to try and make sure we wind up as one of the three vendors in the top three slots and not one of the un-dead.
So we need to reflect upon the simple truth that all new high-technology products are simply an arbitrage of time.
If we find a market and develop a product for that market others will be doing the same, so we have to do it better and faster than them. Using multiple sales channels on a strategic basis can help us achieve this objective.
So we will now look at a simple checklist (see box above) of steps to take to refresh our memory about the previous articles in this series.
We have yet to talk about capital and finance generally, and will leave that for the next article.
You will notice the recurring theme of identify, validate, build, test, build, grow and the iterative basis. These are hard yards and if the process were easy everyone would be doing it.
Yet, more than anything else, how well you (along with your team) can do this will determine the ultimate reward for your endeavours. It’s also worth noting that if there really is a market, you will not be operating in a vacuum.
So taking little steps early and often when testing and validating, is a key idea to take on board.
The final point is also one to reflect on carefully. If you read the Bob Metcalfe article “Innovation is a Weed” mentioned in an earlier piece, I hope you have had the opportunity to reflect on what he said.
It takes a special type of person to be an entrepreneur and build a business from scratch. You need determination, self confidence, positive thinking, great timing and a lot of skill and luck.
Those attributes in one person are a rare combination. Even rarer though is the person with those attributes who can effectively transition from an entrepreneur to a manager.
Even rarer is the person who can be an effective manager of a $5 million company and transition to being an effective manager of a $100 million company.
So along the way you almost certainly will come to a fork in the road. A point at which your personal interests as an investor and shareholder no longer coincide with your interests as an employee, leaving you to decide which is more important.
If the financial consideration is the most important, it’s likely at some time you will need to relinquish your executive role and focus on either a board role or a shareholder role.
I hope it’s the latter, because if you have been able to build a valuable business and can sit back and watch it grow, you can then take satisfaction that you have created something of value.
O’Hara is chairman of Clarity Commerce, a publicly listed software company based in England, and an independent director of Tait Electronics. Contact him at www.johnohara.co.nz