Transcript Market Convergence

When ideas and opportunities meet…
Juanito Camilleri
September 2004
Five young graduates meet in a pub
- an electronics engineer, two computer scientists,
an accountant, and a marketing guru all enterprising, all enthusiastic,
all bursting with ideas…
in fact the ideas seem to increase as the number of
pints consumed increases…
all determined to quit their jobs to dedicate their time
to exploiting their ideas…
Is this a sound basis for starting an IT business?
Do five brilliant guys with loads of zest
make an IT business?
On the other hand, can you create an
IT business without at least some brilliant guys
with loads of zest?
Not surprisingly, as the evening progressed
the technical guys got entangled more and more
in technical jargon…
each trying to impress the others…
objects, modularity, actors, libraries, functions,
application interfaces, specifications, robustness
were all subjects of discussion…
after all if the technology behind an idea is good then
success is just around the corner… Right?
the marketing guru who by now assumed
the role of brand manager
- for the evening’s selection of beer that is was wondering whether any of the ideas floating
around addressed any
perceivable need and if so whose?
the accountant…
clearly lost to the conversation around him
was nodding from time to time
and nodded with greater frequency
as pints were lined up…
and was wondering where the money was?
At the end of the evening,
feeling rather frustrated
the accountant and marketing guru
challenged the technical guys
to write a short note not exceeding a few pages written
in laymen’s terms
describing how each of their ideas can be translated
into a product or service…
For each product or service they needed to identify:
The target market;
The projected unit price;
Existing and emerging competing products or services;
The cost and lead-time of
service and product development;
The sensitivity of the targeted market…
Of course, feeling brave and definitely intoxicated
the technical guys
took up the challenge dismissing
it as trivial…
they agreed to meet the next day for an hour
to draft the blueprint
of their future success
Next day the technical guys did meet
but after three hours
they could only agree that
in fact only two or three of the flood of ideas
they had the previous day
could be
translated into some product or service
which they could describe clearly…
A few brainstorms later
the technical guys honed in on two products
which they had described simply and concisely
and for which they believed there was
a market demand that was untapped…
so they decided to meet the accountant and
marketing guru again…
this time in a more sober environment
Both the marketing guru and accountant
were impressed with the proposed products
as they too could perceive a need for them
BUT
were still unimpressed with the level of
market research conducted by the “techies”
and with their appreciation
of the operational logistics involved
in the production and roll-out of the new products…
The marketing guru set out to do some research and
felt that one of the proposed products was a non-starter
as there were competing products
already emerging on the market
– albeit using a different underlying technology –
BUT addressing the same underlying need
The innovative underlying technology presented by
the “techies” did not really provide any value-added
to the target market and the target market was small…
…before dismissing the first product
the marketing guru exchanged his views with his
mates but the accountant wanted to ascertain whether
the use of the new technology involved less
development-costs than that of the competing products
as whether this
could translate in a competitive advantage…
or merely into an opportunity to sell the new
technology to the established players…
alas this turned out not to be so…
The second product seemed to have
much more promise
as there did not seem to be any competing products
on the market at that moment in time
although there were several established companies
that seemed
to be well positioned to develop such a product…
…some targeted market surveys and
a few carefully conducted customer focus groups
confirmed the prospective demand
for such a product and
gave an indication of how much the target market
was willing to spend per unit…
admittedly the demand though real was niche and
rather limited
The marketing guru called his mates up
for another meeting…
of course the technical guys were very excited
as they were quite confident that the product
could be developed within twelve-months
BUT
this is where the accountant kicked in again…
How many people do we need to employ?
How much do we need to pay them?
What equipment do we need to purchase?
Do we need to lease offices?
office furniture, stationary, company registration,
lawyers, overheads…
branding, advertising, promotional collateral,
packaging… the marketing guru added…
In short, what is the
initial capital investment and working capital
required to bootstrap and sustain the costs of
development, marketing and sales of the product…
will the projected volume of sales of the product
at the unit price determined by the marketing guru
suffice to create enough cash-flow for the business to
survive and indeed…
will this ultimately create additional value for the
shareholders?
Shareholders? The technical people asked…
Yes, those people who need to be convinced to fork
out money to bootstrap and partially finance the
venture…
and these are at least expecting an
Internal Rate of Return greater than the
Opportunity Cost and a Payback period
that reflects a healthy Liquidity…and all this before
the intrinsic risk of the venture is factored in
The shareholders’ expected return on investment
will be greater,
the greater the perceived risk of the venture
and this has to be an intrinsic part of
business projections…
Why?
Because venture capitalists usually don’t risk
money in a venture which does not promise to
give them a sufficient return
in proportion to the risk of the venture…
The accountant continued to explain to the
“techies” that any capital used in a company
comes at a cost and this cost has to be factored
into the business plan…
and this is where he started blurting about…
Cost of Capital being a weighted average of the
Cost of Debt and Cost of Equity and how this
had to be factored in the valuation of a venture
At this point the ‘techies’ felt that they were being
given a doze of their own medicine so they asked
for a simple text book to help them understand the
financial jargon and to help them read the
projections they were being presented…
Anthony Rice
Accounts Demystified 4th Edition
How to understand financial accounting and
analysis
The accountant went away with the list of
capital and recurrent costs and projected income
volunteered by the technical people and marketing guru…
the melee that had evolved in the cross-questioning driven
by the accountant made the “techies” and marketing guru
refine their
operational and organizational perspective…
They started to think not only in terms of what needed to
be done and how, but, also when and how much…
The accountant came back
with a story of gloom and doom…
there was no way anyone would invest in this venture
as it stood
because it was intrinsically very risky and
the initial and recurrent capital outlay
was far too high
for the projected returns on investment…
The End?
The accountant asked the “techies” and
marketing guru
to sharpen their pencils
on the initial capital outlay and to delay certain
recurrent costs for as long as possible
until a projected inflow of revenue was in sight…
moreover to mitigate the risk, the project was
divided into two phases…
The first phase, to be conducted
with skeletal staff willing to be paid with minimal
wages and some equity,
would aim to build a prototype of the product,
which could be adequately
protected as intellectual property
of the company and
which could be used to secure the first clients
before further investment in the
development of the full-blown product
By lowering the initial investment and by
structuring the project differently,
the overall risk was reduced and a new business
plan was drafted with a tighter budget,
which the accountant was comfortable enough to
discuss with a bank for seed capital…
The plan was that in phase two when the
development of the prototype is complete and
hopefully initial customers are secured, the
company would seek further venture capital
The company was set up,
the seed capital secured, the prototype was developed
but ended up requiring a great deal of modification
from the original design
as prospective clients were engaged …
an initial client for the final product was secured…
in the interaction with prospective clients the company
got a better insight of the market and the opportunities
and risks that lay ahead…
With some valuable experience under their belt
and an initial modest success story
the five young graduates met at the pub again
a year and a half later
to plan the launch of their first product…
Thankfully the bank was willing to extend some
further bridge financing to cover the additional
costs incurred in the delay…
…now they all knew that business is about
catering for a market need
- ideally ahead of competition in a timely and competitive manner always
with an eye to increasing shareholder value…
it is always wise to minimize the upfront costs;
seek ways to minimize risk; and
secure revenue flow as early as possible
When you perceive
that your
ideas and market opportunities
are likely to meet…
start writing your business plan
Juanito Camilleri
September 2004