For Mature Companies Only – Part Two

Ace Ventura: “I have exorcised the demons . . . this house is clear.”  From Ace Ventura – Pet Detective

In my prior blog, I outlined a few ideas around why mature companies should remain vigilant regarding the potential for Disruptive Technologies (which are not always technologies) in their industry.  It all sounded a bit ominous, and I did promise to help “exorcise the demons,” so I will provide you some actions to consider.

We all know that change is inevitable and best practices involve embracing that change.  They key is to prevent that embrace from becoming a stranglehold.  So, to help address the impact of disruptive technologies, mature companies should consider the following five steps:

  1. Develop a positive attitude toward innovation.  Get out of the office, stop gathering only where flocks go (like the standard industry trade show) and free up younger staff to explore the world of innovation and social media.  Appropriate MeetUps (you can even form your own) are a good starting point.
  2. Visit accelerators and incubators.  These are the new bastions of disruption and, the more you know, the better off you are.  Today in the NY Metropolitan Area, many of these groups are being formed around industries – food tech, ed tech, fin tech.  Visit them and get involved.
  3. Revisit you brainstorming/strategic approach.  Challenge basic assumptions and make sure those barriers to entry and differentiators remain in place and enhance them. Review your SWOT – there are solid reasons why your business has endured so make sure you remain focused on them.
  4. Know what your competition is doing.  It has never been more important to know this and by scraping data from the internet and social media, your horizons will be expanded and you will be able to counter new threats.  Keep in mind, the market is usually waiting for the market leader to embrace an emerging technology and, in doing so, you can retain a strong competitive edge.  Don’t be afraid to take advantage of your market position.
  5. Follow the money.  There are billions of dollars available to fund new ideas.  There is also data available on what is getting funded for you to review.  Many established and technology companies (like Google and AOL) have their own venture arms and on a daily basis, complete deals which are “disruptive” to their own disruptive technologies. Many start ups seek to partner with the industry leader to use that positioning to further develop their own growth strategy.  Be ready to take advantage of it.

So, my advice is simple.  Do not put your head in the sand and ignore what may be developing around you.  The success of these disruptive technologists cannot be ignored and I would bet if you reflect back on what you did today, you will see at least one example of how they have altered your actions as a consumer.  Embrace the change and use your strengths to maintain your position of leadership and your company will continue to prosper.

For Mature Companies Only – Part One

Commander #1:  We’ve analyzed their attack, sir, and there is a danger.  ShouldStar Wars I have your ship standing by?

Grand Moff Tarkin:  Evacuate?  In our moment of triumph?  I think you overestimate their chances.

From the movie, Star Wars

This is the first of a two-part blog – it focuses on why mature companies should be concerned about startups playing in their space – “disruptive technologies” as it is often called.  The second part (what to do about it) will be covered in my next blog.

I had the chance to spend some time on this topic at our Client CPE event late last year.  I see the issue arise constantly with my more mature clients – yet, some seem oblivious to it much like Tarkin felt about the Death Star.  So, let me provide you with a few ideas to whet your appetite:

  1. This is not just technology, so you have to wake up.  It is not AOL buying “then media giant” TimeWarner in the dot com boom.  This is Chobani, figuring out a way to market a food staple in a different fashion and in 5 short years, becoming the industry leader.
  2. The age of innovation is here.  Remember, startups seek to be a disruptive force.  They focus on changing customer behavior in big markets, especially basic products.  Few industries or businesses are immune – especially if your product involves a recurring purchasing pattern in a large market.
  3. Competition may not be coming from the obvious place – your industry.  Do you think Borders or Barnes and Noble were focused on Amazon as competition when they sought to expand in the 90’s?  This disruptive approach seems logical – a new approach to a market coming from someone not blinded by the way things are today.
  4. Disruptive technologists focus on challenging major assumptions.  Many of us grew up in an era where floating your resume was a risky proposition – your boss might find out and fire you.  Today, we have the equivalent of our CV’s posted on LinkedIn and we can now look to hire someone who is currently employed versus searching through resumes of those looking for their next opportunity.  Our bosses are not only aware of it – they encourage it.  This is the famous “paradigm shift.”
  5. Finally, there is money… lots of money… in the billions sitting on the sidelines waiting to fund the next disruptive force.  Startup entrepreneurs are working every day to study their markets and refine their pitch to investors – much like mature owners honed their sales pitch in the early days of their careers.  And, they do so with the same level of intensity and tenaciousness their predecessors had when they formed their business.

All of this sounds a bit ominous, but it doesn’t have to be.  The mature business has a number of real advantages and with an approach that takes into consideration this changing landscape, they can retain their position of leadership and continue to grow and prosper.  But, you will need to read my next blog to find out how.

Preparing Your Early Stage Company for an Exit

Are you ready? Lyrics from the song of the same name – by Pacific Gas & Electric (circa 1970)

So, I tend to blog about recurring items I see in our practice.  In this case, over the last few weeks, we have been approached by a couple of early stage companies entertaining Letters of Intent to be acquired.  While these are exciting opportunities to monetize those long hard hours, I can’t tell you how much I wish these entities had embraced the lyrics from this rock classic.  The absence of the most basic information has left their advisors “hogtied” and unable to help.  Of course, the owners wanted to be responsive to points raised by the potential purchasers, yet they and we were ill prepared to address even the most rudimentary of concepts because some standard housekeeping had not been done.  Now, trust me, I am not crying over the need to have pristine records available for due diligence.  I am talking about basic information that can seriously impact the economics of a deal.  Some examples will help to explain:

  1. No tax returns prepared for the last 2 – 3 years.  Forget the compliance issues.  Both of these companies appear to have significant losses which may allow us to structure a potential deal as an asset sale (which the buyer wants) with a similar tax impact as a stock sale (which the seller wants.)  But, we can’t even approach this without knowing about tax operating loss numbers and you need tax returns to figure that out.
  2. No assessment of state tax exposure.   What states are the sellers doing business in?  Is the product taxable?  What is the tax exposure?  These are all good questions that we and the potential buyer would like to know the answers to.
  3. No Delaware franchise tax filings for 3 – 4 years.  In layman’s terms, one of the seller’s first representations is that they have a corporation in good standing and these delinquent filings mean they do not.
  4. Equity nightmare.   Options and stock grants without support; unfulfilled promises to employees for ownership – are they valid claims and at what price?  Is there a potential tax to the employee and what is it?  Grants with no valuations – a tax and accounting nightmare.

So, what is the lesson boys and girls?  You do not need to have all your ducks in a row.  But, most of these items could have been addressed along the way.  It would have cost a little money, but both companies will pay now in terms of deal terms and one deal may not get there because of these issues.  For example, the DE franchise tax can be filed online in less than an hour and the tax is probably less than $700 per year.  Working with a CPA or financial advisor, you can at least identify issues and work through fees.  You do not need an audit each year.  We work with emerging companies on such matters all the time.

So, please, do not be penny wise and pound foolish.  Be prepared to say you are ready when that offer comes across your desk.

Business Models Are Not Business Plans

Ace Ventura: [to Lt. Einhorn] Whew… now I feel better.  ‘Course, that might not do any good; you see nobody’s missing a porpoise.  It’s a dolphin that’s been taken.  The common harbor porpoise has an abrupt snout, pointed teeth and a triangular thoracic fin.  While the bottlenose dolphin, or Tursiops truncatus, has an elongated beak, round cone shaped teeth and a serrated dorsal appendage.  But, I’m sure you already knew that.  – Ace Ventura – Pet Detective.

So, I had the opportunity to attend a Demo Day this week which was outstanding but I was struck by the conversation in our little group about what was needed to get funded.  All of the conversation (and advice) centered around the plan and the deck – how many pages; what colors to use; how much to disclose in the financials; how to convey what you were going to do.  There was an absence of discussion on what, I thought, was the far more important issue – the why.  I have previously blogged on the concept of why (another simple but powerful concept) and thought it worthwhile to expand on an article I wrote last year on the difference between a business model (the why) and a business plan (the how).  I was a bit concerned about revisiting this subject, so I invoked one of my favorites Ace Ventura (rrreeeeeaaaallllyyyy) to help me through it.

A business model defines the underlying need for your product or service in a market.  It defines the way your product or service solves a problem or alleviates a “pain” and is the premise you need to justify in establishing the true worth of your business.  A couple of examples may help clarify this point.

Zappos realized that, for years, people had been buying shoes in the same size and that buying and returning shoes was inefficient and time-consuming for you and me.  Thus their business model was to move the shoe store from the mall to our homes with a no-hassle return, thus alleviating the normal “pain ” of shopping for shoes.

LinkedIn observed that when a company was looking to hire someone, most used “job boards” like Monster and other resume collecting tools.  But, many companies realized that perhaps some of the best candidates were probably gainfully employed and there was no effective way to get to them.  Contributing to this was the fact that most who worked were concerned about “floating their resume” for fear superiors would find out and perhaps dismiss them, so their resume was not “in the market.” LinkedIn made placing your “resume” in public an acceptable practice via social media and accordingly, opened up the world of currently employed candidates to recruiters.  Obviously, LinkedIn can charge a premium for access to this information which solves the problem.

A business plan on the other hand, is more of a “how you are going to do it.” nIn addition to the business model, it covers the three elements required to succeed; people, time and money.  It indicates the people you have or who you will need, how long it will take until profitability can be achieved and the funds needed to get you there.  Though most concentrate on the Financial Model in the business plan (there are many packages around that can help with this), it is the business model that contains the key to success.

So, please make sure to focus on the why, because without it, the how is just another unfulfilled dream.