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Vision on venturing

The venture creation process from idea generation to building a viable business is never a routine job and will vary from case to case. However, we found that certain generic guidelines and specific tools can be of great value to articulate the value proposition, develop the business model, structure the launch team activities, support key decisions and avoid common pitfalls: Only a few of all new ventures started annually become truly successful, fast growing and profitable companies. Unfortunately, there is not one unique approach that will always yield the best results. Furthermore the venture creation process will strongly depend on the nature of the business opportunity, market conditions, funding need and availability and the people involved, etc. However, we believe that a clear vision on industry trends, value chains and business models is important to generate and filter the right ideas and that a solid business model and implementation plan is essential to become truly successful. Furthermore, past experiences may help to recognize general patterns early on to prevent venturing projects from derailing. This page summarizes our learning from various experiences in venturing, business development and product launches. It describes the guiding principles and specific tools we use for launching new market propositions and ventures.

1) Follow a stage-gate business development process: We believe that a clearly defined process is essential to minimize risks, to use resources effectively and to maximize the hit rate. For all of our business development activities we follow a stage-gate business development process to guide a project from initial idea to operations, using clear deliverables and stop/go criteria at each stage. The process is outlined in the figure below. It acts as a funnel where only the best initiatives enter and only those projects will carry on at each stage that meet the required business development and investment criteria.

The actual efforts, timelines and documentation may differ significant by business opportunity, depending on the size of the project, the total funding required and the stakeholders involved, but the general principle remains the same. The stage-gate process serves to maintain a clear view on the critical success factors and to address potential show stoppers early on. The figure below provides an example of a highly formalized stage-gate process that was successfully used for various product launches for a major telecom operator.

Within this process standard templates are used for all quality records to ensure that the decision makers at the different sign-offs have the relevant information readily available in an agreed format. A Rapid Impact Analysis (RIA) serves to evaluate each new concept brought forward. When a project passes the concept evaluation stage, a cross-functional team is formed with representatives from the relevant departments, i.e. networks, customer services, sales, marketing and finance. The team is lead by a product launch manager. The launch team documents the relevant information in a "living" document referred to as the Product Source Book (PSB). The PSB evolves through three editions as the project moves from the feasibility and definition phase to the design and implementation phase and finally to the launch and review phase. Over a period of three years about 30 new products were launched following this process. The corresponding services generated annual revenues over € 250 mln by the third year.

We follow a similar process for our ventures, which is often less formal given the smaller scale of the organization. However, when external fund raising is involved, the efforts to create and document the business case, to develop the implementation plan and to support the company foundation (involving the crafting of legal documents such as the Articles of Association, the Shareholder Agreement and the management contracts) will typically be more extensive than for a product launch within an existing organization. Furthermore, investors will usually demand a demonstration of the technology through a Proof of Concept (PoC) and/or "visibility" on the projected revenue stream. The latter requires the commitment of one or more launching customers expresses in a signed Letter of Intent (LoI) or, preferably, a contract. Furthermore, funding will often be released over time and linked to specific milestones which need to be designed carefully to balance the interests of the investors and the management team.

2) Evaluate concepts on the basis of both "business potential" and "ability to compete": Clearly, an opportunity needs to be assessed on its business potential, i.e. its potential size in terms of revenues and profits, its growth potential and expected shareholder value (based on discounted cash flows or exit value). However, another dimension is in our view just as relevant: The venture's ability to compete, which will depend on the core competences of the team, the partners and suppliers, as well as the business model and market structure. Competing head-on with an established player on a comparable value proposition is usually not a good idea for a new venture. Generally speaking, new ventures should change the "business rules", for instance by leveraging a "disruptive" technology . The figure below shows the two-by-two matrix based on the two dimensions.

The classification in the four quadrants resembles the well known BCG Growth-Share matrix for managing a corporate portfolio, but modified for the purpose assessing venture opportunities. The "stars" represent the best opportunities, featuring high growth in an attractive market. However, we also have been involved in some niche propositions of limited size and growth potential, but which could nevertheless generate a steady cash-flow with moderate investments and operational efforts. These opportunities would qualify in the bottom-right quadrant, referred to as "cash generators".

One example where we used the two-by-two opportunity selection framework was in the business development process that lead to the formation of UniXS Solutions NV in 2000. We followed a two step approach of idea generation and attractiveness ranking. In the first step, we used a schematic representation of the ICT and media value chain to identify and classify the business opportunities emerging at that time. The result is shown in the figure below. The blue circles represent the identified business opportunities.

In the second step, we qualitatively assessed the attractiveness of each opportunity along the dimensions of "business potential" and "ability to compete" and mapped the result on the corresponding two-by-two matrix. The outcome is shown in the figure below. The background color used for each business opportunity now refers to its position in the value chain (as specified in the legend).

Typically, most opportunities on enabling technology and network management got a low score on "ability to compete". This was based on our assessment that the required up-front investment and deployment time impose high entry barriers. Many of these opportunities were viewed to have a moderate or even high business potential and ended up in or near the upper-left corner. Others, like the operation of a UMTS network were - even at that time (December 1999) - considered to be structurally unattractive and were therefore put in the lower-left corner. Those business opportunities that pertained to the provisioning of professional services - such as web-design, e-strategy consultancy and WAP design (still a strongly hyped and popular technology at that time) - aligned well with our core competences and faced only low entry barriers due to the limited upfront investments involved. This resulted in a high score on "ability to compete". At the same time these opportunities were considered to have a limited business potential. According, they ended up in the lower-right corner. Our "stars" were the new market propositions expected to yield recurring revenues with significant margins. From that group of stars, we selected the "Web2WAP ASP" opportunity to explore in more detail. This idea evolved in an Application Service Provider (ASP) proposition for enterprises to provide access to company content anywhere and any time in a unified way, using different channels such as the web, SMS, WAP enabled mobile phones and PDAs. This subsequently led to the creation of UniXS Solutions.

3) Develop a solid business model and explore key sensitivities and scenarios: We believe that the constructing of a spreadsheet based business model is an essential exercise to articulate the value proposition, assess revenues and cost, determine the required investments and evaluate the feasibility and attractiveness of the new venture altogether. This is, however, far form a trivial task since new ventures typically exploit new technologies and/or target emerging markets. One therefore has to deal with a significant amount of uncertainty, complexity and ambiguity, which makes the construction of a relevant and valid business model an art in it self. We will briefly outline our approach to business modeling for new ventures.

To start with, one should agree with the key stakeholders of the project what one likes to get out of the business model. In our view, a business model may serve to:

  • Articulate the value proposition, i.e. the value created for the customers and the end-users (which may be the customers themselves or their customers, partners or employees);
  • Identify the target market segments and quantify their size in terms of (expected) volumes and revenues;
  • Define the structure of the value chain and the role of the venture within the value chain, i.e. the channels through which the offering is distributed as well as the complementary assets needed to support the venture's position in the value chain;
  • Specify the revenue generation mechanisms and estimate the cost structure and target margins of producing the offering, given the value proposition and value chain structure chosen;
  • Formulate the competitive strategy by which the venture will gain and hold advantage over rivals;
  • Provide a consistent "total" view on customers, revenues, volumes, activities, resource requirements and cost;
  • Provide projections for all financial statements, i.e. income statement, balance sheet and cash flows from operations, investments and financing.
  • Assess the key sensitivities of the business model, i.e. the key drivers of revenue, volumes, funding requirements and financial returns.

In order to assure the consistency and transparency of the model, we find it helpful to follow a number of general design principles. A properly crafted business models should, in our view, have the following features:

  • Integrated, dynamic and consistent: The model should distinguish input, parameters and output in a clear way. It should make the key assumptions and data sources explicit. Revenues, volumes operational cost and investments should be dynamically linked and integrated such that any change in input data and/or parameters works through in a consistent way;
  • Bottom-up and realistic: Revenues should be derived from price and volume data in a way that the assumptions on the attributes of the offering and the sales process are made explicit. Revenues should drive volumes, which in turn determine investments in assets and all activities in sales, marketing, operations and customer service. All cost should be activity based;
  • Checked against top-down market estimates: Bottom-up revenue and customer take-up rates should be compared to top-down estimates of the addressable target market to ensure consistency and integrity;
  • Checked against back-of-the-envelope calculations: It is essential that the outcome of the model makes sense and can easily be understood at a generic level. We therefore complement a detailed activity driven model with a back-of-the-envelope type of calculation involving only a few aggregated quantities, such as the average number of users, revenue and gross margin per user, sales, general and admin (SG&A) cost relative to gross profit, etc. Such a "simplified" representation can be of great help to check the results and may also serve to communicate the model logic and its key results to people who lack the time patience or affinity to go through all the details of the full spread sheet;
  • Suited for scenario and sensitivity analysis: The model should include a dashboard to specify different scenarios and sensitivities and to facilitate the inspection of the corresponding results.

As an illustration of our approach, the figure below shows the business model logic designed for an application service provider offering converged VoIP and GSM voice communication services on a wholesale basis.

A properly crafted business model can do a lot more than just supporting a one-off investment decision: It can be an excellent tool for ongoing strategic decision support, revenue forecasting, cost budgeting, and the comparison of actuals against forecasts. A properly designed business model will be of great value during the businesses development and launch preparation phase and, in addition, can be used as the core tool to steer the entire plan-do-check management cycle once the venture has become operational.

4 Assess the value of real-options associated with the launch of the venture: A business model of the type described the previous section determines the expected value of a venture on the basis of the best information currently available, e.g. by evaluating the Net Present Value based from the projected cash flows or by applying certain multiplicators used by financial annalists to the projected revenues and profits. However, for an innovative venture operating in an environment where both technological and market developments are highly uncertain, much of future value may be related to the fact that the venture is a "player in the game" and can rapidly respond to future events and new information becoming available. Real options theory should be used to assess the value of the ventures ability to respond to uncertain future developments.

As a practical example, consider a new venture that aims to pursue a "bowling pin roll-out strategy", as described by Geoffrey Moore and depicted in the figure below. Let's say that the base case business model assumes that venture enters the market with Application1 for (beachhead) Segment1. Once this application/segment combination is successfully rolled-out, the venture can then leverage its market position to sell the same application to other segments (referred to as market development) or sell other applications to the same segment (referred to as product development).

The business model may make certain assumptions on the future roll-out of application/segment combinations, based on the best information currently available, and derive a NPV from the resulting cash flow projections. The NPV determined this way tends to underestimate the value of the venture since it does not account for the fact that future decisions will be based on the best information available at that time. The venture may in the future to decide to take an entirely different route than currently anticipated, because the technology and/or market develop in way that is currently not foreseen. The option value stems from the fact that the venture participates in a game of uncertain outcomes and will be able to take advantage of new information when it becomes available.

5) Form the right team and create ownership: Successful venturing clearly requires more than a great business plan. It also needs competent and motivated people to bring the plan to reality and adjust the plan if needed. We believe that a small management team (of 2 to 5 people) with complementary skills, a shared vision, a strong drive and a common incentive scheme based on total company value yields the best results. We favor a flexible, hands-on attitude to do whatever is required, as well as an open and non-hierarchical working atmosphere. However, we also believe that it is essential assign clear responsibilities and define key processes early on. The figures below provide an illustration of a high-level process map for a software company we have been involved with.

Its main purpose is to establish a shared view among the people involved with the venture on what core, strategic and support processes need to be put in place and be maintained to support both the business development and the ongoing operations. The high-level process map specifies all major activities within the venture and makes their inter-relation explicit. The process map needs to be complemented with a responsibilities assignment chart, shown in the figure below, that assigns ownership of the major activities within the company to individual management team members.

In our experience, it is of great value to spend a half-day session with the management team early on in the venturing process to define, clarify and discuss company processes and responsibility assignments using the format shown in the two figures above.

6) Maintain the balance between a opportunistic "sales" and a systematic "marketing" approach: As stated earlier, there is not one unique approach that will always yield the best results. However, one aspect we consider quite essential is to maintain the right balance between opportunistic behavior on the one-hand and program-based systematic behavior on the other hand, referred to as the "sales" and "marketing" approaches respectively. Sales type entrepreneurs are extremely flexible and ad-hoc and do whatever is required to get the next deal done. Some investors consider them to be the "real entrepreneurs" since they make things happen and go out of their way to exploit any new opportunity as it arises. Business models and plans may change overnight, but at least they get things rolling. Marketing type entrepreneurs, in contrast, prefer to plan before they act and focus their efforts on the key deliverables agreed in advance. Both approaches have their advantages and disadvantages. The sales approach may lead to a lack of focus, organizational overload, firefighting and runs the risk of spending scarce resources on less valuable projects. The marketing approach may create too little action too late, miss out on unexpected opportunities and cause "paralysis by analysis". A metaphor can be found in commanding a group of soldiers to shoot the enemy in a joint salvo. The regular command would be "Ready…, aim…, fire !". The sales approach translates to "Ready, fire…., aim" and the marketing approach to "Ready, aim…., aim…, aim…." (Source: MCI management discussion on the differences between the BT and MCI cultures when these organizations prepared for a merger in 1998).The figure below summarizes the characteristics of the sales and marketing approaches.

One way to maintain the balance between the sales and marketing approaches is by complementing the long-term development program with a ranked list of "long hanging fruit" opportunities, which is modified as new opportunities emerge and is reviewed on regular basis.

7) Get visibility on revenue streams early on by engaging launching customers: Unless the venture has very deep pockets, it is essential to get visibility on revenue streams early on. Ideally this is done through a contract with a launching customer. However, since most customers would require the venture's products or services to be in place before signing such a contract, it is often difficult to get definite commitments in advance of the investments required to build the ventures capabilities. This may result in a "chicken and the egg problem", since many VCs demand the commitment of a launcher customer as pre-condition for funding. The figure below illustrates this dilemma.

One way to overcome this dilemma is to build a proof of concept (PoC) for a potential customer using limited investments, either provided by the customer and the management team or through informal funding. Apart from overcoming the full funding dilemma, this approach has many benefits for the product development process itself. Customer requirements can be accommodated at an early stage through a joint learning process of the venture and its customer. A well developed PoC can provide essential information to be used in the subsequent feasibility and definition phase, as well as the detailed design and implementation of the ventures systems and processes. The PoC approach to business development is depicted in the figure below.

8) Maintain multiple options and pick your battle: Although the guidelines and tools described above can be of great value, they will not guarantee the success of new product and venture developments. The high returns that new ventures may bring naturally comes with the risk of failure. In other words "there is not such thing as a free lunch". In our experience the most difficult part of venturing is to withdraw from the activity at the right moment and prevent the waste of time and money on a venture program that has turned into a "mission impossible". The one advice that may help is not to put all your eggs in one basket, that is to maintain multiple options at any time. This will allow you to pick your battle and pursue the initiative (among the different alternatives) that is expected to yield the highest return on venturing effort and invested capital.


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