Beyond 2001: Investing in Internet and Early Stage Technology Companies

Chris Rollyson

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Technology Strategy

Likely this will be the most difficult to assess because detailed information about the company’s technology is virtually always a well guarded secret. That said, you will benefit from this lens because technology is usually the core engine of ESTCs’ value generation.

Revisit your findings from the network vision lens, and look at them from a purely technology perspective. If the offering represents a niche within a complex technology environment, does the leadership have past experience with complex technology environments? Given customer segments, are they pursuing the right technology alliances to help them to develop more differentiated technology? Are they involved with alpha or beta programs for closely related technologies? Are they pursuing co-development agreements?

From a competitive viewpoint, what are their technology’s barriers to entry, assuming that the company is defining the market for an innovation-driven, discontinuous offering? How easy would it be for well financed competitors in adjacent markets to duplicate their offering by leveraging development assets or market power? What is their approach to create unique value with technology? This bears special consideration in light of the boom/bust pattern of 1996-2000 in which speed to market was perceived as critical. Often technology was relatively simple because it had to be to get to market quickly, and many young Chief Technology Officers may not have the knowledge of creating highly complex, differentiated offerings.

Next, what can you learn about the technology environment of the ESTC’s customer segments? What is the strategy to integrate the technology with the IT universe of customer segments? Does the CTO, based on past experience, have an appreciation for customers’ technology environments?

Finally, has the CTO had experience with building a highly scalable, robust, complex application, especially if the company is a B2B? With what technology companies has s/he collaborated in the past, and it what roles? An ESTC is like a supernova born within a galaxy of established bodies; when evaluating its chances to build for itself a strong place in the galaxy, think about what established technology players will be threatened and which will be advantaged by its existence—from the point of view of the customer technology environment.

Marketing and Sales Strategy

In light of Adoption, Network Vision and the speed at which markets move, it is absolutely critical for the ESTC to have a vision for continuously managing its value proposition. At the most fundamental level, marketing manages the interaction of the value proposition with the market overall by creating and executing the message, enlisting sales to see how it plays with customers and adjusting it continuously.

An excellent test for marketing strategy is, "How would the company react to the entry of a similar ESTC into the market?" A very quick read of the ESTC’s leaders’ maturity is their vision of competitors. A clear indication of a weak team is the attitude that their offering is so advanced that no one exists that’s even close to their offering. If the ESTC’s value proposition is valid, there will certainly be others attempting it. More important than the team’s knowledge of competitors is their attitude towards competition. Too many teams like to dispense with competition because they don’t want any. Further, ask the Chief Marketing Officer to assume entry of several competitors at a certain point, an event that is the hallmark of a successful offering. What are his/her thoughts for responding, how does s/he anticipate? The competitive "lens" should always be foremost in the CMO’s mind as s/he surveys the competitive landscape. Discuss scenarios and probe to see the robustness of the marketing strategy.

If the ESTC is a B2B, try to determine the CMO’s and VP Sales’ insight into BAM e-business dynamics for the targeted industries because e-business will dominate the context for BAMs’ use of technology for the foreseeable future. Without this knowledge, the CMO will be hamstrung when attempting to manage the company’s marketing strategy.

Regarding leadership, is the CMO experienced in applying the value proposition’s interaction with the market and focusing it in product management? In addition, a large part of Network Vision falls under strategic alliances. Specifically, does the CMO have a vision for how alliances will produce value for the company as well as a concrete plan for implementing the vision?

Given what you know about the company’s intended customer segments, are the marketing and sales initiatives appropriate in terms of activity and proportion? What is the vision for using marketing and sales to add to competitive advantage? What kind of relationship assets do the CMO and VP Sales bring with them, and how relevant are these relationships for each stage of adoption? Also, do they have solid experience with creating and leveraging thought leadership for innovation-led ESTCs?

People

ESTCs offer some of the highest risks and rewards available to investors of all kinds: founders, financial investors, employees and customers. Risk and reward tend to move together, being at their maximum at the company’s founding, when the idea or concept is not validated and extensive unknowns surround the company. One way to deal with the uncertainty is to focus on the chief constants of the situation, the people.

When evaluating a company for an investment, it is crucial to look at the management team as well as their professional services providers and advisors. It is important to learn about their backgrounds, including the ventures they have been involved with previously and their stated motivations for giving their time to the venture. This also has bearing on their ability to recruit top drawer people as the company grows. Quality due diligence goes far beyond the websites; it includes going through a network of people who can provide insight directly. Of course, the most permanent people are often the most important: a company’s angel or venture investors are more permanent than its choice of law or accounting firm. Likewise, founders have often invested extensive time and are loath to abandon the venture. They are more permanent than management who are brought in later. Based on your analyses using the other lenses, what competencies does the company need at each stage of adoption?

The reason for focusing on the team is that the company’s strategy and offering must often change due to market developments. A quality management team will strike a balance between a commitment to the idea with a willingness to change or reject it later due to market conditions. This is more of a challenge than it might appear: the company has worked hard to develop the concept and solution, and changing strategy means accepting losses. This is why venture capitalists always say that they would, all else equal, invest more readily in a "B" strategy with a "A" team than an "A" strategy with a "B" team.

Knowledge: Intellectual Capital¹⁵

Closely related to the people is the company’s intellectual capital, especially in its early history because intellectual capital is virtually its only asset! In the case of an ESTC, the founders and their web of relationships bring their minds to bear on a technology or business problem that should have business ramifications, and, ideally, they create a unique value proposition. Assuming that the proposition is discontinuous and innovation driven, the market must be defined and created by applying founders’ business and technology knowledge.

To apply this lens, take the body of knowledge that you’ve developed thus far about the company and its strategy and value proposition, identify critical success factors and ask yourself what the company needs to know to reach its goals. Think about other companies that have faced similar challenges: why and how did they succeed or fail? What insight or knowledge was key in achieving success?

To the best of your ability, map that knowledge back to the people, including the extended circle of investors, services providers, alliances and customers. Where does the knowledge reside? Does it lie with the most invested parties? Does the team have demonstrated experience with thought leadership, which is especially critical when creating new markets? If key knowledge is too concentrated in one person, and they leave, would that sabotage the company? Of course, the latter point assumes decreasing importance over time: as the company matures, more of the employees’ knowledge becomes codified in the company’s products, services, processes¹⁶ and business relationships.

Finance: Bootstrapped v. Synthetic

This lens refers to the company’s financial strategy. Is the strategy appropriate for its business strategy? If the company’s product is to enter into a market that is ultra-competitive and dominated by a few major players, it probably won’t make sense to bootstrap, which typically involves slower development and growth because the investment must lag revenue that the company generates. If it does this, it will probably succeed in getting initial success, awakening dominant players and being crushed by them shortly thereafter. A company in this situation may stand the best chance by targeting investors who have also invested in complementary players in the market. It will need capital to build out its technology (while in "stealth" mode) to the point that it can negotiate strong agreements with market players and build up a lead in technology and market power before it educates everyone to the value of its solution.

Alternatively, if the market is highly fragmented, the executives come from the industries into which they are selling, and the market for investment is tight, they may waste their time trying to secure investors too early. In this situation, bootstrapping might be the best approach. How creative is the management team in their financing strategy? Do they consider approaching customers for investment, joint ventures or advances on product/services sold? What is their reasoning behind the strategy? Lastly, how invested are the founders? If they are not willing to invest their own funds, it may indicate that they are not committed to the venture.

Operations: Service and Logistics

Depending on the nature of the company, its approach to service and logistics can be critical. Think about the process through which the company creates value for the end customer. What has to happen in order for customer segments to receive and understand the value created? This line of thought will tell you how important service and logistics are.

If logistics is critical, is the company’s approach appropriate? Is logistics a core competency, and should it be? If the company handles logistics itself, does the knowledge gained contribute significantly to its value proposition or future product development? For example, a supply chain optimization software company may derive strategic insight from an in-house approach.

Regarding service, is the offering complex, and does it require an education and training program? Will the company’s products have short life cycles that depend on customer input to maintain or increase value created over time? If so, outsourcing service would be a danger sign. Would it be appropriate for the company to have customers actively involved with designing new releases, product lines and offerings?