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Show Me the Value

Starting a technology company is a difficult and risky proposition. As we learned in the latter half of the 1990s, a professional-looking business plan, good contacts among potential investors, and a gift for selling were the primary prerequisites for getting initial funding. However, many of those business plans defined their exit strategy as getting acquired by another, usually more established company that wanted the technology for a specific business purpose.

In reality, few of these ventures delivered technology compelling enough to merit an acquisition by a company that could actually afford to pay for it. The vast majority were shut down when the money ran out, and many never even developed working software. In some cases, that was a good thing, because they were simply copying another concept that had proven popular.

Today, it seems a very different world. While investment money is starting to flow again for technology concepts deemed worthy, the barrier seems to be set somewhat higher this time around.

Yet there are few among us who have not given at least a moderate amount of thought to striking out on our own. After struggling with some commercial software, or writing our own utility to perform a critical task for which no vendor offered a solution, it seems like a short step to a small but profitable enterprise selling your own solution. Many of us don't necessarily know venture capitalists or angel investors personally, but if we start asking around, we find that many of us have a friend of a friend in that capacity.

So we spend our evenings and weekends refining a 20-page business plan, along with half a dozen spreadsheets detailing financing needs, cash flow estimates, and financial projections. We painstakingly prepare a PowerPoint (forgive me, StarOffice) presentation, and practice it in front of family, friends, the dog, or whoever will listen. We get an appointment with the friend of a friend, and start (or continue) our dreams of working incredibly hard for five years, then selling off our interest and retiring to a villa located in our preferred climate.

To which I say, Show me the value.

For such a simple concept, it turns out to be incredibly slippery. Well, I'm going to charge X for my product, because some established vendor charges Y for theirs, and I'm better.

Nah.

That may all be true, and it's still not valid. The comparison excludes the vendor brand recognition and good will built up by being in the market for a while, doing some marketing and advertising, and selling and servicing a product through multiple versions. The one part that entrepreneurs most frequently underestimate is the value of market presence. This is the part of the software business that lets a company continue making money long after it has stopped producing a good product.

But there are more ways to demonstrate value than there were five years ago. Perhaps you're going to offer your solution under an open source license, and make money by supporting it, or customizing it for specific uses. Similar models proved to be successful for the likes of Red Hat and MySQL.

But that turns out to be even more difficult, because you're placing all of the value in the product with that of your own expertise with that product. That means you are counting on two things to happen – that others will find enough value in your free software to want to use it regularly, and that that value will extend to your own expertise and the offerings based on that expertise. While it is possible, you have created an exceedingly long value chain that at best will take a long time to develop.

The point is not to discourage anyone's initiative or dreams. Rather, the value of a business concept in technology is elusive. Having the idea, and even building the product, is nowhere near enough. Before you embark down the entrepreneurial path, make sure that you have pinpointed just where the value of what you are providing will be perceived by the potential customers. If you can determine that value, you know exactly how to market your product, and what to charge for it.

Posted by Peter Varhol on 05/02/2005 at 1:15 PM


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