Turning over "Rocks"?

First, I would like to extend my apologies for taking so long to post again! With music performances, Kerrville Folk Festivals and client work, it has been a busy year!

Following my earlier posting on JVP's and Extracting Value, I thought it would be interesting to discuss an example where finding strategic Joint Value unlocked an alliance discussion and led to a unique opportunity for both sides.

In this case, the two companies were participants in the adjacent segments of enterprise security. One large company - call them BigSecure - with a mature customer base and an ageing product in this market, and the other, a smaller company - NewTech - offering complementary technology. During some relatively tactical go-to-market discussions, NewTech realized that its own product direction would eventually compete directly with the mature product from BigSecure.

An interesting dilemma. Should NewTech (i) continue down the go-to-market path, which promised some exciting revenue opportunities, albeit tactical, ignoring the eventual, likely inevitable, collision that risked alienating BigSecure when its new product came to market, (ii) drive the go-to-market discussions off the road and avoid wasting any more time, or (iii) try to figure out how to engage BigSecure in a discussion about the potential collision.

NewTech knew that BigSecure's adjacent product was old, but there was still considerable momentum in the field and a huge installed base to be reckoned with. More importantly, NewTech could turn this approach to its advantage, by finding ways to integrate its technology with BigSecure, and realize even more upside (than a tactical GTM). Finally, there was the threat that NewTech's competitors would get to the table first, eliminating the opportunity. But, NewTech also risked the loss of competitive IP and marketing plans to BigSecure if they opened discussion too far.

What to do? What to do? Tactical gains vs. longer term strategic gains vs. a complete blowout!

The answer is often found in how you negotiate, rather than an "either-or." NewTech decided to negotiate down path (iii). But before showing its cards, it spent considerable effort in a short time negotiating away from the table exploring ways to move forward. NewTech began by carefully assessing BigSecure's options and possible moves, before making a more of their own, introducing a 3D approach into the strategy. With more information about BigSecure's challenges, and its plans with other partners to improve customer satisfaction with the ageing product, NewTech decided it would be able to gain advantage and decided to disclose its own new product plans.

This resulted in (i) identifying competitors who were vying to partner with BigSecure in addressing the problem; and (ii) unlocking new Value Creation opportunities to work with BigSecure by delivering its innovative capabilities into BigSecure’s installed base and new initiatives, both huge strategic advantages.

Lesson learned: It wasn't foreordained to turn out this way. “Turning over rocks” at BigSecure yielded significant rewards. But it was certainly true that the partnership would remain only a tactical GTM alliance if they did nothing. So the key was to explore strategic options in a 3D negotiation paradigm. Then decide a way forward.

Think 3D - it really can make a difference in the outcome and help identify and unlock Value in a relationship...

As aye.

Michael
PS Thanks to my friend John Soper for his invaluable editing!

A Balancing Act: business focus versus exit planning...

I trust everyone is having a fine summer, and more rain than we have in Central Texas!

Boards of Directors will make it clear to a CEO that building and running the business is central to success, and suggest strongly not to focus too early on who might acquire the company and when. Good advice. It is a world-class team, a solid value proposition, and a strong revenue growth curve that create value in the business - and that eventually affects price and interest from potential acquirers.

But hold on - forming strategic alliances is often critical to both the marketing and revenue picture as well. And, if my competitors are out talking to their friends at potential acquirers, am I not missing the boat by focusing on the business?

Most startups that reach the go-to-market phase where customers are buying their products are balancing business execution with Corporate and Business Development. It is a balance. The executive staff needs to be involved in development of alliance strategy, but generally line organizations should not. Details about progress with strategic alliances should be compartmentalized.

An Alliance Strategy should be based on:

• A clear sense of the value of your product and service capabilities, including both what you sell to your customers and any unique capabilities and components that underly
• A well-considered view of adjacent markets that leads to partner selection - thinking as broadly as possible
• Articulation of a rational joint value proposition to approach each potential partner, and any desired outcomes
• Availability of someone skilled in approaching partners and driving a strategic exploratory process (refer to my June 17 post!)
• Availability of technical resource (e.g. CTO) to keep them honest, technically.
• A market view of your competition and what they might or might not do

I work with each of my clients at quarterly offsite or board meetings to fully develop this plan, and formulate an evolving list of targets. From there, the team can start to execute and then refine the process over ensuing quarters.

Business development becomes more complex as you look 1-2-3 years down the road, consider potential acquirers (or "Chairs" - see May 13 blog), and start to understand what will attract (or repel) you to those chairs. It is not always the right answer to approach or form an alliance with your comfiest chair early on.

There are good examples of companies who tried to get a deal done in the wrong sequence, without considering broad market factors, and drove their preferred chair to their stronger competitor. Consider this example: A company has a market-leading flagship product, but a competitor has both a poorer, but often sufficient, offering in the same area and an adjacent product offering that could provide additional value to partners. A strong alliance strategy may be to complete the offering by internal development or forming an alliance with someone who also has this adjacent capability, and then to approach the desired chair with the combined offering. Approaching the desired chair too early might simply educate them and send them to your competitor.

So, given the importance what are some techniques to manage the balance between business execution and corporate exit? If you have a designated executive running the BD process who manages their strategic work separate from any day-to-day responsibility, you already have some separation. Maintaining confidentiality of the process from the line organizations, particularly if the effort is bearing fruit, is important - but the pressure to pre-announce a revenue or go-to-market alliance to the sales team can be distracting. Choose carefully what you communicate. Sales teams are paid to find out information - including from your corporate team - so I recommend having a clear executive decision process for what and when BD information is provided to line organizations.

In the end, strategic BD should start at the go-to-market phase of the business. The challenge is to find good, focused resources to begin the Corp and BD process - aimed at supplementing revenue and market presence, but always playing the game with an eye to the exit.

Next time, we'll talk about when negotiating actually starts with a potential partner?

Peace,

Michael

Musical Chairs?

Many of us will remember that game of Musical Chairs we played as kids! It was a simple game, played with 33 1/3 LPs and a parent lifting up the stylus in my time! When the music stopped, everyone tried to sit in a chair, but there was always one less chair than kids, and someone had to step out of the game - a chair is removed and the game continues until there are two people and one chair. Then one winner!


What does this have to do with Business Development? Well, the rules of Musical Chairs change in BD, but the game is similar. Chairs come and go, sometimes in blocks, at an alarming rate, and it is hard to hear the music. Mergers change the layout and comfort of chairs, and market evolution serves to add or removes chairs over time. The goal, nonetheless, is to sit in the most comfy chair in the room at the right time. The "Chairs" in our version of the game are potential acquirers, the "Players" are typically venture-backed companies evolving from incubation through revenue, to some level of market recognition, trying to guess what the right time is, and who their eventual buyer might be. Sitting in a chair means you have reached your exit, and the comfort of the chair is a reflection of the "best price" for your circumstances. With the state of today's public stock markets, an acquisition is the most likely "liquidity event" for most of today's startups, so this should be important stuff to today's entrepreneurs and investors.

But, why does this really matter? In Three Dimensional Business Development, 3DBD, we need to consider our alliance strategy from now until the music stops as a game of Musical Chairs, and plan alliances that take us ever closer to our favorite chair. And, as most of us are probably a bit picky, our choice of favorite chair can change over time, which adds another dimension to the game.



Let's look at an example: Argon Tech has the opportunity to do an OEM deal with Immense Business Networks, IBN. They consider IBN one of about 4 potential acquirers they see today, but don't yet have the revenue to justify the required exit price. So, as they are working on a deal, a 3DBD approach would suggest taking some steps including:

1. make sure that the terms of the deal are not so good that IBN doesn't need to acquire Argon,


2. this deal doesn't "repel" Argon's other chairs - potential acquirers, and


3. that this is the right time and sequence for this deal with IBN.

So, having a naturally evolving strategy for who your potential acquirers are as well as an optimum path to reach them is critical to forming strategic alliances, even in the early years. An evolving strategy deliberately includes key company stakeholders in an ongoing discussion of the chairs in the room, and which seem most comfy in your chosen exit time frame.

So, next time you grab your kids or grand kids and that old LP and record player (OK, OK, CD and remote control) to play some Musical Chairs, think about what names you would put on the chairs today - or in 6 months.

Next time I will dig a little deeper into the alliance life cycle...

Peace,

Michael
CMT Consulting, Inc. - Business Development Consulting Services