The market valuations of Internet business are very heavily weighted towards the big brands within any particular market. The big three investment questions any entrepreneur should use to test their plans are all related to scale:
Q1: How big is the market?
Q2: What percentage is likely to go online?
Q3: Will the business plan make you one of the top few players?
If a business is in the top few brands in its market, then it is more likely to be locked into a virtuous circle of scale and profitability. It also follows that businesses are much more likely to dominate their markets quicker if they are first to arrive. Consequently, executional speed is one of the defining strategies for success. Business methodologies with logical phases of design–plan–build–prototype–test–roll out are being rapidly replaced with short sprints of do–learn–do more–learn more. Speed will define the winners and the losers:
Lock in customers with speed: First to market has the opportunity to lock in customers sooner than the competition. With customers come scale and profitability. With the prospect of these elements comes financial help to start the business. As a start-up it may be difficult to raise the funding for the expensive one-to-one technology required to truly build loyalty, but this merely emphasises the speed required to prove the customer appeal of the concept and expand the offer. There is a fine balance to be struck between speed and customer service. A fast uncompetitive offer will lock your potential customers out quicker. When IPC, a UK magazine publisher, launched ipcmedia.com, a late entry into the intensely competitive UK female portal market, they did it with a blaze of publicity including a high profile sponsorship of the Ally McBeal TV programme. The launch directed people to a graphically advanced site under development with very little authoritative content, no active community and a promise of 'commerce soon'.
Affordable brand building is fast brand building: The later a business is launched, the more it will cost to establish a brand with appropriate values. The first mover can freely advertise, taking 100% share of voice within its market and build considerable and broad appeal for its services. The second mover, spending a similar amount will only have 50% share of voice and will be communicating a differentiated and potentially more niche position. Compounding this situation is the dramatic growth of dot.com advertising. The AOL European dot-com commercial in 1998 was a novelty that aroused interest in the whole 'Internet thing'. Those days are going fast. For a bit of perspective, on a recent trip to the US I found that 7/8ths of all TV advertising was dot.com related; there was advertising on the airport runway and on 38 billboards between the airport and my hotel, one mile away. This is an expensive place to be noticed; soon Europe may be the same.
Fast firms can tie up the strategic assets: A strategic asset may include customers, relationships with content providers, suppliers of product and the rights to differentiated technology. If start-ups can acquire them early and limit the ability of latecomers to replicate their business models, then they will increase their chances of success. When a UK Internet start-up exchanges equity with Freeserve, the UK's leading portal, it is acquiring an exclusive right to a prime position that will help them acquire their 1.5m online customers. If may be difficult for any late entrant to acquire such important assets and beat the start-up to the number one local position, and subsequent European roll out, an initial public offering and category domination.
Early to market, early to exit: Investors prefer to invest in the first movers because they are more likely to be successful. Consequently the exit strategy will have greater clarity. The most common European exit strategies for investors are likely to include a trade purchase, perhaps by a local offline laggard wanting to speed up its progress, a US business expanding across Europe or an Initial Public Offering. All of these exit strategies are more likely to be available to the early mover who will be well positioned by the time the option arrives.
Speed breeds enthusiasm, slow movers breed doubt: As entrepreneurs start to set up their businesses, they need to demonstrate speed and delivery. Every deal will take longer than expected and all potential partners will have ample time to watch the business plans progress. Venture capitalists often like to watch the entrepreneur develop plans to see if they have the capability to close deals. If potential partners see speed, they will develop a fear of being left behind, and great confidence in the entrepreneur's ability to make everything happen. Conversely, if they realise that they have the ability to slow the development of the business with protracted negotiations and don't see other activity being closed, they may walk away. This may include the entrepreneur's team who will seek the next great opportunity that may happen. This is not uncommon in Silicon Valley where the average employee moves job every 2 years.
The Internet has sparked a latent entrepreneurial spirit in the hearts and souls of European entrepreneurs in bricks and mortar firms and garage start-ups alike. As a 'dot.com consultant', I have been privileged enough to work with these entrepreneurs. I have helped them generate their ideas, qualify them, write business plans, raise money and bring them to market. I have found start-up entrepreneurs to be a wonderfully eclectic bunch of individuals with a very few, but very important, set of common traits. They all believe passionately in their vision and have the ability to drive the vision to the market. They have the ability to learn from their many, many mistakes and buckets of emotional resilience to keep picking themselves up and drive their plans on… and on… and on…
If you plan to be one of these entrepreneurs, you may feel insecure without the depth and breadth of knowledge to get through every step and over every hurdle by yourself. If you are just starting to formulate your embryonic ideas and craft plans to deliver them, you are probably looking for advice and sounding boards. Almost certainly, you will have found it tough to get a holistic view of your plans, especially when you don't have the money to recruit a team or to pay consultancy fees. It is imperative to get the best advice early in your thinking to differentiate your business plan and increase your chances of success. Atlas Venture is a well respected Internet venture capitalist. Their London office alone will get over 9,000 business plans a year to review. In their last $400m fund they invested in only 26 European companies over 11 months. If your business plan is flawed in any way, you won't get to see the venture capitalist. If you haven't thought through all the issues, you may find that nobody will be willing to fund the plans. I have found no holistic source of early advice for you. There is a gap in the market waiting to be filled.
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Note: This article was sent to us by: Daniel S. Allen at 03152010
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