New Venture Lab: Equipping Christian Entrepreneurs

Question

Thanks for all you do!

During the CMR case study discussion in Venture Academy DVD Training Series one of the points you had mentioned was making "strategic" rather than "opportunistic" business decisions.  Yesterday I heard something interesting along those lines, so I'll describe the situation and then ask for your perspective.

The sales team of a very prominent VOIP (Voice Over IP) communications software company were demonstrating a new plug-in to their communications test suite.  What it does is it can capture any videoconferencing data and determine the video quality.  That's reasonable enough for a plug-in I suppose, but here's the interesting part.  One of the sales reps added the side comment, "after all, we were founded as a VIDEO CODEC company".

What?!!  So they started out as a video company, but their flagship product; the thing for which they are famous and effectively makes all of their revenue, has little, if anything, to do with video?  Though an outsider, it seems to me like they've been very successful but probably also have drifted significantly away from their original purpose.

So how does an entrepreneur evaluate these opportunistic decisions that come along?  On the one hand, taking advantage of opportunities that arise can be a great way of increasing profit, but on the other hand you can't lose sight of your vision.  Even though you may be making a killing, you're also wandering aimlessly.  (Despite what the balance sheet may say, I can't think things are headed in a healthy direction here.)

I suppose keeping an eye on the business plan will help prevent the big diversions.  (Obviously, my software company shouldn't buy a fish shack, no matter how good a deal it is.)  Even more frightening though is what about all of those little opportunities that crop up? They aren't much of a deviation in and of themselves, but when taken all together, I'm sure they take up a lot of resources and tend to derail your business' primary focus.

Is A&W a softdrink company or a burger joint?  I dunno.  Even though they've obviously made it work, the message to the consumer is still a bit sketchy there.

In your experience, how do you add all this up to the point of being able to say either, "yes, it's a great opportunity, lets go for it!", or, "looks tempting, but sorry, it's too much of a distraction"?

Answer

To set the stage a bit, the CMR case that we read and analyzed in the Venture Academy was about an entrepreneur that acquired a company and then hastily “partnered” with a company in an “opportunistic” alliance that promised more revenue, but resulted in a partnership that was not very profitable for the company.  What I mean by “strategic” decisions rather than “opportunistic” is that the business decision should be thought through carefully, both long-term and short-term and in terms of the full impact on the company, as in earnings, revenue, market reaction by customers and competitors, etc.  In the CMR case, the partner did deliver the promised revenue – which was exciting growth – but they were also very demanding and delivered smaller, more costly jobs that had less gross margin.  Overall, it was not a good strategic decision in that the entrepreneur began to question the alliance once he starting analyzing its impact on the company.

So, how should an entrepreneur evaluate a business decision?  First, think through all possible ramifications by qualifying the opportunity by asking all of the relevant questions.  In the CMR case, potential questions that should have been asked up-front would have included: What is the price point of the average job?, How repeatable is the average job or is it highly-customized?, How many change orders does the average job include?, What seasonality is there to the business?, etc.  In short, what you are probing for is the “quality” of the opportunity.  See our Venture Analysis for more such questions.  Our Venture Analysis tool was designed for analyzing any idea or business plan and the exact same questions can and should be applied to various business opportunities such as entering a new market, starting a new branch or entering a new partnership.  If you are faced with multiple opportunities that score high in the Venture Analysis, you would then want to evaluate the opportunities against each other in terms of the overall potential value to the company by using a Discounted Cash Flow analysis as taught in the Venture Academy and defined in our Glossary.  Further, it would be ideal to first test out a potential partnership or alliance like we saw in the CMR case with a few beta customers or projects from that potential partner and then analyze them prior to making a full commitment.

While it is important to minimize diversions, sometimes a company vision is purposely broad and somewhat vague.  The first business I launched as an entrepreneur with venture capital backing had a very broad vision of building a recurring-revenue business model with software-based outsourcing services.  We then proceeded to acquire two completely unrelated companies and merged them together, which could have looked very confusing from the outside, but we were purposely acquiring specific capabilities such as a data center, software development, software support, list management, and call center.  We then took those capabilities and bundled them together to build a global information services business that ended up solving a very specific problem that I did not envision when I started the company.  I was focused on building a recurring revenue information services/software business model because it was a superior business model and then I refined our actual value proposition through initial customer consulting engagements.  My understanding with my investor was that we would work in a “skunk works” mode until I figured out an unmet need to attack with the various capabilities that I acquired.  We ended up creating several different companies out of that initial skunk works and spun them all off into separate companies.  It was somewhat unfocused, but very purposeful and overall, very strategic.