Monday, September 19, 2005

Companies as Products

With the tech sector heating up again, it’s a good time for venture-funded entrepreneurs to think not only about their companies’ products but also their companies as products: Unlike your actual product, your company-as-product operates in a capital marketplace of investments, IPOs, and acquisitions. Managing this marketplace matters as much as anything else you do, both in normal times and especially when financial markets get exuberant.

A scenario to consider:

Advances in technology have led to a small but fast-growing market with huge potential. Jack’s start-up has the best product and is executing well. Jill’s start-up is a me-too clone of Jack’s, created later and still playing catch-up.

Although her product is less-developed, and her business is well behind Jack’s, Jill is far more aggressive than Jack in the company-as-product marketplace. The IPO market is hot, and she gets there first, selling the concept of her company—which is a clone of the concept for Jack’s company—to the public markets.

As Jack watches from the sidelines, he knows that his business is the one that actually has the substance behind Jill’s story. But when Jill’s company raises $100 million in cash from the IPO, Jack has a problem. Jill now has the resources to shore-up her product and, in the meantime, overwhelm Jack’s marketing and sales efforts with five times the feet on the street. In addition, Jill is bathing in the free publicity of being the poster child of this hot new market.

Now the investment bankers are knocking on Jack’s door, saying he could be like Jill, having a big IPO. But having gotten out first, Jill can use her resources to damage Jack’s IPO. Ouch…she just used some of her IPO cash and inflated stock to buy the one company Jack was actually worried about, a bunch of rocket-science types whose next-generation technology is disturbingly good. Now that company’s technology is in the hands of Jill and her expanding sales and marketing machine. Between this move and her PR from the IPO, she is defining the playing field.

As Jack prepares his IPO, he now is on the defensive for being the me-too player.

Is this fair? If you said no, you missed the point. Jill leapfrogged Jack because she seized an opportunity in the larger system, using the company-as-product market to vault her forward in the actual-product marketplace. It’s fair as long as you realize that the game is played at both levels, especially in times when financial markets are exuberant and thus less discerning than they should be.

The lesson: Although many tech entrepreneurs would like to just build great products, building a great company can also require playing like Jill, or at least actively blocking Jill-like competitors. That requires thinking about companies as products.

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