In the course of owning a business you get a lot of phone calls from investors and venture capitalists. It’s a game, but a fair one if played correctly in that whatever your revenue, their criteria is just about twice yours. When we were 1M they were looking for 2M companies. When we were 2M they were looking for 3. When we were over 3 they were looking for 5, etc…. But they knew that when they contacted. So why?
Because knowledge is power. In an industry like membership management software there isn’t much transparency because so many companies are private. So they call. The calls are always polite. It’s important to remember they are frequently just due diligence by the firm as they negotiate to purchase a competitor in your space. Again, there is nothing wrong with this if knowledge is shared both ways.
Business Owner action item: as the business owner it’s up to you to ask the questions as well. Start with the simple stuff like “where do you see the industry going in 5 years?” etc. Trading information can be helpful, for both parties and if you are the smaller fish you better be more nimble anyway
How do most of the calls end? Typically the same and both parties knew it when the call started.
“well let’s stay in touch and touch base in a year.”
If you did your job and asked questions of them as well, then hey, that’s fair. In the VC world the “it’s not you, it’s me” breakup equivalent is “we are looking for someone a bit larger and with higher profits so call back”. But both parties knew that when the call started, it’s just the polite way to end the call. What highly profitable business owner wants to sell? Not many that I know of. It’s an attempt to be polite.
But, sometimes something interesting happens. Specifically I had someone ask me an interesting question recently about a competitor. It was a bit out of the blue which tells me it was on their to do list more than mine. The investor rep asked:
What do you see as company-x’s Achilles Heel besides being on the Microsoft platform?
I have to admit that I wasn’t expecting the question and I prefer to not say bad things about competitors. Usually they are good people trying hard in a competitive environment. We hang out together at NTEN, SXSW and for some of us OSCON. They really are good people. So I didn’t answer the “Achilles Heel” question fully. This is me correcting the record.
Yes, they have a problem. Why? Because in one of my History classes while getting a BS in POLS from Texas A&M University we studied Carnegie Steel. Given I like history, let’s look at it through the lens of “what would Andrew Carnegie do?”
In 1870 Carnegie decided that instead of being a “capitalist” with diversified interests he was going to be a steelman exclusively. Using his own capital, he erected his first blast furnace (to make pig iron) that year and the second in 1872. In 1873 he organized a Bessemer-steel rail company, a limited partnership. Depression had set in and would continue until 1879, but Carnegie persisted, using his own funds and getting local bank help. The first steel furnace at Braddock, Pa., began to roll rails in 1874. Carnegie continued building despite the depression—cutting prices, driving out competitors, shaking off faltering partners, plowing back earnings. In 1878 the company was capitalized at $1.25 million, of which Carnegie’s share was 59 percent; from these policies he never deviated. He took in new partners from his own “young men” (by 1900, he had 40); he never went public, capital being obtained from undivided profits (and in periods of stress, from local banks); and he kept on growing, horizontally and vertically, making heavy steel alone. From 1880 onward, Carnegie dominated the steel industry.
Still with me? Because from that dominance he sat at the top of the food chain. And then inexplicably they poked him. Why? WTF?
Carnegie had thought of selling out and retiring in 1889: his annual income was $2 million, and he wanted to cultivate his hobbies and develop the philanthropic program that was taking shape in his mind. But the threats that now came from the West as well as the East were too much for his fighting spirit and his sense of outrage, and he took the war into the enemy camp.
Sooooo… Carnegie then did NOT retire but rather took the fight to them. He took the fight to them with the advantages and business knowledge of his industry that he possessed. Now back to our story…
He (Carnegie) would not join their pools and cartels; moreover, he would invade their territories by making tubes, wire and nails, and hoop and cotton ties and by expanding his sales activities into the West. He ordered a new tube plant built on Lake Erie at Conneaut, which at the same time would be a great transportation center with harbors for boats to run to Chicago and a railroad to connect with Pittsburgh.
The competition surrendered, but at a much higher price than they would have otherwise.
Thus originated the U.S. Steel Corporation in 1901, through the work of J.P. Morgan. The point was to buy Carnegie off at his own price—as he was the only disturbing factor that held back “orderly markets and stable prices.” The Carnegie Company properties were purchased for almost $500 million (out of the total capitalization of the merger of $1.4 billion); Carnegie’s personal share was $225 million, which he insisted upon having in the corporation’s first-mortgage gold bonds. At last Carnegie was free to pursue his outside interests.
Why, how, could the competition have so badly misjudged things? They missed the megatrends/macroeconomics and underestimated their competitor. Realize one dollar of capital in the hands of experience is far more powerful than ten dollars in the hands of bankers.
It’s quite simple really. Carnegie had lowered his costs and built up his capital to the point that the competitor’s moves were an “event” and his response was simply a “choice”. A freaking choice. If that doesn’t make you nervous then I didn’t explain it well.
From the start Carnegie was willing to pay the price to win. Who knows, maybe he was just bored? Regardless the competition was in over their heads with a combined company run by bankers without the institutional knowledge of a steelman.
The bankers accepted their losses. But their misstep meant they paid a significant price for not researching the market, researching the trends, and especially for not understanding the machine Carnegie had built. It wasn’t just the capital, it was years of best practices developed by Frick and Carnegie that allowed him to win. A business is complex. Business practices are maintained by people, not Viseo flowcharts or Powerpoint.
Pick your fights.
Further – the only thing more complex than a business is communities of people like the open source community. You can’t buy them off or learn the social norms in a year or two.
Back to the phone call – in this case, the competitor the investor asked about is one we see occasionally in the sales process. They have some aggressive affiliates but I can’t say I’ve had a bad encounter with their CEO or one of their employees. So yes, I know them. I know how our product is differentiated with greater functionality. (having a better product does help – but they would say the same thing).
SWOT analysis if it got aggressive?
Well I can back into the competitors costs using the usual methods like salary survey sites and looking at their network. There are people who will research these things for a very reasonable price. Add to that the fact that they are proprietary AND require two year contracts just makes it easier. You wouldn’t want to sign your nonprofit up with a proprietary solution if you knew there was a better solution that was also open source, right? (data says 90% want use open source or “roll their own” – NTEN).
Maneuvering around their market positioning would be as strategically challenging as going around the Maginot line. Easy pickings – IF someone wanted a fight.
If this sounds arrogant, it isn’t. It is just me acknowledging how the future would put the very existence of our company in question if we hadn’t changed. I did what any self-aware responsible and knowledgeable CEO would do. We did a pivot. And WordPress and Drupal are great examples to follow.
The bigger question is why other leaders didn’t see open source coming?
Our competitive position – Tendenci has driven our costs down and gone open source in a group of competitors trapped with huge employee expenses, high proprietary licensing costs, shared servers which amplifies security risks, and constant turn over in their work force. Meanwhile hack attacks are sky rocketing and insurance and benefit costs climb.
Add to that programming isn’t something you can throw money at – it just takes time and adding more keyboard-monkeys just slows down the innovators.
To the person who asked the question – my answer is this:
Company X’s achilles heel is they exist at the whim of a better positioned open company with an aggressive strategy. You don’t have to win every prospect, you just have to force the competitor to sell below their cost. And wait.
The rest is details.
Tendenci will continue to rise because it is exactly what nonprofits and government agencies are asking for. Freedom. Respect. Dignity. Openness. Love.
Tools to help the cause first and our company second.
PS – if you are an investor in that company, don’t worry. I have no intention of implementing the above strategy right now as this is a case of “there is no spoon.” What is next is far more interesting to me. There is some amazing stuff on the horizon. I just wanted to come clean on how vulnerable some companies are. And yes, in a SWOT analysis or a prospectus, you should probably cross reference their technology with tech trends. I guess that is a question for the attorneys and IANAL.