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Visualizing value creation
It’s a rare startup that picks the right path, and then executes flawlessly. Of course sometimes external events mean the path needs to change. But all too often, key value milestones are attacked in the wrong order, or neglected all together. Because this seems so prevalent, we have created the graphics below — snapshots in time of the development of a new venture — to help illustrate this discussion.
On the two axes are specific value creating milestones — technical milestones, and commercial milestones. The amount of value created is represented by the size of the rectangle joining completed milestones.
Over-emphasis on technical progress
The example of figure 1(a), in which progress has been made primarily along the technical axis, is one which we see all too commonly. Just think how many startups and advanced development groups have technical development teams of tens of engineers, but only a single individual tasked with making progress along the commercial axis.
There are two problems with this unbalanced approach. First, as seen in figure 1(b), the venture’s value is far greater after it has accomplished the commercial value-creating milestones as well as the technical milestones.
Don’t leave money on the table
So the company shown in figure 1(a) has an opportunity to create a substantial amount of value by attacking and completing the value-creating milestones on the commercial axis — morphing as a result into the company of figure 1(b). This can usually be done relatively quickly (compared to making technical progress), and with a very attractive Return on Investment.
It seems a shame to leave that extra value on the table when it comes time for the next financing.
Value is often destroyed
The overemphasis on technical milestones of figure 1(a) also leads to a second, more significant source of value destruction. Because of the way the technical and commercial milestones interrelate, when the company of figure 1(a) gets around to attacking the milestones on the commercial axis, it will often find that some of its prior technical work has been misdirected.
For example, often the product needs to change if it is really to meet the customers’ needs better than potential competitors. Or things that were neglected early on, such as thinking about how to create sustainable long term competitive advantage, dictate time consuming and expensive course corrections.
Iterative approach saves money and time
We recommend an iterative approach to value creation — a little progress along the technical axis, a little progress along the commercial axis, then more along the technical axis, then more along the commercial axis, and so on. We describe this as Balanced Execution.
This approach to value creation ensures that, at any point in time, the company has come close to maximizing the value of what it has created with the time and capital invested thus far. It also helps avoid misdirected effort, and the need to go back and redo work. This is particularly important, because at best this waste of time and effort means investors need to invest more capital and entrepreneurs need to invest more time. At worst, it can lead to death of the venture if more capital is not forthcoming.
Technical Value Milestones are things such as:
- Complete proof of principle experiments;
- Develop first prototype;
- Test in realistic situations; and
- Scale up for manufacture.
Commercial Value Milestones involve questions such as:
- Which of several possible products enabled by my technology will be the best starting point for a sustainable long term business?
- What are my competitors developing now to hit the market in x years when my product is ready?
- What is my sustainable competitive advantage?
- What are the unmet customer needs I am addressing?
- Why will my technology enable a product that meets those needs better than competing solutions?
- Which layer of the food chain should I develop my products to attack?
- What type of acquisitions will be most valuable to the industry giants 5 years from now?