A software product start up

Last week I went to product enclave by NASSCOM and met some amazing people. Almost all of them oozing energy to discuss the ideas they have for their respective products. It got me into thinking, how can they be sure, that this product is going to succeed. In my interactions where I asked pointed questions, I found, some had the answers. Well others also had the answers :), but I was not really convinced. It got into searching for a framework to determine market size of the product. The question is also pertinent in the light of many indian IT firms trying to get into the space of non-linear growth by investing heavily in products, platforms and solutions. I am sure, everyone would be having a framework, I thought assimilating this information from various sources. Please comment, will refine based on our discussions.

To my mind, this is a case for Five Cs.

Here are some points adjusted for the unique dynamics of the start-up environment.

 

Character

How would you evaluate the sincerity, honesty, and integrity of the owner of the business? Do others that they deal with (employees, suppliers, customers) value them as partners or are there character issues?

Are there any legal actions pending against the business?

Does the mission of the start-up make sense? Is their business concept sound?

What is the timeline/progress of development, coding, testing, and production as originally conceived in the business plan? Does it make sense?

What is the previous track record of each of the principals of the startup?

Capacity

What is the plan for producing the product when the code is ready? Is outsourcing stamping, packaging, and shipping an option?

Capital

What is the makeup of the initial seed capital to start the business? Personal assets, small business loan, venture capital funds?

What is the debt structure like if it exists? Interest rates, due dates, rollover ability, secured assets, etc.?

(more of this case on next page)

Collateral

Have any patents been applied for? What is their status?

What has been done to protect the intellectual capital/property associated with the software design?

Conditions

Describe the market space the business occupies. 

Why did the business come into inception?

What defines dominance in this market? Cost? Economies of scale? Speed to market? Relationships with customers? Where does this business fall against the aforementioned metrics?

Is the market for this type of product saturated? Is there a particular unfulfilled segment where this product fits or will it be competing against other already established products?

What is the advertising and promotional activity planned for this product? 

Deciding on technology

At the coffee table today, we were discussing how should a company decide to invest in a new technology. How it should align with business strategy of a company and here it is a study framework to decide the same.

So for the purpose of this blog, let us assume that a bank is coming to you for consulting engagement to decide on embarking on a technology change. The change will cost the bank close to $ 50 Million. Now that is a lot of money, bank is asking us, should we do this or not?

Before we start creating hypothesis about whether this is a good idea or not, we have to understand the reason for this technology change. Is it the case that, this will help in gaining more market share by increasing customer base? or is it just a technology change due to support termination of the current technology? Nail down the reason and build this in the part of the hypothesis.

Ultimately, this exercise should lead to a basic NPV analysis. For that we require cash flows. The next question is how to reasonably determine cash flows. The answer would be to investigate the situation in the form of 3 Cs customers, competition, and company. So if the hypothesis is not to go ahead with the technology, factor in the the possibilities whether the customer base will be shrinking or not, that the competitors for the smaller number of banks were huge and low, low cost providers, and that the companies cost structure and particular strengths would keep them from being competitive with larger players no matter how much they invested in technology.

This is not a an elaborate framework, just a guiding tool for the study!

Thoughts?

Why it is not what you hear & see and more? A tale of an organization

Off late, we have been hearing a lot about one of the best companies not doing so good in the recent quarterly performance. Although numbers are always right, but there is more than what meets the eye. I don’t know why but having associated with “her” for more than 6 years, I am saddened when people spit comments based on reading few articles or news flash. I feel it is my moral responsibility to clean up a few facts and present the positive picture which is just and plain based on facts!

So the way I approach this is by thrashing a few arguments upfront and I will try to remove my emotions and will be as objective as possible.

The number one point is about guidance. For people who would not be familiar with it, it is a forward looking statement about the pipeline of work which is supposed to come. Now this is a company which is based on the principle of stating upfront what they are going to achieve in next 3 months to one year. This is a regular practice for 20 years now. Also, this is the company which goes first to state upfront what they feel is there state of business. It takes balls and nerves of steel to predict and that too predict first. The guidance may be low, but at the end of the day it is guidance and the company has a reputation of beating it year after year barring few instances in recent past. Does it mean, it has lost its sheen? Well, few quarters are not enough to pass judgment in business. Anyone who is an entrepreneur will know this; the labor and changes take time to sink in.

So what all changes are expected?

Barney Stinson will say “India’s performance in outsourcing business is legend..wait for it dary”. So what was getting outsourced: Tech support, voice calls, programming and what not? Things are being delivered at much lower costs and efficiently. I know, this will raise a few eyebrows on about efficiency, but the argument will be this business is on for more than 30 years and business houses are finding it efficient. Now there is a simple rule of economics, the marginal utility. Utility on Y axis being programming and voice and other mundane outsourced stuff and Time on X axis. Over time, the utility will be stagnant. That is precisely what is being observed. The utility of writing code is not growing exponentially as it was happening few years back.

Having said that what is the best way for the company to grow? The idea should be to grow in areas where there is more utility in terms of outsourcing. In IT terms it is calling consulting. Why consulting and not anything else? Because it has the ability to strike where the business needs are: Solving business problems. Now why the same growth can be predicted for this?

When you are running a business, you have two kitties. One which you will spend on your mundane stuff. Stuff without which you will not be able to survive. You cannot survive if your application is not being maintained. You cannot survive without your call center support. So this kitty is the money for your usual needs. Then there is another kitty which is termed as “futuristic”. This is something which you will use for creating the future. Setting the future direction and you will hire consultants to make decisions for you. Now in depressing times like today, you will forget you have a futuristic kitty and you will focus on “Mundane” stuff squeezing every penny to get your work.

The futuristic kitty is something which is discretionary and you can’t get a full forward looking view in tough times. It is hazy and hence unpredictable. Having said that why leave something which is predicable to something so unpredictable. Below table gives the answer. All numbers are in the scale of 1 to 10. 10 being the largest.

Now there can be bias and inherent flaw in assigning values to this numbers, but this gives a drift of thinking. Strategically speaking, the payoff matrix is tilted in the favor of choosing the unpredictable business. It is an altogether different question on which companies can capitalize on this. But I want to make a statement that to my mind; this is the right direction and right strategy.

Moving on,

There were many questions raised around dividends and its distribution. For the sake of everyone, anyone who thinks that shareholders have made money should get the facts straight. Assuming you have invested 1000 rupees in 2010 in that share, you would have made nothing or probably would have lost a few rupees. In what universe shareholders are getting benefitted? It is futile to even argue that shareholders are the biggest winners. They have not won, but they are still invested as they believe in the direction in which this business is going. And I resonate that feeling.

Last thing is handling employees. Well it has a history of not firing anyone based on poor market conditions. There can be instances of unpleasant experiences. But seriously guys: are you telling me other companies outside are all white & fair in dealing with people. Atleast this organization has a platform that someone can walk in to big boss’s cabin & talk. Can question the seniors openly in the form of blogs, posts & question them on their action.

In all, I feel, it is like a spa treatment. You know after the treatment it is going to be relaxed. But you make faces & sometimes cry when you are pressed at different places in your body!

So give this baby one chance!! :)