Luck had nothing to do with it

Date

11/29/2015 11:08:53 PM

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(MENAFN- Asia Times) Henry Kressel

This is a cautionary tale more than an inspirational one and many of the book's deepest insights are found in its diagnosis of what went wrong with seemingly bulletproof ventures. Great new companies require the right technology for the right market niche the right management for the right customers the right investors for the right executives the right financial controls for the right take-off trajectory. It sounds simple and it is. It requires vision experience contacts and common sense to bring all these elements together in one venture. There are very few venture firms with the brains and bandwidth to do it all but the ones who do produce a remarkably high number of hits.

Kressel and Winarsky have no use for the popular notion that start-ups should fail until they succeed 'pivoting' to things that work by trial and error. They write:

Failure has become de rigeur particularly in software start-ups that initially require little capital and small teams. The idea seems simple enough: you start with an initial venture concept put together a team and launch the venture. You develop minimally viable products keep testing different market and product hypotheses and pivot based on the market feedback you get. You expect to fail repeatedly and hope to eventually get to product-market fit.

Norman Winarsky

That's fine for the entrepreneurial bush league but 'world-changing opportunities' have such a high threshold of expense and expertise that 'there aren't many chances to survive if you get your value proposition wrong.' Either you know what you're doing from the outset or you don't: adaptability is one thing and hoping to stumble onto the right solution is quite another.

Kressel and Winarsky give the reader a wealth of examples to illustrate what works and what doesn't. The capsule case histories are sufficient to make their book a standard reference work for business-school courses on entrepreneurship for some years to come. Although they draw mainly on American experience the present book should be of exceptional interest to Asian and especially Chinese entrepreneurs and venture capital investors. Warburg Pincus has had exceptional success investing in the Chinese tech space and remains heavily committed in China.

The star of the show is Siri Apple's talking virtual assistant. 'It was only two weeks after we launched Siri that we got the call from Steve Jobs' they begin. 'We had set out to create a breakthrough in the market and we thought success would be years away not weeks. A year and a half after that phone call Siri had become the core application for a new and highly popular service on Apple iPhones In the first few weeks after its introduction Siri helped accelerate billions of dollars' worth of sales of the iPhone 4s. We had succeeded.'

Siri's object was to 'target the consumer pain of too many clicks' and 'Give the consumer a 'do engine' that provides answer to queries rather than just links.' When Jobs bought the product it was still more a high-end toy than a practical way of booking restaurant or travel reservations. Entertainment value can be key to the value proposition to 'surprise and delight customers' as the authors note. More on this theme would have been welcome.

Siri is the sexiest story among the case histories reported by the authors but also the least typical because Steve Jobs made them an offer they couldn't refuse. 'We were not looking to sell' the authors allow. 'We believed that the business value would almost certainly increase as we continued to develop new versions of Siri according to our road map. But 'Jobs made an offer that was a sufficient return on investment.' Jobs also had the option of throwing Apple's engineers into competition with the startup.

The decision to sell Siri to Apple though is central to the authors' story: Knowing when to raise and when to fold is half the battle. Startups need more than a great idea. They need the right plan the right people to execute it at the right time a clear idea of what customers want and what customers will accept and the discipline to maintain financial controls and accountability to stay the course. They need to know whether they are a project to be sold to an ongoing venture or the beginning of a new venture that will transform the economic space around it.

Kressel and Winarsky offer the obligatory how-to lists of what to put in a business plan how to pitch venture capitalists and how to read the competitive horizon. Their diagnosis of how new ventures fail though is remarkable for its thoroughness and wealth of example.

You have an innovation a really new disruptive technology? Congratulations: you're the lab rat for your competition who watch from the sidelines as you spend money in R&D test the market work out the kinks and pave the way for others to roll right over you.

Let's say you have a bulletproof innovation a technology no-one else can produce and market. But are your customers willing to innovate? One of SRI's failures was a communications technology called PacketHop. Emergency service workers died on Sept. 11 in part because firefighters ascending the stairs at the Twin Towers never received the call to stand down. SRI found a solution: 'a wireless network that hopped from handheld device to handheld device' or a 'local version of the Internet.' PacketHop drew on government-funded technology first devised for another purpose and attracted top investors. And the government stood ready to invest billions to improve the communications of first responders.

The trouble Kressel and Winarsky report was that 'the emergency responders PacketHop's initial target customers were naturally conservative and reluctant to move from a well-known brand like Motorola to a start-up's product even if it would be superior. No matter how much value there was in creating this new seamless low-cost product the customers were dedicated to maintain what had been long-standing relationships.' They were unwilling to innovate even when lives were at stake. SRI made what the authors call Fatal Mistake One: 'Failing to know your customer.'

Say that you have a great innovation and customers who are also willing to innovate and you've assembled a great engineering team. You set out to run your new venture and find out that you're the world's worst chief executive officer. You're in love with your technology and hopeless at herding cats. You should have hired a CEO with a track record of turning ideas into successful startups. If you dodged that bullet and hired a great startup CEO that CEO has to know when to turn the business over to a different kind of manager.

'Although you've created a great company you may or may not have the skills to manage it in all the stages of its growth … The primary point of CEO failure occurs most often from the freewheeling atmosphere of an early-stage start-up to a larger and more structured organization.' The authors call this Fatal Mistake Two: 'Keeping the wrong CEO.'

Fatal Mistake Three is mismanaging finances and Fatal Mistake Four is overconfidence. The cleanup killer of new ventures is Fatal Mistake Five 'failing to anticipate future industry developments.' That includes commodity pricing of what used to be cutting-edge products changing industry standards and failure to react to new technologies.

Central to any business is the value proposition namely 'how you will deliver value to customers and how this value will generate revenue from customers at a cost to the venture that will lead to profitability.' Innovation technologies may or may not drive the value proposition. 'It could be valid' the authors contend 'if in fact the cost is lower because of new technology or distribution channels or added services (or a combination) and if the model cannot easily be copied by others therefore making the advantage sustainable.'

The authors' avuncular advice recalls George Gilder's quip that an entrepreneur is the sort of person who stays up all night studying garbage pickup routes. What separates successful entrepreneurs from the also-rans is massive preparation: exhaustive knowledge of technology markets regulation customers investors and managers.

By way of example the authors cite 'RDA a semiconductor start-up in China' [that] built a great business on that basis by selling lower-priced chips to local producers of cell phones and displacing imported chips.' In fact Warburg Pincus more or less tripled its original investment in 2014 when Tsinghua Holdings bought RDA in 2014 for slightly over $900 million. RDA recruited mainland Chinese engineers in a field long dominated by Taiwanese and Korean developers and beat them on pricing.

RDA's success likely is the first of many Chinese ventures that will challenge Western prominence in key fields of technology. As noted customers' willingness to innovate is as important as the ability of entrepreneurs to offer innovations. That is a point made in depth by the Nobel Laureate Edmund Phelps in his 2013 book Mass Flourishing. Examining the Industrial Revolution Phelps shows that all the usual suspects in the great economic advance of the 19th century had been rounded long before the economic liftoff began: scientists engineers and entrepreneurs. What drove the post-1815 surge in productivity and living standards were not particular innovations but rather the willingness of millions of people to embrace innovation.

After the great wave of urbanization that brought nearly 600 million Chinese from countryside to the city in the past 35 years the Chinese are perhaps more ready to embrace mass innovation than any other people in history. Reviewing Phelps' book last year for the British monthly Standpoint I asked whether China might outstrip the West at innovationnot in pure scientific discovery but in the mass adoption of innovations especially in the retail and finance spaces. There will be room for many great ventures with disruptive innovations in Asia and Kressel and Winarsky well may have a much larger readership there than in their home countries.