September 2004

Growth Challenge: Creating Value
This Time the Rules are Different

So how's "the recovery" going for your tech company?

However you answer, it's a good bet that running a young and growing private or public technology company now may not be what you had expected at the beginning of this cycle or experienced in past ones. To be successful today, you need to use a different set of rules than those that may have guided you in the post-bubble, bubble, or pre-bubble periods that go back over the last 10-12 years.

The post-bubble period of the last few years was all about cutting costs, managing precious cash, narrowing focus, and keeping your company in front of customers, so that they knew you well when the recovery came.

During the bubble of 1997 to 2000 it was about being first, market share over profits, and growing the size and scope of your business as fast as you could raise the money to do so.

In the pre-bubble period of the early to mid 1990s, breakthrough technology, strong management, and big ticket, enterprise sales drove success.

While the effective use of cash remains an ever-present foundation and maximizing value is still the goal, none of the past formulas to create a successful, growing technology company works today. What are the rules now? Here are a three of the most important.

Rule 1: Marketing trumps management and technology: The old saying goes "I'll take good technology with a great management team over the reverse any day." The truth now is that only companies with both great technologies and great management teams are left and what separates them is the quality of their marketing.

Why? Customer technology budgets, while increasing a little in this recovery, are being managed more tightly, with greater sophistication, and by more senior line executives than ever before, seemingly by an order of magnitude. Good marketing is therefore critical to target well defined business needs and develop value propositions, product offerings, and service/support approaches aligned to those needs. This focus, in turn, drives every part of the growing technology company's business, financing, technology, and operating models.

Rule 2: Technology enables rather than disrupts: Most investors boast that they only put money into companies with "disruptive technologies," those that give customers the opportunity to separate themselves from competition. Conversely, most customers say they've bought enough disruptive technology for a lifetime and they now need to wring value from all of it, if, having purchased so much disruptive technology doesn't first separate them from their jobs.

In response, for example, software and other IT companies today are succeeding by providing increasingly open solutions that allow the multitude of individually purchased systems and applications to talk to each other, extract critical data, analyze it in meaningful ways, and enable management to make timely business decisions from it.

For their part, big telecom carriers are mercifully reducing network spending, instead developing vendor-provided services and applications. This enables customers to get more value from their use of new communications technology while giving the carriers new and higher value revenue sources.

Rule 3: Go fast in a slow economy: Whereas patience was truly virtuous in the post-bubble downturn and pedal-to-the metal was the mantra of the hyper-growth economy of the bubble, CEOs of the best tech companies are quickly expanding their businesses in the midst of the current slow growth economy. To do this, private companies are raising large later stage investment rounds and public companies are making follow-on equity offerings. These additional funds are being used to expand companies from a few big customers or segments into new channels, vertical markets and global regions and for acquisitions to fill out product and service offerings.

This is the reality of:

• Still ample investor dollars looking for high growth and high return levels historically expected of venture and high tech asset classes
• Increasingly rapid business and technology change forcing companies to deliver now before the value of their IP and business advantages decay
• Far greater financial strength of the haves taking advantage of the have-nots' inability to fund their own growth

Managing in this irresistible force (investor money) — immovable object (slow economy) environment is not without significant risks and effort. First, marketing must truly be first rate and staffed to expand (see Rule 1 above). Second, as you expand your customer base into new markets and regions, you must also shift from a few early adopters to a larger number of more risk averse ones as your primary customers to sustain the expansion. And third, new business processes, organization and competencies, and management controls must be put in place to effectively manage this kind of expansion.

Company executives and investors are always trying to draw lessons from past successes to apply to their current situations. It's human nature to do so. But the best lesson to come from the past few periods, looking at them side by side and against what you need to do to succeed in the current economic recovery, is that what worked before doesn't work in a different business environment. For growing technology companies, there are a new set of rules now, and it's best to acknowledge this and begin working these new rules to your advantage as soon as you can.