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Dr Shailendra ‘Shai’ Vyakarnam, Director of the Bettany Centre for Entrepreneurship, Cranfield University is a CFO Club speaker alumni.
We take a look back at our archives to revisit ‘Camels, tigers and unicorns – building revenues or blowing smoke?’ which looks at the types of enterprise currently being built and the chasms they have to cross to become established.
The camels have got all their resources as they plod through the three chasms. Engineering companies would be something like that. You can’t start a full-on engineering company on a lean start-up. The tigers are operating in hostile environments and need to be agile. For example, in Telecoms, Media and Technology. Modest and frequent funding keeps them going as they move in agile ways. The unicorn is the mythical creature seen somewhere in the mist, blowing smoke. They are the billion-dollar company valuations.
I’ve been in the world of start-ups, entrepreneurship and early growth for about 25 years now. Over that time, I’ve met hundreds of students wanting to start businesses and they ask me about building teams, finding customers, raising money, and inevitably, in places like Cambridge and Cranfield, protecting intellectual property (IP), to which I can usually find answers.
Within my line of work, I often come across questions regarding the ‘fast fail’ and how Silicon Valley does moonshots, compared to British business which is risk-averse.
Thinking back to Jim Collins’s book Good to Great, it raises the question: why can’t we build companies that last 100 years? Why do we need to build them for five to seven years? What are we trying to do by way of making a difference in society?
If you are in science and technology and need heavy engineering, you can’t really build for a quick fix. It takes seven to eight years just to get there. And if the investment community wants an exit in five to seven years, you’ll never build those kinds of businesses.
The kind of rhetoric we are using in the day-to-day business world is constraining industry from getting off the ground. It’s been a genuine problem for the last 10 to 12 years. Serious businesses take a long time to build.
I am an advisor to small businesses, as well as teaching and research. One recently raised $1.5 million. I was celebrating with the CEO and talking about the next funding round, as the amount raised will be burned in 12 to 14 months. I left them thinking about whether they want to build a company for revenue or for a series of partial exits and eventually IPO. These are really serious questions for the founders of businesses because the trajectories are different.
In the current “Unicorn” climate it feels you need a little traction and a lot of promise to build valuation models and almost do not want real sales because it can jeopardise valuations.
Uday Phadke (co-author of the latest book and co-founder of AccelerateorIndia) and I think one reason is prevailing ideologies.
One of these is a public investment and private profit. We want government help – taking on the technology risk if you like.
In the US, it’s a defence; in other countries, the state is investing huge amounts. The EU has put €1 billion into quantum technology, for example. Tesla had a loan from the US Government for $500 million. Every single element of technology in an apple device was funded by government sources. But where’s the profit from that going? Not back to the US Government.
Here in the UK, we have tax credits and other schemes and again, it’s the taxpayer helping the private sector get going. When the exits come – who gets the benefit?
This dilemma of public funding and private profit can be viewed through a short tour of the history of industrialisation and therefore how prevailing ideologies influence us.
For me, the most significant impact on our ideology was probably the industrial revolution, especially the period around the 1800s when labour and capital were disaggregated for the first time. This led to neoclassical economics – ‘all things being equal’.
The notion of equilibrium was countered by Austrian economists, most notably Schumpeter who is best known for his work on creative destruction. He finally helped us to understand the significant role of the entrepreneur in economics and innovation. In the 1970s, we got Michael Porter’s work on how the markets and supply chains operate competitively, ignoring the role of the entrepreneur.
Christiansen, also from Harvard, picks up on this and says that while we live in stable environments, there is a role for the innovator to make things work within that structure. He refers to the innovators’ dilemma, where static non-inventive industries are killed by fast-moving innovators.
However, Porter and Christiansen’s work does not reflect today’s realities. That work from the 1970s and 1980s has filtered through to our thinking today about corporations and their role.
Milton Firedman, who was awarded a Nobel Prize in Economics gave us the notion of shareholder value – not only was capital and labour separated in the Industrial Revolution, now in the 1970s we were going to separate ownership of capital from its management. Lazonic a historian puts it rather nicely saying that we now live with the “financialization” of everything, although he referred to it as shareholder value. For him, this was really the final nail in the coffin of innovation.
There may well be some evidence of note to back up his assertion. An article recently came out about Tim Cook, CEO of Apple, and how he built the revenue. (Read it here.)
If we look at Apple in the last 15 to 18 months, do we see radical innovations? Microsoft ended up with Office as its suite of products and the whole business was built on current product lines. Steve Balmer was highly focused lines of business and as a result of building verticals on product lines, it has prevented from cross-disciplinary activity.
I’ve known people at Microsoft with all sorts of innovations but no way to get them going because the people at head office couldn’t see the link to existing products. Apple is the same, they don’t seem to be innovating the product, they’ve just hooked us into the idea that they’re innovating. There are some amusing videos by Jimmy Fallon on late-night TV in the US on this point.
So there is this question of financialization linked to the sentiment of the market. The scenario is a rather simple one. We need an active market with upward trending IPOs. This creates a funnel for VCs to exit and this draws in the capital. Because of the need for exits, the whole enterprise becomes increasingly short term focused.
This ladder that’s funding innovation needs the sizzle to get out at higher valuation levels – we need to blow smoke and any hard evidence of sales and profits can start to distract us from exaggerated valuations and searching for Unicorns!
Building business valuation is, therefore, going to be different from building businesses with revenues and longer-term sustainability at the heart of the vision. And it is this latter point I want to conclude on briefly with our findings and recommendations.
We looked at 300 science and technology (enabled) businesses. A broad term covering various sectors. In those, we find, curiously, there are three chasms or stalling points:
We use the term chasm – based on the excellent book by Geoffrey Moore. He identified a single chasm – at the point of scaling. But in our work, we have found there are three distinct chasms when the acquisition of new customers comes to a halt because there is a clear need for product/market development.
The triple chasm happens at different times in different sectors. We also looked at the notion of time. It could take up to 12 years to reach scale. That is probably why investors go into the shorter-term companies, where you can get that maturity level quickly.
We did some analysis about time, the total number of customers in the market place and the proportion of new customers acquired relative to market potential.
When you cross the first chasm, the proportion is probably only 1% of the market. Even when you’ve made half the journey, the second chasm, you’ve probably reached a maximum of 15% of the market. So, when companies bale out at that point, they probably haven’t reached their full potential.
We then looked at the managerial challenges of crossing those chasms. Happily for us, we got lots of responses, and we identified 12 levers/vectors. Briefly, they are:
For each of the three chasms, our research-based data shows that different priorities hit you at different moments.
The first chasm is literally a technology piece, primarily making sure that it’s working. That’s the critical part. The other part is framing the proposition in a way that the customer can understand it. If you can’t get those two things right, you’re unlikely to make it to the second chasm.
The second chasm is where the tornado hits. All 12 of these levers/vectors need to be manipulated at the same time. It’s why we see so many failures and why it’s known colloquially as ‘the valley of death’. It’s because absolutely everything has to happen at that moment. Therefore, the quality of advice that’s available and the expertise within the team and experience of having done it before is so critical.
While we know this anecdotally and we talk about it, what’s satisfying is finding we’ve actually got data.
The third chasm is basically a marketing operation – sales and marketing, scale up operations and the like.
MBA students and other business community types now want to talk about Silicon Valley compared to Cambridge; ‘fast fail’ and how Silicon Valley does moonshots, compared to British business which is risk-averse.
As a result of moonshot thinking, you get the unicorn phenomenon – billion-dollar company valuations, blowing smoke in the wind!
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