Monthly Archives: May, 2008

Avoiding predictable disasters -John O’Hara

Presentation by John at the recent NZSA meeting last month: notes by Chip

John O’Hara – April 08 NZSA Dinner Review

Forget Picking Winners: Avoiding predictable disasters is much more likely to lead high tech start ups to financial success.

Which has the greater probability of occurring during your lifetime?

  • an economically significant earthquake in Wellington
  • an economically significant volcanic eruption in Auckland
  • or your having a heart attack?

Statistically, the all have equal probability
Which is more likely to survive five years? A Technology Start up or a person diagnosed with cancer?

Survival Rates after 5 years are;

  • the 5 year Cancer survival rate is greater than 80%
  • the 5 year Tech start up survival rate is less than 15%

The key is that a high tech business is not generally a business you leave to your children. How can we reduce the risk and maximise the chances of success?

John covered four key areas to focus on: Market, Team, Strategy and Cash.

Note product is not one of them!

The Germans have a unique word with no English equivalent called “Schadenfreude”, which loosely translated means taking pleasure from the misfortune of others.

So whilst enjoying our Schadenfreude let’s reflect that choosing the right market will more than anything else determine how well you are rewarded personally for the effort you will put into your technology business.

If you have the nagging doubt that maybe you are not in the right market now is a good time to reflect. Often by moving slightly to an adjacent market you can change the outlook significantly.

The biggest risk is that you don’t know what you don’t know. There are always traps for the unwary and having seen the same issues previously is hugely valuable experience you can benefit from at much lower cost than making the same mistakes yourself.

In most cases a kiwi company will build a product and then look for the market. The American company will typically find the market then build a product, a subtle but important difference.

Knowing the market before building the product is a key attribute and helps keep the product development tightly focused.

In contrast a product that is constantly evolving in search of a market is usually much more difficult and expensive to build and although often more feature rich is ultimately not usually as commercially successful as one built for a known market.

Balanced Team
As a sweeping generalisation NZ high tech start ups are often over represented with technical experience and lacking sales and marketing experience along with financial expertise. This often leads to a high spend on building product and a low sales and marketing spend.

In the UK and US sales and marketing is often 45% of revenue, rarely for New Zealand companies is it more than 20% and often it’s much less.

A balanced team including people with sales, marketing and financial experience in building start ups in the same or a similar sector have a much greater chance of success.

In the UK having completed a number of presentations over the past year or so the most credible team to represent the company to financial institutions is a team comprising the Chairman, CEO and CFO.

An advisory board or board of directors with proven experience is also a key way of reducing risk and helpful in establishing realistic strategies. A recent report by a UK analyst commented that lack of grey hair around the board table was a significant red flag for new technology companies.

In most high tech categories the top three vendors share 90% of the value, while everyone else has to fight for the last 10%. In the US these companies are called the un-dead. Here we usually call them lifestyle businesses.

If you have a balanced team of people your chances of getting the funding you will need to get to positions 1,2 or 3 will be greatly enhanced.

We are not instinctively good at assessing risk and estimating probability. So we need to work at it and also try hard to be objective in developing strategies.

Carefully developing a sustainable strategy and then implementing it successfully is a key discipline. The marketplace creates a background noise of tactics and incidents that can bounce a small technology company around like a cork floating on a turbulent sea.

A coherent strategy is like a compass showing direction through the turbulence and gives direction to the business and confidence to its external stakeholders.

Of course having the right people around to develop, critique, review, modify and adapt a winning strategy is critical.

Finally Cash, the Oxygen to keep breathing and the resource to pull your business out of the pack and into a position where it can become meaningful and valuable.

It’s often the difference between being un-dead and being successful. If you plan to be successful on a wider basis than just within New Zealand, you will not be likely to get there organically.

Finally for any high tech start up cash is the oxygen that keeps you alive, managing cash wisely and avoiding running out at inopportune moments is a key skill to acquire.

If you are growing quickly, you almost certainly won’t have enough of it. How do you get it?

Well you need to show you have a valuable market a balanced team and a coherent strategy.