assessing your value proposition

“Technology by itself never has a value proposition,” according to Accenture’s Matthew Haley. What shows value is how you turn the technology into a product that people are willing to pay for. That means solutions that are faster, better, or cheaper than what the competition has to offer. But make sure that you get the equation right. As entrepreneurs learned at this Netpreneur Coffee & DoughNets event held April 24, 2002, building a faster mousetrap won’t get the world beating a path to your door.

panelists:
Venkat Gopalan, VP, Information Technology and CIO, DynCorp
Matthew Haley, Corporate Strategy & Business Architecture Executive, Accenture
Tige Savage, VP, AOL Time Warner Venture Group

moderator:
John Backus, Managing Partner, Draper Atlantic

Copyright 2002 Morino Institute. All rights reserved. Edited for length and clarity.

Disclaimer: Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The transcript is provided “as is” and your use is at your own risk.

mary macpherson: welcome

Good morning and welcome to Coffee & DoughNets. I'm Mary MacPherson of Morino Institute’s Netpreneur. On behalf of the team, thanks for coming.

          This morning's program is about helping entrepreneurs honestly assess their value proposition. We have a terrific panel, and we'll look forward to your equally terrific questions. Before I introduce the panel, let me acknowledge an anniversary. Yesterday, April 23, was the fifth anniversary of Netpreneur.

          Netpreneur was originally launched as an initiative of the Potomac KnowledgeWay, and I pulled this description from the press release of 1997: "Netpreneur is a support network, virtual and physical, that brings netpreneurs together to share information, develop contacts, and help each other succeed.”

          But, what is a netpreneur? In 1997, it was defined as “a digital age entrepreneur, someone who is building products or services for or on the Internet.” Today, Netpreneur might better be described as the network of and for entrepreneurs in this region, and perhaps every entrepreneur is a netpreneur today.

          The very first Coffee & DoughNets was in February of 1997. It grew out of the idea that we could take a discussion list we had started and maybe get a few of the people together to hold an event in our conference room. It very quickly outgrew the conference room and ended up being held at the Sheraton Premier in Tysons Corner. There were about 50 people in attendance, and we had no idea that there were so many entrepreneurs in the region. We'd like to thank those of you who were with us in the old days, those who are here with us today, and those of you who will join us later via streaming video or transcript. We appreciate your participation in this incredible community.

          I also want to take a moment to thank our volunteers today who help us make these events work -- Christina Fredette, a student at George Washington University, Fred Kelly of HiTek Solutions, and Tom Macon of The Level Playing Field. Thanks very much, and, of course, let me acknowledge the entire Netpreneur team, who makes all of this all happen.

          Now I'll turn the podium over to John Backus, who will get us started.

john backus: between idea and reality

Thanks, Mary. I want to start with a quote that I've used in speeches before. Actually, I've used it in just about every speech because it's an easy one to remember. It's from T.S. Eliot’s poem The Hollow Men, and it applies today to venture capitalists, to entrepreneurs, and to value propositions. If I were giving another talk, I'm sure it would apply to that as well.

Between the idea

And the reality

Between the motion

And the act

Falls the Shadow

I'm going to suggest that Eliot's "Shadow" is like today's value proposition, because having a good value proposition is the difference between an idea and a reality, between trying to do something and successfully accomplishing it.

          The biggest flaw we see at Draper Atlantic when entrepreneurs come in is that they often don't have a value proposition. We see it every day, and it comes in many, many different forms. Sometimes they have a cool idea, but it's not a big idea; or it's a neat feature, but it's not a product; or it's something nice to have, but it's not something anybody needs to have. If it's not something people need, then, when times are tough, they make trade-offs. You generally don't go there. Other times it's a good product idea, but it's not a good business; or it may be a good business idea, but it's not a profitable business idea. Those are all things we see every day when people come in thinking that they've come up with the best thing since sliced bread. It may have some terrific attributes, but it's not necessarily something that is going to end up being valuable to an investor or a potential customer.

          What I'd like to do today is explore the broad concepts of value propositions, why your business had better have a good one, and how you should understand and be able to articulate it if you're going to grow a successful business.

          Before I introduce the panel, I'd like to leave you with a thought about value propositions. It is a sound bite, because I know that you're going to take away just a couple of things from all the wonderful knowledge everyone up here is going to give you. I will leave with you a straw man, which is that to a potential customer, your product or service had better be better, faster, or cheaper. Think about those three things. I suggest that you don't have a value proposition if you don't have at least one, and perhaps two of those. Better. Faster. Cheaper.

`         Even if you have one or two of those characteristics, if they're not meaningful, it’s probably not going to work. For example, suppose you have a faster mousetrap. So what? If the mousetrap I have now catches 99 out of a hundred mice because the spring works pretty darn quickly, it doesn't really matter if your spring works faster. If you have a cheaper mousetrap, who cares? They’re three for 99¢ at Safeway. But if you have a better mousetrap, that may be what people are looking for. It's not just that you have a value proposition; it's that you have a value proposition that is relevant to your customers and solves the problem.

          With that, I'd like to introduce our panel. I'll start to my immediate left with Tige Savage.

tige savage: a walk in the buyer’s shoes

My name is Tige Savage with AOL Time Warner Venture Group. Like John, we are investors in young companies and are therefore focused on the same things that he is. As investors from a big company, however, we have an additional screen that John doesn't have, which is that a potential investment has to be strategic to our organization in some way.

          To the extent that we make investments in companies, we work very hard with them to introduce them throughout our organization. It is not a small organization; it has 80,000 people, and a bunch of brands around the world. We work very hard with the companies to tailor their value proposition to our various audiences, all of which are very different. They're all clearly interrelated, and they need to make sense, but the value proposition for a company coming to us as investors is different from the one that they're going to explain to a potential customer in one of our divisions, or a potential channel partner, or a potential technology partner. We work hard to help our companies articulate it. Hopefully, we can explore those different audiences, today, because not speaking to them clearly is certainly a downfall that we see in a number of both potential and portfolio companies in which we invest. Putting yourselves in the shoes of your audience goes a long way in taking advantage of that one bite at the apple that you get when you're sitting in front of them.

          In terms of my background, I've actually rather recently come to the Venture Group. John was very kind in not making the opening remark that he made to me earlier. He saw that AOL wrote off over $50 billion this morning. Before that, I co-founded another local venture capital fund called Riggs Capital Partners. We had a couple hundred million dollars under management.

Mr. Backus: Thanks. Next is Matt Haley with Accenture, arguably one of the largest IT solutions providers in the world.

matthew haley: do the dogs eat the dog food?

Good morning, Thank you, John. I'm here in part because at Accenture I help large companies spin off small organizations, and I help small companies tune their value propositions to sell to large clients.

          In my early days, I actually got value propositions wrong. I founded a couple of companies on the West Coast and learned that it is very easy to construct a very bad value proposition. When we got the value proposition right, our sales cycle went down and our price went up. It's pretty easy to test whether you have a good value proposition. Like they say: Did the dogs eat the dog food? Did people actually buy faster, did they spend more, and were they happier after they bought?

          One of the things I learned through that process was that as your product line matures, you don't have a single value proposition. If you are in the corporate world, there is no value proposition that applies equally to IT, to marketing, to sales, and to the end user.

          At Accenture, I hear a lot of value propositions these days that go something like, “You spend $100,000 on this software and we're going to save your company $300 million.” That doesn't pass the sniff test. It doesn't matter if you can do that kind of ROI; it's a bad value proposition. Yes, faster, better, cheaper is important, but it also has to be faster, better, cheaper for a buyer. I think one of the things a lot of people get wrong is thinking that companies buy things. Companies have people who buy things. If you don't appeal to the individuals and the individual’s needs, it doesn't matter that a $100,000 investment can save the company $300 million -- you don't get the phone call returned, no one gets to the third paragraph of your letter, it gets trashed because it doesn't pass the sniff test. A lot of the thought behind the value proposition isn't in trying to make it look like you get infinite return for zero dollar; rather it is: "What does my product do that helps this person be faster at their job, better at their job, get better return for their company?” If you don't have a value proposition for every individual that is involved in the purchase, they won't buy your product. A lot of what we will be talking about today is on how you tune it so that it works.

Mr. Backus: Thanks, Matt. Next is Venkat Gopalan, who is with DynCorp, probably our area's best kept secret among billion-dollar companies.

venkat gopalan: between idea and reality

Thank you, John. I'm glad to be here. Thanks to Netpreneur.

          My role at DynCorp is Corporate Vice President in charge of IT investments, as well as the Chief Information Officer. I bring a slightly different perspective from these gentlemen. DynCorp, as John said, is one of the region’s best kept secrets. We don't brand ourselves like an AOL or an Accenture; we are primarily in the federal government space. We have about a billion dollars of business on the information technology side and another billion dollars in the outsourcing side. We have grown primarily by acquisition over the last 55 years, so we have looked for value propositions along the way in several different areas.

          To us, value proposition means a different thing depending on the scale and depending on the time. As an illustration, a couple of years ago there were a lot of high valuations on dotcom companies. Now we find companies like DynCorp becoming of fairly significant value to investors. We're an employee-owned company, and our internal stock price has gone up about 86% in the last year or so. Value propositions can be different at different points in time.

          What we look for in a value proposition is anything that can contribute to our revenue, our growth, our return on investment capital, and our profitability. As we talk to vendors, companies, or potential partners that we might acquire, we are looking for all of those things.

          A couple of years ago we set up an internal venture fund called DynVenture, which we use to invest in different things to create value for our own company. We have gone through the mechanisms of working with various companies, and primarily invested in some healthcare-type operations, some transportation logistics, and so on. This has given us an interesting look at how you build value from external companies, add it to your own growth, and bring it out in stockholder value, which is really what we're all about.

the panel: colloquy

Mr. Backus: Let me get us started by trying to draw on some examples. Tige, I'm going to start with you. You've spent many years at Riggs and now AOL looking at businesses. In that time you've probably seen more than a thousand pitches by entrepreneurs. Tell me, what is the worst value proposition you've ever seen?

Mr. Savage: That is not a fair question. There are a lot of really bad ones.

Mr. Backus: It's hard to pick, I know.

Mr. Savage: You know, there are far more bad ones than there are good ones. There are some really bad ones. It's probably more valuable to spend some time talking about some good ones. It's a lot more fun to talk about the winners, and more instructive.

          There was a company that we invested in at Riggs Capital Partners, called SpeechWorks. What really got my interest up in SpeechWorks was the simplicity and focus and reality of their value proposition, both from a customer standpoint and from an investor standpoint. We invested in them years ago, and they are now a public company. This will be instructive because it differentiates strategy from value proposition.

          The company produces industrial-strength speech recognition software. Their strategy was based on the following. They said that the number of cycles necessary to recognize speech is going down. The algorithms are getting better. There are only a handful of good algorithms out there anyway, as proprietary technology and they had their hands on some of it. At the same time, Moore's Law is perpetually going on. They had charted this out years before and said, "Listen, at some point these two lines are going to cross. It's going to become inexpensive for commodity hardware to be able to recognize voice." That was their strategy, and they built the company around it.

          From a value proposition standpoint, they would go out to call centers. Their customers were typically big companies with big call centers, such as Amtrak, United Airlines, and Continental Airlines, that receive lots and lots of calls and spend lots and lots of dollars in their call centers. The value proposition to their customers was as simple as this: “You buy a Windows NT box or Linux box -- a piece of commodity hardware -- you put our software on it, and you take two people out of your call center.” It was that simple.

          That kind of thing gets your attention as an investor because it gets the attention of the buying agent. Call centers spend millions and millions of dollars a year on expensive phone calls. They got it right. It is a very customer-centric value proposition, which is clearly important for a company to be successful. There is a big differentiator between a customer's value proposition and that from an investor standpoint. For an investor, a big piece of it is: Will this make money? A very compelling value proposition from the standpoint of a customer is: Is it cheaper, faster, better? Cheaper is not a sustainable advantage, necessarily. Lower costs are a sustainable advantage, but not a cheaper price. A cheaper price just means it's less profitable. Less profitable is not interesting from the standpoint of an investor. What SpeechWorks had that was interesting was a compelling value proposition, proprietary rights to one of the two pieces of core technology out there, and a demonstrable ability to generate revenue and profits over time.

          That is what I consider an example of a good value proposition. Some other time we could have a bunch of yucks over the bad ones.

Mr. Backus: I'll see if Matt or Venkat wants to cough up an example of a bad value proposition . . .

Mr. Haley: I'll talk about some of my bad ideas. 

          At Intrinsa, we found a way to simulate software so that we could find defects without having to have test cases. It seemed like a good thing. The value proposition that I constructed -- I was the marketing founder -- was that we could go to engineering managers and tell them that for $40,000 they could buy this software that would make sure they had fewer defects in the software that they shipped. It seemed like an obvious thing.

          It wasn't quantifiable, however, so we read all the books and came up with all the numbers about how much defects cost, how much more they cost the later you found them, etc., etc. What we found as we made a few deals was that the sales cycle was exceedingly long because we made the mistake of saying we had no competitors. We had no competitors and we had a value proposition that promised infinity.

          What we did that eventually made this into a very profitable company was to go back and retune the value proposition. We had a value proposition for engineers: “You're going to be able to check in code that is better than all of your peers' code, and you'll be able to identify whether it's your problem or someone else's problem if the build doesn't work.” We went to a value proposition for build managers: “When you are doing the build at night, you will know exactly which code caused the problem.” We went to engineering managers with a different proposition. It costs $4,000 per seat for the engineer; it costs $50,000 a seat for the build master. “Your builds will be cleaner, your bug percentage will fall much faster as you ship the product.” Breaking it into those things took our price from $40,000 per team of 10 to about $130,000. It cut our sales cycle from about six months to about five-and-a-half weeks.

          At first we got it wrong. It was too broad and looked like it was too good to be true. Everybody knew it was an impossible problem. When we got it focused on what they got out of it and broke it into the two kinds of buyers, the sales cycle went down, the price went up, and our customers were a heck of a lot happier.

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