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who needs a faster mousetrap?
assessing your value proposition
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Mr. Gopalan: I’ll talk not so much about a bad experience as about lessons learned.

          A few years ago, we invested in a state and local business, which, fortunately for us, worked out pretty well. We sold it recently to a public company. We had a 40% stake in the company, called DynTek, but associated with that, we invested in a small internal effort to do a transportation logistics software company. Essentially, it would provide non-emergency transportation algorithms and reverse auction rides for various Medicare and Medicaid patients going to hospitals and things of that nature. The essential lesson learned from that was not to do something based on internal customers alone. We worked pretty well from an internal customer point of view; however, when we tried to market it to outside customers, we found that the transportation indices and the operators -- the taxicab operators, the van operators, and so on -- were not accepting the software proposition. It worked for us from an internal perspective, but it never gelled into a viable business on the outside. You have to have a broad audience, a market, if you will, identified before you step into something like that.

Mr. Backus: Thanks. Good examples. I'm going to try to elaborate on that with a couple of examples that you all have heard of. I will suggest that over the last five years, one of the worst value propositions, both for investors as well as for consumers on the Internet, was the pets space. I'll give you their pitch -- and it may sound familiar -- then I'll explain what is wrong with each element. Here’s the gist:

Pets are a $100 billion business in the United States. I just need 1% of that, and I'll have a $1 billion business. If I just get 10% profit on that, I'll have $100 million a year in net income. At today's market value, I'll get a 200 price/earnings multiple. I'll have a $20 billion market cap, and you all are going to make a fortune.

          That was the value pitch to investors. You can probably pick out the flaws at each stage. First of all, we don't want someone who only wants 1% of the market. We want someone who wants the market -- we're looking for someone who is looking to win. We're not looking for 10% net income, we'd like something higher. We don't believe the market is always going to reward you at a 200 times P/E.

          It's a failing value proposition because it says that you're going to get there by being lucky. We want to see how you're going to get there by being better, faster, cheaper. From the consumer side, I'd argue that it was a terrible value proposition because you're basically taking a low-cost commodity product, call it dog food, and you're replacing the distribution costs -- the retail markup at a store -- with very high costs to ship it to individuals.

          Over the last five years, my favorite example of a great value proposition is eBay for both buyers and sellers. Ten years ago, if you were selling stamps, or coins, or baseball cards at a flea market, you could only get a price based on who showed up that day or who was in your geographic region. Now, by putting it on eBay, you can access hundreds of millions of people worldwide. Same thing for a buyer. Instead of going to your coin shop and seeing what they have available, you can find what is posted anywhere. It creates a new marketplace.

          In our area, one sector that is really down and out right now is telecom. Venkat, what happened in the last three or four years in the telecom sector, particularly with the CLECs, some of the long distance carriers, PSINet, etc.? A lot of companies just haven't made it. What went wrong in that sector? Did they miss something?

Mr. Gopalan: I think it was a problem of overcapacity. Too many people rushed in on the promise of revenue and potential, but there was overcapacity in the system. I get approached by a lot of vendors selling telecom services, and we were not ready to bite into that space. We did all of the fiber work to connect our different locations together. Once we had done that, we couldn't add any more value on the promised services. We never got to broadband or video services across the company at 500 locations. All of those are not necessarily reality.

          If you think about it, telecom primarily provides an infrastructure. I need to be able to use it for a certain purpose. Our own systems, our enterprise applications, had not gotten to the point where we could ride that bandwidth and get value for our company. We didn't invest in that space beyond a certain point, and that was the experience of a lot of other companies. We saw a downward spiral of prices. We had competing vendors come in and offer us better and better deals every day, so, obviously, we took the best from a competitive standpoint.

          I think the lesson learned from that is you cannot go into an investment situation with a single value proposition. In telecommunications, it turned out to be a single value proposition. You have to have a broad array of choices. If the definition of your company, or the definition of your value proposition, can be tied to one event, or one feature, or one set of values, that is not attractable across the space.

Mr. Backus: Matt, you came from Silicon Valley. What is different out there? A lot of people in this area have Silicon Valley envy and think that incredible things happen out there. We'd like to “be like Mike,” be like what everyone is out there. Do they get value propositions better than we do? Are they more experienced?

Mr. Haley: There is one huge difference -- you can't be in marketing without an engineering background. You have people who truly understand the product and who have carried a sales bag. They've done marcom (marketing communications), they've had to construct the whole pyramid of marketing, the positioning of the company, the product positioning, the value propositions, the sales messaging. If you truly understand the product, the use of it, and how it's going to be bought, you have a different perspective. One of the things that you see a lot of here is marketing defined as marcom, PR, etc. You see the engineering group and the CEO trying to come up with a value proposition, and you see the marcom people trying to espouse the value proposition, but where’s the linkage to what the salespeople are going to have to overcome during the sales process? What are the objections going to be? What is the value proposition’s natural extension? What is the second order of effect of someone buying this and understanding the technology? What is the psychology of the sale?

          The other big difference, of course, is that our houses are cheap here.

Mr. Backus: You heard it here first. Housing is cheap here.

          Tige, how many presentations that you get have a value proposition? Of those, how long does it usually take before the entrepreneur tells you what the value proposition is, as opposed to talking about the big idea? Within that, how long before you get impatient listening to the pitch and want to jump out and ask, “Tell me, why should I invest in this? Why is this a big idea or good idea?”

Mr. Savage: The answer to number three is usually shorter than the answer to number two.

          We are very fortunate in that we see a lot of companies. Of that large number of companies, we invest in a very small percentage, just as you do, John. A majority of the companies get screened out not because they are unable to articulate a proposition -- you can help them with that -- but because it's just not there. There is a grand vision, a vision to change the world, a great feature, there is the very common problem of transplanting individual desires for functionality with those that the market might buy. We surround ourselves with techie types, so we think techie kinds of things are what people want to buy. I work at AOL, right? We were successful by making things simple, not by layering on the next tiny layer of functionality. The next layer of functionality is great in the next revision of a product. An internal group may put it in there, but it does not make a company and it does not make a stand-alone value proposition. I don't know what the percentage is, but a great percentage of them not only can’t be articulated, they simply don't exist.

          A good presentation gets it out right away: “This is what we're doing that is important to you, as an investor, and why you should invest in us. This is what we're doing that is important to our customers.” At the end of the day, it gets exactly back to the problem that Matt was talking about -- they have to sell stuff. Often, your sales people and marketing people have a real challenge ahead of them. If that value proposition is not articulated throughout the entire company, if everybody doesn't get it, or if everybody can't state it, that’s likely because it's not clear, right? You need to be able to get to the point at which it's clear. It starts at the top. The CEO or whomever you are working with should get it out there in the first five or 10 minutes. We spend a lot more time trying to figure out what it is than listening to what they're talking about, so my advice to companies that may be looking for investment is to sit down with your investors, get it out there, get that hook in, or you're going to spend the next half hour trying to overcome this glazed look on the faces of the people at the table, versus an engaged investor group.

Mr. Backus: It's not just about getting your value proposition down right so you can raise money from venture capitalists. Nine out of 10 people who are going to start businesses in this room are not going to get venture capital, but they will still start businesses. Venture capital is not required to build a successful business. It can often help you accelerate it, but it is certainly not required. You need to look at your value proposition before you even go out and start a business. If you don't know why what you're doing is important to someone, and important enough that they open up their wallet and pay for it, then you have something that may be pretty cool, but you probably don't have a business.

          One of the questions we see people wrestle with is: How do you know if you got it right? How do you test your value proposition? I'm going to suggest two thoughts on that. First, you probably know you're onto something if someone is willing to pay your asking price for a product. The first acid test is whether someone is willing to give you money for what you have, whether it's a product or a service. That tells you that you've got a good product, but just having a good product doesn't necessarily mean that it's a good business. It turns into a good business, in my mind, when you are able to get enough customers to pay you enough money to generate a profit. At the end of the day, to be sustainable, a business has to generate a profit.

          If we go back over the last five years, just to pick on another company since I can't get anyone else to pick on them, I'll pick on Buy.com. Buy.com generated a heck of a lot of revenue and a multibillion-dollar market value by selling products below cost. Okay, yes, you can generate revenue doing that. By the same token, if I want to set up a website and sell $100 bills for $90, I'll probably attract tens of millions of customers. Five years ago I could have gone public [Laughing] and I could have had a $5 billion market cap, but I would not have had a business. In fact, I would have gone out of business real quickly. That is not a value proposition. You need to have someone buy something from you, then you need to have someone buy enough from you that you can ultimately turn a profit.

          Let me toss it back to the panel and ask, are there other acid tests for knowing when you're onto something, or knowing if you're not onto something?

Mr. Gopalan: When we look for value propositions and pitches from folks wanting to sell their company, we're looking for who else has that pitch and what have they achieved in trying to take it to the next step? We want the entrepreneur to offer how we can make money out of the investment, as opposed to what they're planning to do with the investment dollars. We've got to ensure that the proposition is sustainable, number one -- that it's not a fad that's going to go away -- number two, that it can generate revenue in the markets we are in, and, three, that it's going to be profitable over a certain period of time. Those are the three things we're looking for. If you are coming in with a pitch, the clear way to win is to be able to articulate those things and show that you have thought about where the process is going. We usually find that companies that come in are very passionate about their products or services. Unfortunately, we're not buying passion. We're really not even buying the technology, although that is an addendum. We're really buying the business side of things. We're looking for how we can get to our next goal from whatever it is that you're offering.

Mr. Haley: I have a test we used at On-Link Technologies. In 1997, we made an Internet product that helped people sell very complex goods. By this time I had learned that it's good to have a competitor, so we thought it through. We invented competitors where we had weakness in that space and worked it out. The test for us was that we were selling against people who typically sold to IT. Our value proposition was that we could get IT, marketing, and sales all working together. These were three groups that can only agree that they don't like each other. You’ve never heard an IT guy talk about how great the sales department is, or the sales guy talking about how IT is helping him, right? Our test for the value proposition was when we got to the point where they were all agreeing that this was the right solution, and they wanted to work together to make the buy. We knew that we finally had the proposition honed so that everybody that was involved in the purchase -- marketing, sales, and IT -- had something that appealed to them.

          That’s when our price point went up. When I got to the company there were two brilliant technologists who were selling the product at $7,000 per site. When we got the proposition a little bit tuned, it became a $175,000 product. When we got it right, it became an initial $750,000 purchase, with an end goal for a new client of right around $3 million. The technology didn't change -- not a single thing in the technology was different -- but we went from $7,000-$10,000 to $3 million for the same technology, the same product, solving exactly the same problem. We changed the market we went after, we changed the message, we changed the channel, but everything was in sync. The value proposition with the other channel would have never worked. The value proposition that we were stating at the old price point wasn't believable. People don't believe they're going to get $10 million worth of return for $7,000. For $3 million they think they might get $10 million worth of return. Our test was, can we get groups together that hated each other buying faster to solve the real problem we wanted to solve?

Mr. Backus: Tige, let me ask you a different question, then I'll pick on each of you in turn on this. You were assimilated by AOL about three months ago. Can you tell us what your value proposition is at AOL?

Mr. Savage: My response is: As an investor or as a consumer? I think they're different, just like most companies. The company is good at entertaining people and making it simple to do that across channels. The AOL brand made getting online simple and economical. The Time-Warner properties, like Scooby Doo, not the most sophisticated of entertainments, but, boy, I asked John about it and he said, "My kids love it." Matt said, "It's probably different from the Scooby Doo I watched." Actually, no, it's the same one that has been on for 20 years. Now that brand is being repurposed and they're making a movie and a play. We entertain people, and we do it in a simple way.

          From an investment standpoint, I think it's getting more compelling by the day.

Mr. Backus: Good answer. Safe harbor statement in there somewhere. Matt the value proposition for Accenture?

Mr. Haley: We help companies solve very, very difficult problems that aren't their core business, and we tie the strategy to the implementation. If it's a company like eBay, which really understands the linkage between the buyer and the seller, we can solve things like their collections, billing, and payments, which are necessary, but not what differentiate eBay. We take a company and take over the hard problems that are necessary to make it successful. We'll take the risk out of that, and we'll let the management team focus on their core differentiation.

Mr. Gopalan: Very simply, at DynCorp our value proposition is two things. One, we make your government work, and, two, we make your lives a lot easier. If you've ever been through passport control going to Canada or Mexico, we’re there. When you file an application with the FCC, we're there. If you have ever done any business with the Securities & Exchange Commission, we're there. If you have ever dealt with child support payments or Medicare/Medicaid, we're there. If you have ever been in the armed services, you've been touched by us. We are there in Afghanistan, in Pakistan, everywhere that the U.S. government is. Our value proposition is that we make the things that you want possible, and we do it well.

  Mr. Backus: Thanks. I guess I'd better say what ours is at Draper Atlantic, otherwise these guys are going to pick on me. If I took the better, faster, cheaper construct, we're probably not going to be the cheapest money out there or the fastest money, but we're trying to position ourselves as venture capitalists with a team of executives who have been businesses executives before, who have walked in your shoes, who have big Rolodexes and like to use them, and who are well-connected to Silicon Valley, which is a differentiator from other firms out here. We position ourselves in the “better” category.

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