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who needs a faster mousetrap?
assessing your value proposition
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the audience: q&a

Mr. Backus: With that, I'd like to open it up for questions. You can pass them up on cards at your seats or go to the microphones. While you are getting your questions ready, someone on the panel had brought up a question about convergence and cool products. To demonstrate, we have a very sophisticated technology group up here. The hot topic in the phone/PDA space is convergence, and I'm going to challenge all the people on the panel to pull out their converged devices. I have two. They haven't converged yet. Anyone else?

Mr. Haley: Three.

Mr. Backus: Three.

Mr. Gopalan: Just one. I win.

Mr. Backus: You win. Why one?

Mr. Gopalan: I've got this NEXTEL device which provides me the online capability to do my email, my calendar, my contacts, so on and so forth. From that perspective, it works fine. The only thing is, I think I need prescription glasses to use it. The panels are very small.

Mr. Backus: I go through a new device about every six months, so I just traded in my Nokia Palm Phone, which I thought was going to be great when I bought it. It turned out it was a good Palm and a good phone, but it couldn't do email, so I kept my Blackberry. I got rid of that and went for the smallest phone possible. In six months I'm sure I'll have something else.

Mr. Savage: This is a good example of value proposition. The phone -- voice -- is a killer app. Email is a killer app. I left my Palm Pilot in my car. It’s a killer app for contacts. They’re killer enough that I'm walking around with three sets of batteries. A briefcase full of batteries. I would love to converge all these devices, but it's not important enough to me. I will continue putting out $400 every six months for a new device because it's a little bit better, and I can't wait until we get the “converged device.” They're out there, but not quite good enough because they give up a little bit on one application or another. At the end of the day, better, faster cheaper, right? It's better because it's converged; it's faster because you can do it all at once; it's cheaper because you don't have to buy all three; but you know what? It doesn't solve my problem.

Mr. Backus: It's not better for voice. The phone is better for voice and the PDA is better for data. The phone is a bad data device today, the PDA is a bad voice device today. They're not 100% there yet.

          Let's get a question from the audience. 

Q: My name is Cy Weinstock, and I'm in the encryption area and virtual private networks. As investors, what are your interest areas and how do I go about finding the right investors?

Mr. Backus: Any venture capitalist that you want to take money from should have a website that tells you what they're looking to invest in. It should express the spaces they’re interested in, the type of business -- early stage, later stage, growth stage, pre-revenue, seed -- it should talk about how much money they're looking to invest, and it should give success stories of what they've done. If someone doesn't have that on their website, you shouldn't waste their time, because they're not doing a good job telling you what they're looking for.

Mr. Savage: We invest in early stage companies ahead of operating deals, A and B rounds, typically between $2 million and $3 million in areas where the IP-centered world of AOL overlays with the media assets of Time Warner and the delivery mechanisms of Time Warner Cable. That leads to home networking, improvements in delivery mechanisms, converged devices, delivery to multiple platforms, etc. Next-generation digital media is our focus.

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Q: Good morning, my name is Walter Ludwig with a company called Difference Engines. Before I ask my question I have to say with all due respect to Tige that the worst value proposition I've ever heard is merging a big Internet company with a big media company. I say that as both a former shareholder in each company and customer.

                Actually, this has been very valuable to me. We're in the stage where we're making pitches. We have a moderately complex value proposition in that it reaches across several different constituencies, even in the customer group. We hear from potential investors that we should focus, focus, focus, focus. Yet, I'm hearing here that you need to tune the value proposition for different audiences. That seems to me either disingenuous or unfocused, and I'm not quite sure how I can reconcile them.

Mr. Haley: They are not disingenuous. You cannot be focused on one individual if you have a complex solution because just one individual is not going to make the purchase.

          I can say, very simply, that at On-Link we cut the cost of sales by leveraging the Internet and tying multiple channels together. That was the value proposition that we took to the investors about why our buyers were going to buy from us. No single person in the company cares about that value proposition, however. The IT person needs to know that he can get it installed, that there is low risk to him, that it's not going to change his system, that there is not going to be the midnight call when it goes down, and that he doesn't have to go out and hire 45 LISP programmers. The value proposition that we took to him was that we will guarantee that the system is up on a certain day, you don't pay unless it is, and we will make it work on whatever systems you have. We removed the risk for that person. To the marketing person, we said, “You have multiple channels. The Internet is a way to support all of them. You are going to have a little bit of channel conflict, but you already have channel conflict which your sales people are good at managing, between the telesales, direct sales, indirect sales, etc. Here is one more channel that is going to help you with all of those, and the value proposition for you is to manage your channels less expensively.” To the salesperson, we said, “Any good company with good salespeople has people leaving. You probably have on the order of 8%-12% of your territory uncovered. This gives you coverage in those territories, and it cuts your cost of sales to your direct channel.”

          Those were very, very different value propositions for those three individuals. If they couldn't come together around something that applied for each of them, we had a $7,000 product instead of a $3 million product. We only sold to people who had complex goods, who had a direct sales force and some other channel. We targeted very closely, and the segmentation was not the trivial segmentation people like to do. Now, one of the tests I do when I speak to schools is to say "Come to me with a segmentation theory that ties Amdahl, which makes mainframe computers, with Snap-On tools. When you can define that, then you understand what your product does. The segmentation theory for those two companies is very, very straightforward; however, a cursory look at “we're going to help cut the cost of sales” doesn't help you make the sale to those two companies. That is what I think requires additional focus, laser-like focus, on what you do for everybody who has to sign off on the product.

Q: My name is Marc Hausman of Strategic Communications Group. Could you talk about differentiation from competitors in terms of value proposition? Matthew, I would offer that the folks at PricewaterhouseCoopers and Ernst & Young could give a very similar value proposition to the one you shared for Accenture, and, Venkat, there are probably a variety of different “Beltway Bandits” up and down Interstate 66 who would share something very similar to your positioning of DynCorp.

Mr. Gopalan: We handle this on a daily basis because we're in the midst of competition. As you say, there are several competitors who could specify the same space as us. A couple of things come to mind. One of the things that we tend to focus on is customer intimacy, such as how well we know the customer and how we have done our research. Before we make a pitch, we try to fully understand what it is that the customer is looking for and their strategic plan. Where are they going, and can we partner? A lot of times we have found ourselves unable to differentiate, and therefore have stayed away from the opportunity.

          Differentiation can be on the basis of a particular product, on the basis of a particular service, or on the basis of people. We take a lot of pride in our people, therefore we tend to hire the folks who can make the difference for us. We use that as a differentiation, as well. Another area is your longevity, your ability to perform over a period of time, and your ability to maintain credibility. There are a number of different ways to differentiate, and you've got to figure out for yourself what your particular differentiation scheme is. By the way, differentiation changes with time as well. Our differentiation prior to 9/11 and after 9/11 are two vastly different things. In several of the agencies we're at, for example the State Department, National Security Agency, Air Force, Army, and so on, the government agencies have come to us looking for certain things, primarily because we've been in that space and we've had the skills, capabilities, and competencies.

Q: I'm Jeff Alexander with Washington CORE. In Clayton Christensen’s book, The Innovator’s Dilemma, he talks about disruptive technologies. One of the arguments is that emerging competitors often aren't recognized because their value proposition looks bad to begin with, but it eventually exceeds the incumbents' value proposition and overtakes them. If I'm an incumbent looking at the competitive landscape, how can I spot the companies that seem to have bad value propositions, but could become very good value propositions and eat my lunch before I realize it?

Mr. Backus: One of the biggest mistakes that big companies make is to define their business the wrong way so they define out innovative competitors. For example, automobiles were not deemed to be a competitor to trains early on, but they were transportation. A lot more goods move today via truck then ever before. The buggy whip people didn't see automobiles as competitors. You have to define your business the right way at the starting point.

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Mr. Savage: I think it depends on the company. The reason that AOL Time Warner has a venture group is specifically that. We're not attached to any division. We are a relatively small, relatively nimble group. We spend a lot of time talking to new companies focused on disruptive technologies, and part of our rationale is to make this big company act less like a big company. We're just one little piece of it, but that is what we do. Speaking from a big company standpoint, we're not in the venture business just as an asset class, it's so that we can see disruptive technologies before they disrupt our business, and we can either partner or help those companies grow, and we can learn from the experience.

Q: Good day. My name is Julius Johnson, CEO of a company based in Greenwich, Connecticut. Venkat, when someone is making a pitch, aside from having a favorable value proposition, what do you look for in terms of giving the green light? Is it strictly based on a quantitative analysis or do you put any subjective factors into your evaluation?

Mr. Gopalan: We're a little different from the Draper Atlantics of the world. We're not open for venture business like they are; we tend to choose the opportunities that we really want to go after. Essentially, we tend to make our own value proposition plays before we decide who we want to go with. In terms of a presentation, other than the quantitative aspects and the objective evidence, absolutely, there is a gut-feel factor that goes into the decision process as well.

Q: What percentage?

Mr. Gopalan: It really depends on the situation and different people’s expertise in terms of how they think the chemistry will work. I don't think I can characterize a specific percentage, but, after all is said and done, we've got to feel good about the deal, and so do you. That clearly is a non-quantitative, subjective element that is present. I won't deny that it is there, but it's towards the end of the deal. We go through all the objective evidence first. If it doesn't make financial sense, I don't go after it, even though one of the board might feel it is appropriate.

Mr. Backus: Let me try to give a broad picture. People who are looking to invest in businesses put everything through a generic screen. Is it a good idea? Is it a big idea? Is it a unique idea? Can the management team assembled pull it off? Is it a good idea for us? What may be good for us may not be good for Venkat, for Accenture, or for AOL. Is it a good for us now? It's a mix. You can't apply a formula to it. It's all very subjective. At the end of the day, if someone decides they want to invest in a business, they'll put an offer on the table. There is an arm's length negotiation. If there is an acceptance of an offer, a negotiated offer, then that determines who owns what, and the way investors make money ultimately is if the company is either sold or goes public.

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Mr. Backus: Let me ask some of the questions passed up on the cards. What is the value proposition for Wi-Fi or 802.11b?

Mr. Savage: We talk about it a lot, actually. From a consumer standpoint, broadly, wireless has been a very overused space. I think wireless is good for two things. It's good for people who need to be portable, and it's good for people who have a hard time running a wire. Certainly if you can run a Cat-5 wire around your house, it's a better, higher quality, faster connection than 802.11 in whatever form, a, b, or h, but it doesn't give you portability. Most of us don't have that cable running through our house. The value proposition is that it's commodity hardware, very inexpensive. It allows you to network your house easily. Most people still think networking is either sharing broadband or a dial-up connection and/or sharing a printer among four computers. You can do it for a couple hundred bucks.

Mr. Haley: Technology by itself never has a value proposition. It's the productization of the technology. One of the things we see a lot of when people come to Accenture is that they have some cool technology -- I've seen this a lot in the Valley, and I'm sure you see a lot here. Technology by itself has no value. Technology productized so that someone can get the value out of it is the value proposition. All the things that Tige just said was the productization on 802.11b, c, etc. We see a lot of people confusing the difference between a technology product and product family, between a product family and a company. They confuse it a lot.

Mr. Savage: We've spent a lot of time looking at it and at all the companies out there, and we haven't made an investment because we don't see something yet that is compelling enough from an investor standpoint. We would love to, because it's an interesting additional pipe in the house. I've got it at my house. From a consumer standpoint, it's got a clear value proposition. From an investor standpoint, I think people are still working on it.

Mr. Backus: I've got an 802.11b network in my house. Why do I have it? Because I have a Roadrunner connection coming in that terminates on one desktop. I then have a small router that is broadcasting out wireless across the house. I've got three other computers in the house; my wife and kids each have their own computers. They put it wherever they want. I don't have to do any wiring, I’ve got great bandwidth, great throughput. It's easy, it gives me a fast connection at every desktop, and I don't have to go to Roadrunner and pay an extra $6.95 a month for each one that I wire up because I have it all done wirelessly.

Mr. Backus: Another audience question. Do you differentiate between value propositions and elevator pitches? If so, how?

Mr. Haley: Having done elevator pitches, to me the test of an elevator pitch is whether it only takes two floors to get it right. The elevator pitch is much more a simplification of the value proposition to the investor, plus the other things John talked about earlier, such as: “We have assembled the team, it's a large market with a segment we can own that has adjacent markets that we can then grow into and own, and it has a value proposition that we know how to deliver and sell.”

Mr. Backus: Another audience question. What do you look for in a value proposition for a services company, as opposed to a product company?

Mr. Gopalan: From a services perspective, you've got to be able to differentiate on the people you bring and for what service. The value proposition and services can change over time, depending on the skill level that is required and so on. Clearly, we're looking for quality. Clearly, we're looking for something that is not available with somebody else. Longevity helps. If you have done it for awhile, we can rely on you to do it better the next time. It's all about expertise on the service side.

Mr. Backus: I see my friend Mary coming, so I'm going to turn the mike over to her. Thank you,

Ms. MacPherson: I want to thank the panel for being with us this morning, they deserve a hand. This notion that there is a value proposition for different constituents is very important, and you heard some good examples. Thank you all for coming. Have a great day.

[End]

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