Gaps, CAPs And Pragmatists In Pain
Moore Reveals The Secrets Of Managing For Value In The Internet Age
DC -- October
According to Geoffrey Moore, the key marketing challenge for
startups is positioning, and positioning means “getting your company
put in the right category and making sure it's a category that you
win. It also has to be a category that's valuable.”
Moore’s Step-By-Step Explanation Of Why Tech Stocks Fell Off The Fault Line
Into The Chasm Like An 800-Pound Gorilla In March, But Will Come Back Like A
So Keep The Faith.
market realized that “the Internet is the most investable category ever.”
Step 2 There were a limited
supply of Internet stocks and, at least in the beginning, they offered a limited
number of shares.
Step 3 This drove up early
Step 4 Since companies are
valued in comparison to other companies in related categories, the valuations of
new companies escalated.
Step 5 Speculators increased
Step 6 The market absorbed
enormous abuse. Dot.com after Dot.com created paper billionaire after paper
Boom Now we’re in a correction period that may go on for a while, but the
fundamentals are fine. Honest!
Moore is quite possibly the most recognized
and respected pundit on business in the New Economy. He is founder of the Chasm
Group and venture partner at Mohr
His books are bibles of high-tech marketing and management,
including his newest, “Living On The Fault Line,” about managing
for shareholder value. That
was his topic tonight, speaking at an event for the Morino
where he tailored the message of managing for value to an audience of
over 1500 Internet entrepreneurs live and via Webcast.
are essential because that’s what investors look at first when
valuing a company¾not
you and not your competitors. That comes later.
In an area of disruptive technologies like the Internet, the
most important question is how much wealth the new category can
create. That sets the maximum amount of future unrealized potential,
and managing for value is all about one thing¾increasing the unrealized potential of your
applies to private as well as public investors said Moore, “When a
shareholder buys your stock. They
need you to increase the future unrealized potential of your company
in order for them to sell at a price that is higher than what they
bought it for. If, instead, you milk that potential to make numbers,
you end up with a company that has less future unrealized potential;
so, when they sell, they lose money. That's what we are managing for
when we are managing for shareholder value.”
potential can become realized value based upon a number of factors¾how well you execute, movement between
categories, the speed of market acceptance for a new solution¾but when an investor is considering your
opportunity at the early stage, he’s looking at two things: Gap and
capitalization is a function of two things: your share of the
potential returns in the category and the time it takes for you to
realize them. When
investors value your company they discount for risk along both factors¾the
difference between current returns and unrealized potential, and the
amount of time you have to both realize and sustain the value.
The Competitive Advantage Gap is the distance between you and
your closest competitor. It affects the height of the value curve.
[See Figure 1]
Copyright 2000, Chasm
Competitive Advantage Period (CAP) is your sustainability over time
and involves factors such as barriers to entry for new competitors.
The further it stretches out, the more the investor’s risk
decreases. The more area
under the curve, the higher the value, at least from a fundamentalist
investor’s point of view, so you can gain value by extending Gap or
CAP, but most managers focus on the former.
Moore, “The issue of sustainable competitive advantage is what gets
lost in the shuffle of day-to-day management.
We put a lot of attention on Gap, so product introductions get
the entire company mobilized. Lower
priced offerings and superior customer service, those are a little bit
CAP issues, but things like patent positions, market share leadership
or brand loyalty¾investments that take time to put in place¾tend to get the short shrift in highly
competitive situations and this is where managing for shareholder
value is the thing that rescues you.”
reason why the time vector is especially important for netpreneurs is
because all disruptive technologies have a unique adoption curve,
ranging from innovators to laggards. [See Figure 2].
Copyright 2000, Chasm
happens when a technology is able to “cross the chasm” and gain
acceptance by that bulge of pragmatist customers who have been waiting
for proof of concept. When you do that, you have a real market instead
of just a category. The best way to cross the chasm is to search out
the niche markets of pragmatists
people in the early majority who feel compelled to fix something they
can't fix with existing technology.
what Angie Kim, President and Chief Customer Officer of EqualFooting.com,
and Brian Keane of Aether
Systems are doing. Following
Moore’s talk the three engaged in a conversation to apply the topics
he covered to the real challenges of their two companies.
Both seem have found their niche opportunities by addressing
the “context” needs of customers.
businesses perform two types of functions: core and context. Core
functions are those that directly affect shareholder value, such as
introducing new products. Context functions are necessary but they
don’t increase value. For example, according to Moore, when Adobe
made $300 million on their Netscape
investment, their stock didn't move. Such investments make money, but
they do little or nothing to increase unrealized potential. When
companies are young, they spend almost all of their efforts on core
functions, but, as they mature, they spend more and more of their
critical resources on context functions¾the things that don’t increase value.
That’s one reason why startups are more agile than the big
companies they compete against.
Institute founder Mario Morino picked up on this theme in his
wrap-up to the event, tying it to another of Moore’s points, the
difference between good revenue and bad revenue. It’s an important
distinction for startups who find themselves, as Kim put it, focused
on getting “any revenue.” Bad revenue brings in dollars, but costs
so much in time, resources or money to get or maintain that it draws
you away for focusing on core functions that continue to increase
to Morino, an investor and former technology entrepreneur himself,
“If you want to kill a company, get bad revenue. If you want to kill
it slowly, get indifferent revenue. You must get business that counts.
If you can’t get it, get the hell out because you are not going to
it’s in the battle for core over context that Moore and Morino both
see the real opportunities of the New Economy. Said Moore, “Context
is really core in the wrong place.
Can we just rearrange things so that we get everything in the
right place? That's the ideal vision.
If you think about this new economy, it's a network of
cooperating companies creating end-to-end solutions in which nobody
would do context, and everybody would do core.
It creates higher returns for investors because every company
is spending more of the investor's dollar on core.
It increases flexibility because you have multiple sources of
support. It creates
greater value for customers because you have more minds working on the
problem than just yours, and, furthermore, better minds are working
because you don't put your best minds on context.”
potential is why he remains so bullish on the sector, even in areas
that are currently out of favor with investors like B2B markets. “Do
not let the current financial markets confuse you,” he said, “The
Internet is the greatest category that has ever hit the planet, and
the fact that you are in an Internet-related business is a very, very
2000 Morino Institute. All rights reserved.