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when the top line meets the bottom line

in the black

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      Another thing to realize is how fast things are moving, and some of the nuances of globalization. Again, I’m not being critical. There was a leading US executive who spoke, who I won’t name. One person from a different country got up and he was sort of amazed. He said, “That CEO is so appallingly ignorant. All he talks about is eLearning and distance education. Doesn't he understand that it's not going to move the way he assumes? Do you think that we want to hear an American like that in our country without any cultural filter whatsoever? That's not the way it's going to be. I've been in this field for 15 years, and it's very difficult to move things so that they are adaptable to different cultures.”

          If you go back to the end of the 1980s, what client/server was about technologically, in some respects and in theory at least, and what the Web also allows, is highly tailored, customized packaging of product to fit culture. What you see going on today is almost the inverse theory in a lot of global models where they're assuming that one eCommerce model like the Internet is now instantly accepted in all countries in the same way just because it has a protocol. I caution you, in all of your marketing, when you're going into a different country and a different market, you must be cognizant of those cultures and what the difference in those cultures will be in accepting it. This was driven home when I sat next to a businessman who ran one of the largest conglomerates in Saudi Arabia. He said that he runs into more US businesspeople who simply do not understand how to do business in Saudi Arabia. They stumble, they fall, they make huge mistakes and waste millions of dollars in their efforts because they don't realize that the Saudis operate differently. John Burton can address this as well, because he has lived this and knows the importance of these issues quite well.

          Mary made the earlier comment about returning to basics, and there was a fascinating conversation in which several people, among them Don Tapscott, who some of you know from the Tapscott Group, Michael Porter from MIT and someone I found absolutely fascinating, Martin Varsavsky, who did Jazztel out of Spain and is a highly successful entrepreneur. They got into a debate about value in a company, and Porter said that you can talk about all the intellectual assets, how you put people together in your virtual networks and such, but, at the end of the day, if you can't convert what you think is an intellectual asset into a competitive advantage to change your financial performance, it doesn't count. He said that fundamentals still rule the day. You know what? He's absolutely right. They are assets, but until they give you competitive advantage that fundamentally translates into sales and revenue and market share, they don't count. We have to demystify some of that, and I think Porter was dead on in his analysis.

          I'll go back to that Asia-Pacific Internet dinner. The way it operated was that in the evening you could pick a dinner to go to, typically about 70 people with table moderators, and you had all of these side discussions which they summarized. There was Masayoshi Son from SoftBank, one of the largest investors in the world; Semmoto of eAccess; Richard T.K. Li of Pacific Century Cyberworks, an absolutely fascinating mind; and several other individuals including Minoru Murofushi of Itochu. The Chairman of Hitachi kicked off the show. It was fascinating to hear the demographics from their perspective, and one number that blew me away was when Son said that if you look at Internet penetration today, we're at about 300 million users with the US population representing about 40% of that. Within five years, the approximation is that the world will be at one billion Internet users and the US will represent 20% of that. Asia-Pacific will represent half of that one billion. Give or take a couple of years, and that number holds with some of the classic forecasts. It’s a stunning demographic number.

          If you look at emerging markets, the one that impressed me most was Korea because of something that may not be apparent in this kind of dialogue, the issue of public policy and how important it is. Maybe we have been more negligent than we should in this country. Korea has the highest concentration of broadband connection per capita of any country in the world. I wouldn't have guessed that in a million years. In the early 1990's, the Korean government subsidized putting computers in all the schools; not a connection, but computers in literally all of the schools, and they made English a primary language in the educational system. Both moves were aimed at spurring economic development in the country, and it gave them a platform as well. Now they have gone from 500,000 to four million households with broadband connection. Put that in the US context where there are six million homes with broadband connectivity. Four million in Korea versus six million in the US. There is a big difference when you get to the top of the equation. That is an amazing penetration and bodes significantly well for what could happen in terms of eCommerce activity in Korea.


          Another impressive statistic was about China. In mainland China it was projected that right now there are 100 million people on regular cable and 70 million people already using cell phones, both of which are tailor-made for immediate transfer movements into some level of Internet connectivity. The way it could happen fast, ironically, is that most of it is government controlled. Almost all the cable distributors are municipal governments that can flip on a dime. What you can't predict are the consumption and business patterns, but when you start looking at these demographics they become quite daunting. We had the woman who does China Online at our table, one of the top journalists. She made the comment that the US is so focused on the issue of censorship in Asia-Pacific, more than they are, themselves, and everybody at the table agreed. She said, “Let me give you an example. AOL Instant Messenger is outlawed in China, but they estimated that there are three million viral users of Instant Messenger in China right now.” They expect it to explode as a communication mechanism.

          The net result is the eye-opening elements of how the rest of the world looks at this. There are also a lot of things I could tell you about what is going on in Germany and some of the activity and movement in Europe. The reality is that these markets are real and emerging. For the first time, companies can be formed in these markets, go public and be totally sustainable on large market caps without ever going out of their own countries. Folks, the game is changing for America, and it represents tremendous opportunities for firms to look at things globally. However, as we said in the “Going Global” Coffee & DoughNets session, do not assume this to be a simple process. Do not assume that because you've created a Web site somebody in another country can reach it and that you're a global business. You're not even close. I go back to all the things we discussed. If you're looking at this, take the protracted steps to understand, overall, what it's going to require to do business in different countries.

          The last thing I'll leave you with is that the reason I was at the conference, in addition to wearing my GAP hat, was that the sub-theme of the conference was this emerging new base of philanthropy and social entrepreneurship in which we are very involved. Kathy Bushkin was there, who many of you may know from AOL and who is now the President of AOL/Time Warner's foundation. It was fascinating to see that there really is a global movement underway and how there is new money from people of your age, from 25 to 50, who are looking at community engagement. As some of you may know, the Morino Institute has taken steps here in the National Capital region to create a program called Venture Philanthropy Partners. We've kept it very low key, but we've organized about 30 founding investors, including our speaker, John Burton, as well as other names you know, such as Ted Leonsis, Raul Fernandez, Jeong Kim, Steve and Jean Case, Jim Kimsey and John Sidgmore. It's a great group of people, and we've raised $31 million. Our intent is to invest in organizations serving children in the National Capital region where we can create social returns to help the children in the lowest income areas. Right now we’re in phase one, and we’ll probably be coming back to you in the months ahead at another engagement level. Not everybody can write checks of the size and generosity of the people I mentioned, but we’ve talked to many people in this audience who would like to get involved in a way that is consistent with their time schedule and financial capability. This year, we hope to come up with approaches to leverage the Netpreneur network to partner with Venture Philanthropy Partners at various levels.

          Now, John Burton is the speaker this morning, and I would like to say a couple of words. You're in for a treat. The subject he is covering is sales and distribution. He is a person I have truly learned from, and that's the most honest way I can describe it. My learning with John began at a Four Seasons Hotel in Boston, I think it was either 1984 or 1985. John, even then, was known as one of the best marketing strategists in the United States. You will talk to very few who understand the issues of distribution as profoundly and as deeply as he does. He has been an operating officer, including CEO of the firm I was part of, Legent Corporation. We merged firms to create our relationship back in 1989, and we have worked a long time together. He has made the transition to become one of the leading venture capitalists, not just in the region, but, I believe, in the country. On behalf of Netpreneur and myself, I'm very glad John's here today.

          My time is up. Second prize is 60 minutes next week, so see you later.


john burton: the world of sales & distribution

Good morning. I'm not sure how many of you have had the opportunity to follow Mario, but I'll tell you, it’s daunting for good reasons. It's also a bit difficult to segue from world-level, socio-economic political issues into Sales 101, but we have to start somewhere.

          The best segue I can come up with is that you have to start small, but think big.

          A lot of what I see in the various things I'm involved in, working with companies as both an M&A advisor and a venture capitalist, is that we tend to focus on big things, and we tend to focus on little things, but, often, it should be in reverse order. What I'd like to do this morning is to talk about some of the issues related to sales and distribution, which are distinct and separate from marketing, though I'd also say that you cannot do sales and distribution without marketing.

          The other part of what you do in your organizations has to do with a service or product or technology that needs to get consumed by some type of audience. Whether that audience is an individual or a corporation, you have to think about how to deliver something that, in most cases in this region, is based on technology.

          I think that Mario has given me more of an introduction than I probably deserve, so let's get into the context. What I'd like to do is give some glimpses at the things that I, along with a lot of the venture capitalists I work with, see in our daily travels.  Then, go into how you can develop sales and distribution concepts and ideas and execution plans that fit a way to get success, as well as how we look for them to be described to us.


what VCs wants to hear

          Often what we venture capitalists see is a great entrepreneur or an established businessperson who comes in and says:

        I have a great technology. I've got a great team. I've got a great company. I've grown my sales. I have this many customers and I believe I'm going to be successful. All I really need is financing to get to that next level.”

          When asked what the financing is for--you've all probably gone through this and you have a “use of funds” section in your business plan--they say:

“I'm going to hire some people. I'm going to start marketing and sales. I'm going to finish any number of things in development. I'm going to move my offices. I'm going to get on the map. I'm going to do a lot of different things with this financing.”

          What I don't hear are the things that I'd really like to hear, which are:

        I have a great distribution strategy. I have a tremendous channel into a highly lucrative market. I am differentiated when I talk to those potential clients by several characteristics. My market is lucrative because of the following reasons. I am distinguished from my competition in the particular market because my salespeople are more experienced in hearing the things that you need to hear and turning them into solutions that those particular clients want to hear about, which they will acquire, buy and spend money with me.

        I have a great distribution channel because when I capture a client I have a sustainable relationship with that client. Every incremental thing that I sell has a higher gross margin and a lower marginal cost of sale. I expect within two years to have a client base that consists of the top 50% of a great market.

        When I get that financing, I am going to use it to gain market share by building on those distribution concepts and by hiring more salespeople who have the same characteristics, who can do solution selling or can deliver solutions over the Web. They understand what the person on the receiving end of my product, service or technology is looking for. I am going to build those channels, I am going to hire the great expertise I need to leverage it. I'm going to build partnerships with others who service that market, who are the kinds of partners that also build product, sell solutions and service that client and marketplace. 

          Those are the things that I don't ever hear when people present. Sometimes we hear a little bit about it, but I hear lots of highly articulated, well-thought-out approaches to a technological problem. I hear a lot about the Internet. I hear a lot about different techniques for different levels of object coding and whether it's a differentiating technology characteristic, but, if we could hear the other more often, you and your companies would really stand out when you're presenting to folks who finance companies. What’s more, you would probably be very well served in trying to attain what it is you want to attain.

          I'm certainly not trying to be simplistic here, and I'm certainly not in any way trying to be patronizing to those of you who have this squared away, but I believe that this is a very important thing to think about, particularly in light of today's market climate and in light of many of the things Mario said about worldwide consumption habits, traits and characteristics that will develop. The companies that have been the most successful are not those that have made technological breakthroughs; they are the ones that have made those breakthroughs coupled with unique marketing and distribution capabilities to promulgate their concepts and their ideas.

          I'll point out one very simple thing that goes back many years. How many people know who Mitch Kapor is? I'm sure lots of people, unless you're under 25. Mitch Kapor was the developer of Lotus 1, 2, 3. How many people know who Dan Bricklin is? Dan Bricklin developed VisiCalc. Which of them is better known and which one was more successful? If you will, Lotus 1, 2, 3 was a large step above VisiCalc as a spreadsheet, but it was so well marketed and so well presented that it created an empire in Lotus and a highly notable company, even today as a division within IBM.


reaching clarity through precision

          I hear regularly, “People don't understand me when I present my idea.” There is a huge amount of frustration, perhaps understandably so, because venture capitalists can be the dumbest people you'll ever see. I would like to think it is intentional, but sometimes it isn't. We can't help ourselves. Venture capitalists like to be able to compare what you are presenting to something that they can understand quantitatively, because then they can start to think about, “if I invest in this firm, if I put my capital to work, what can it be similar to in terms of its return?” The more ephemeral you get with your concepts, the harder it will be to get quantitative on the part of the person to whom you're presenting.

          How do you do that? How do you present in a way that doesn't detract from what you have to sell, while at the same time relating to a venture capitalist? It goes far beyond a venture capitalist; it goes to how you train your salespeople when you get to that level.

          You have to define your market precisely. How big is that market? What is the precise target? Are you going at the Global 5000 or the Fortune 500? Are you going at financial institutions? Are you going at someone who has a Small Office/Home Office? What size? What geography? What are the purchasing characteristics? What else did they buy? How much did they spend? How much disposable capital do they have for this particular thing? What budget does it come out of? Does it come out of expense budgets or capital expenditure budgets?

          Compare it to a traditional way it has been done before. “I sell with a direct sales force similar to company X which did it very well.” BMC Corporation, a multi-billion dollar software company, essentially came first with a telesales model instead of a direct sales model. It was a great breakthrough in terms of cost of sale, and they did extremely well. They then went into a matrix mode of selling, with a lot of other partnerships, as well.

          Compare yourself to your competition. Everybody has competition. If you think you have no competition for your technology, and if you're right, you still have competition for budget dollars and you have competition with other distribution channels.


gaining momentum with early customers

          Another extraordinarily good way to have your market explained to a venture capitalist is by having a client explain what they use your technology for, why it is different, what it will save them and what means they will use to acquire it and other things like what you have to offer. That, as well as your interaction with a potential client, will help you define how you best sell to them, as well. I find an extraordinary lack of organizations with great technology, great ideas, and great client or potential client research. If you identify 10 IT directors, marketing people or consumers that you would like to have as clients, go out and talk to them. Don't try to sell them, just say, “I have this idea. What do you think of it? How would you buy it? How could I best service you?” Take that data, bring it to the venture capitalist and define what your objectives are. “I want 10, 15, 20 of them installed. I want an average sales price of the following.” Remember, venture capitalists also relate when they can compare themselves to someone and jump in bed with somebody who's already there.

          The most important indicative value is how rapid your client capture is. What does that mean? It means that the only way you're going to get client capture is through selling and somehow distributing your product or service to people. In today's climate, client capture means momentum, momentum means revenue, revenue means profit, and profit means you'll get financing. Profit means that you'll get a return, irrespective of the IPO markets or public venture capital money--which no longer exists.

          How many clients are possible? What is the universe to which you are selling? It will help you define how many salespeople you need. It will define what kinds of distribution channels you need to set up. What is the price tag by which you can measure the kind of channel you'll use? We'll talk about that in a moment.

          Your first client influences an enormous amount of others. Pick that first client well and make them your friend. Solicit their confidence and their advice. You also can use that first or second or third client to do a lot of other things that you need to do to lay the field for your distribution mechanisms. You can have that client talk to another strategic partner. Perhaps you have a product that client uses, and they use another product for which you need an interface. Don't call that other vendor, have your customer call them and say, “I want an interface between these two products.” That is precisely how Mario and I met in the early 1980s. We had a product; Mario had a product; and the client wanted the two products to work with one another. It makes all the sense in the world. We interfaced through the client.

          The best introduction to Gartner Group or Meta Group or Forrester Research is also with that client. Get them to talk to them and say, “This is the technology you should look at because we're going to use it.”

          What is all this about? This is Selling 101. It may not be selling to get a transaction fee or a sale or a license price or a service fee, but it is selling to lay the groundwork for a distribution channel that you will build or that you have built already. Nobody goes into battle unless there is some air cover softening the turf for the infantry to land. That's what you're doing when you're thinking about your sales channel.

the thermos corollary

          There is a joke that I really got a kick out when I heard it a long time ago A very simple man was asked what he thought the greatest wonder of the world was. He said, “The Thermos.” When asked why he said, “It keeps hot things hot and cold things cold, but how does it know?”

          As you define your sales and distribution plans, you need to know precisely what your objectives are, not just because they are milestones but because, at the same time, they are going to define the economics by which you will make that profit which we all know is critical.

The World of Sales & Distribution


          Let's say that you have a technology or software product. You need to define how many clients you have potentially, how fast you're going to get them and what they are going to spend. If it's a software product, what platforms does it run on? Is it all the platforms? Some of the platforms? UNIX? Is it a mainframe product (Heaven forbid!)? Is it the Internet, meaning IP? Is it mobile? Wireless? People throw those terms around without really understanding precisely what they mean in terms of economic return. What is the revenue per channel type? What is the average transaction size? If you're selling through resellers, how many inventory returns? How much selling? How much sell-through? The contract size, in value, has a relation to how you define the type of distribution mechanism. We'll talk about that more later.

          If you're a services company, how many new clients do you need to have over what period of time? What are the average relationships with those clients in terms of contract size and value over what period of months? What are the gross margins you expect to have? What are the hourly billing rates? What are the utilization rates? What other factors will help you judge whether your distribution channel is successful?

          Define whether the Thermos is going to be hot or whether it's going to be cold. You can be the absolute leader in a market if you define what that market is. You can be a leader in execution if you define what your execution plans are.

          When you go to a venture capitalist and begin to explain how successful you've been, it would be wonderful if you said, “When I began, we put together a plan and said that within three months we'd have this many salespeople, we would have this average transaction size, we would have this many clients, we would define this market and we would be the leader in it.” If you have those objectives defined and then you report to that venture capitalist every three months on how you've done against those objectives, you'll be doing both your financing opportunities and your own internal execution a very big favor.


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