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Don’t Build A Faster Mousetrap
Entrepreneurs Learn How To Assess And Articulate Their Business Value Proposition

(Chevy Chase, MD) -- April 24, 2002) The old saw goes like this: Build a better mousetrap and the world will beat a path to your door. Not so, said John Backus, speaking at this morning’s Netpreneur Coffee & DoughNets meeting, at least not completely. Backus is Managing Partner of Draper Atlantic, one of the region’s most active venture capital firms, and a person who has had more than a few entrepreneurs pitch more than a few mousetraps (and other technology solutions).

According to Backus, in order for someone to buy your product or service it has to have at least one, and preferably two, of the following characteristics -- it has to be better, faster, or cheaper than other solutions. That’s not all. The ones you pick have to be meaningful in the context of the solution, which is why no one ever got rich building a faster mousetrap. There’s just no need for one, which means it has no value proposition.

Want to know something that should happen faster? According to Tige Savage, Vice President of AOL Time Warner Venture Group, it’s getting to your value proposition whenever you get that precious few minutes in front of an investor, customer, partner, or other person who might take a stake in your success. Instead, too many entrepreneurs prefer to talk about technology, or market share, or features/benefits, or strategy, or almost anything else before getting to the heart of the story. Not only do many entrepreneurs meander around this critical point, many others have never addressed it properly, analytically, or completely in the first place, and still others don’t articulate it clearly.  

Backus and Savage were joined this morning by fellow panelists Venkat Gopalan, Vice President of Information Technology at DynCorp, and Matthew Haley, Executive in Accenture’s Corporate Strategy & Business Architecture organization. The four came to offer their insights and experience in “Assessing Your Value Proposition” to an audience of over 300 entrepreneurs.

According to Backus, “The biggest flaw we see at Draper Atlantic is entrepreneurs who come in and don't have a value proposition. It comes in many, many different forms: It's a cool idea, but it's not a big idea. It's a neat feature, but it's not a product. It's something nice to have, but it's nothing anybody needs. It's a good product idea, but it's not a good business. It’s a good business idea, but it's not a profitable business idea.”

The first thing to realize is that different audiences have different ideas of value. Customers are the most important. They buy because you understand and solve one of their critical needs. An investor, on the other hand, buys that, as well as your ability to sell the customer on the value proposition at a profitable price. A corporate investor, such as AOL Time Warner, also wants to see that your abilities fit with their larger strategic goals. An acquisition candidate wants to know that you can continue to do it within the context of their corporate culture. The list goes on, and the entrepreneur’s challenge is to identify, understand, quantify, articulate, and prove a meaningful value proposition for each.

One thing is certain, though, according to Haley. “Technology by itself has no value. ‘Productizing’ the technology is what has value.” But it isn’t a marketing communications function, either. In reality, it’s a fundamental definition of the business, and, as a serial entrepreneur, Haley gave the audience practical pointers on how to approach the problem and how it affects nearly every aspect of the business. In one story for example, he told how changing the value proposition led to raising the price of the product from $7,000 to $175,000 to $3,000,000.

“Not a single thing in the technology was different,” recalled Haley. “The same technology, the same product, solving exactly the same problem, but we changed the market we went after. We changed the message, we changed the channel, but everything was in sync.”

How could they justify such a jump? The new value proposition actually demanded it because part of the message was that Haley’s solution would save customers some $10 million a year. “The value proposition 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. You have to sell a $3 million product for a $10 million benefit.”

By the same token, the value proposition should not be confused with company strategy. For example, Savage told the story of SpeechWorks, a speech recognition technology company that AOL invested in. “What really got my interest up was the simplicity and focus and reality of their value proposition, both from a customer and an investor standpoint.”

In a nutshell, SpeechWorks was banking on two lines crossing -- the increasing sophistication of speech recognition algorithms and the declining cost of information processing power. They saw the opportunity to capitalize on a new technology that was becoming practical on commodity hardware. That was a strategy, however, not a value proposition.

“The value proposition to their customers,” explained Savage, “was as simple as this: Buy an NT or Linux box, put my software on it, and you can lose two people in your call center. That simple kind of thing gets your attention [as an investor] because it gets the attention of the buying agent.

Besides audience and market dynamics, there’s another key element of the value proposition -- timing -- as pointed out by Gopalan. Want proof? Remember the crazy days not long ago when dotcom companies had valuations in the billions without revenues or profits? An “old economy” company like DynCorp, even then one of the country’s most successful government contractors, couldn’t get the time of day. Today, it pays to be on the receiving end of defense, intelligence, and security contracts. “We're an employee-owned company,” explained Gopalan, “and our internal stock price has gone up about 86% in the last year or so. You get the idea that value propositions can be different at different points in time.

The dotcom days may have represented the low point in value sanity, but they offer great lessons. Backus used two. eBay, he said, offered a real value proposition both to customers and investors because it created a new marketplace where sellers could find buyers who were previously unreachable. The counter example could be found in the online pet space. Like many consumer plays, they were largely taking a low cost commodity product, dog food, and replacing the retail distribution costs with very high individual shipping costs. Ultimately not very valuable perhaps, but many people bought into it for a time.

That irony should not be overlooked. To a large degree, perceived value is real value, which factors into how you test your value proposition. According to Backus, “You probably know you're onto something if someone is willing to pay your asking price for a product. That tells you that you've got a good product.” A good product doesn't mean it's a good business, however. According to Backus, “What turns it into a good business is 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.”

Copyright 2002, Morino Institute. All rights reserved.



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