your value proposition
“Technology by itself never has a value proposition,”
according to Accenture’s Matthew Haley. What shows value is how
you turn the technology into a product that people are willing to
pay for. That means solutions that are faster, better, or cheaper
than what the competition has to offer. But make sure that you get
the equation right. As entrepreneurs learned at this Netpreneur
Coffee & DoughNets event held April 24, 2002, building a
faster mousetrap won’t get the world beating a path to your
Gopalan, VP, Information Technology and CIO, DynCorp
Haley, Corporate Strategy & Business Architecture
Savage, VP, AOL
Time Warner Venture Group
Backus, Managing Partner, Draper
Copyright 2002 Morino
Institute. All rights reserved. Edited for length and clarity.
Statements made at Netpreneur events and recorded here reflect
solely the views of the speakers and have not been reviewed or
researched for accuracy or truthfulness. These statements in no
way reflect the opinions or beliefs of the Morino Institute,
Netpreneur.org or any of their affiliates, agents, officers or
directors. The transcript is provided “as is” and your use is
at your own risk.
mary macpherson: welcome
morning and welcome to Coffee & DoughNets. I'm Mary MacPherson
of Morino Institute’s Netpreneur. On behalf of the team, thanks
program is about helping entrepreneurs honestly assess their value
proposition. We have a terrific panel, and we'll look forward to
your equally terrific questions. Before I introduce the panel, let
me acknowledge an anniversary. Yesterday, April 23, was the fifth
anniversary of Netpreneur.
originally launched as an initiative of the Potomac
KnowledgeWay, and I pulled this description from the press
release of 1997: "Netpreneur is a support network, virtual
and physical, that brings netpreneurs together to share
information, develop contacts, and help each other succeed.”
But, what is a
netpreneur? In 1997, it was defined as “a digital age
entrepreneur, someone who is building products or services for or
on the Internet.” Today, Netpreneur might better be described as
the network of and for entrepreneurs in this region, and
perhaps every entrepreneur is a netpreneur today.
The very first
Coffee & DoughNets was in February of 1997. It grew out of the
idea that we could take a discussion list we had started and maybe
get a few of the people together to hold an event in our
conference room. It very quickly outgrew the conference room and
ended up being held at the Sheraton Premier in Tysons Corner.
There were about 50 people in attendance, and we had no idea that
there were so many entrepreneurs in the region. We'd like to thank
those of you who were with us in the old days, those who are here
with us today, and those of you who will join us later via
streaming video or transcript. We appreciate your participation in
this incredible community.
I also want to
take a moment to thank our volunteers today who help us make these
events work -- Christina Fredette, a student at George Washington University, Fred Kelly of HiTek
and Tom Macon of The
Level Playing Field.
Thanks very much, and, of course, let me acknowledge the entire
Netpreneur team, who makes all of this all happen.
Now I'll turn
the podium over to John Backus, who will get us started.
john backus: between
idea and reality
Mary. I want to start with a quote that I've used in speeches
before. Actually, I've used it in just about every speech because
it's an easy one to remember. It's from T.S. Eliot’s poem The
Hollow Men, and it applies today to venture capitalists, to
entrepreneurs, and to value propositions. If I were giving another
talk, I'm sure it would apply to that as well.
going to suggest that Eliot's "Shadow" is like today's
value proposition, because having a good value proposition is the
difference between an idea and a reality, between trying to do
something and successfully accomplishing it.
flaw we see at Draper Atlantic when entrepreneurs come in is that
they often don't have a value proposition. We see it every day,
and it comes in many, many different forms. Sometimes they have a
cool idea, but it's not a big idea; or it's a neat feature, but
it's not a product; or it's something nice to have, but it's not
something anybody needs to have. If it's not something people
need, then, when times are tough, they make trade-offs. You
generally don't go there. Other times it's a good product idea,
but it's not a good business; or it may be a good business idea,
but it's not a profitable business idea. Those are all things we
see every day when people come in thinking that they've come up
with the best thing since sliced bread. It may have some terrific
attributes, but it's not necessarily something that is going to
end up being valuable to an investor or a potential customer.
What I'd like
to do today is explore the broad concepts of value propositions,
why your business had better have a good one, and how you should
understand and be able to articulate it if you're going to grow a
introduce the panel, I'd like to leave you with a thought about
value propositions. It is a sound bite, because I know that you're
going to take away just a couple of things from all the wonderful
knowledge everyone up here is going to give you. I will leave with
you a straw man, which is that to a potential customer, your
product or service had better be better, faster, or cheaper. Think
about those three things. I suggest that you don't have a value
proposition if you don't have at least one, and perhaps two of
those. Better. Faster. Cheaper.
` Even if you have one
or two of those characteristics, if they're not meaningful, it’s
probably not going to work. For example, suppose you have a faster
mousetrap. So what? If the mousetrap I have now catches 99 out of
a hundred mice because the spring works pretty darn quickly, it
doesn't really matter if your spring works faster. If you have a
cheaper mousetrap, who cares? They’re three for 99¢ at Safeway.
But if you have a better mousetrap, that may be what people are
looking for. It's not just that you have a value proposition; it's
that you have a value proposition that is relevant to your
customers and solves the problem.
With that, I'd
like to introduce our panel. I'll start to my immediate left with
tige savage: a
walk in the buyer’s shoes
name is Tige Savage with AOL
Time Warner Venture Group. Like John, we are investors in
young companies and are therefore focused on the same things that
he is. As investors from a big company, however, we have an
additional screen that John doesn't have, which is that a
potential investment has to be strategic to our organization in
To the extent
that we make investments in companies, we work very hard with them
to introduce them throughout our organization. It is not a small
organization; it has 80,000 people, and a bunch of brands around
the world. We work very hard with the companies to tailor their
value proposition to our various audiences, all of which are very
different. They're all clearly interrelated, and they need to make
sense, but the value proposition for a company coming to us as
investors is different from the one that they're going to explain
to a potential customer in one of our divisions, or a potential
channel partner, or a potential technology partner. We work hard
to help our companies articulate it. Hopefully, we can explore
those different audiences, today, because not speaking to them
clearly is certainly a downfall that we see in a number of both
potential and portfolio companies in which we invest. Putting
yourselves in the shoes of your audience goes a long way in taking
advantage of that one bite at the apple that you get when you're
sitting in front of them.
In terms of my
background, I've actually rather recently come to the Venture
Group. John was very kind in not making the opening remark that he
made to me earlier. He saw that AOL wrote off over $50 billion
this morning. Before that, I co-founded another local venture
capital fund called Riggs Capital Partners. We had a couple
hundred million dollars under management.
Next is Matt Haley with Accenture, arguably one of the largest IT
solutions providers in the world.
matthew haley: do
the dogs eat the dog food?
morning, Thank you, John. I'm here in part because at Accenture I
help large companies spin off small organizations, and I help
small companies tune their value propositions to sell to large
In my early
days, I actually got value propositions wrong. I founded a couple
of companies on the West Coast and learned that it is very easy to
construct a very bad value proposition. When we got the value
proposition right, our sales cycle went down and our price went
up. It's pretty easy to test whether you have a good value
proposition. Like they say: Did the dogs eat the dog food? Did
people actually buy faster, did they spend more, and were they
happier after they bought?
One of the
things I learned through that process was that as your product
line matures, you don't have a single value proposition. If you
are in the corporate world, there is no value proposition that
applies equally to IT, to marketing, to sales, and to the end
At Accenture, I
hear a lot of value propositions these days that go something
like, “You spend $100,000 on this software and we're going to
save your company $300 million.” That doesn't pass the sniff
test. It doesn't matter if you can do that kind of ROI; it's a bad
value proposition. Yes, faster, better, cheaper is important, but
it also has to be faster, better, cheaper for a buyer. I
think one of the things a lot of people get wrong is thinking that
companies buy things. Companies have people who buy things.
If you don't appeal to the individuals and the individual’s
needs, it doesn't matter that a $100,000 investment can save the
company $300 million -- you don't get the phone call returned, no
one gets to the third paragraph of your letter, it gets trashed
because it doesn't pass the sniff test. A lot of the thought
behind the value proposition isn't in trying to make it look like
you get infinite return for zero dollar; rather it is: "What
does my product do that helps this person be faster at their job,
better at their job, get better return for their company?” If
you don't have a value proposition for every individual that is
involved in the purchase, they won't buy your product. A lot of
what we will be talking about today is on how you tune it so that
Mr. Backus: Thanks, Matt. Next is Venkat Gopalan, who is with DynCorp, probably our
area's best kept secret among billion-dollar companies.
venkat gopalan: between
idea and reality
you, John. I'm glad to be here. Thanks to Netpreneur.
My role at
DynCorp is Corporate Vice President in charge of IT investments,
as well as the Chief Information Officer. I bring a slightly
different perspective from these gentlemen. DynCorp, as John said,
is one of the region’s best kept secrets. We don't brand
ourselves like an AOL or an Accenture; we are primarily in the
federal government space. We have about a billion dollars of
business on the information technology side and another billion
dollars in the outsourcing side. We have grown primarily by
acquisition over the last 55 years, so we have looked for value
propositions along the way in several different areas.
To us, value
proposition means a different thing depending on the scale and
depending on the time. As an illustration, a couple of years ago
there were a lot of high valuations on dotcom companies. Now we
find companies like DynCorp becoming of fairly significant value
to investors. We're an employee-owned company, and our internal
stock price has gone up about 86% in the last year or so. Value
propositions can be different at different points in time.
What we look
for in a value proposition is anything that can contribute to our
revenue, our growth, our return on investment capital, and our
profitability. As we talk to vendors, companies, or potential
partners that we might acquire, we are looking for all of those
A couple of
years ago we set up an internal venture fund called DynVenture,
which we use to invest in different things to create value for our
own company. We have gone through the mechanisms of working with
various companies, and primarily invested in some healthcare-type
operations, some transportation logistics, and so on. This has
given us an interesting look at how you build value from external
companies, add it to your own growth, and bring it out in
stockholder value, which is really what we're all about.
the panel: colloquy
Mr. Backus: Let me get us started by trying to draw on some examples. Tige, I'm
going to start with you. You've spent many years at Riggs and now
AOL looking at businesses. In that time you've probably seen more
than a thousand pitches by entrepreneurs. Tell me, what is the
worst value proposition you've ever seen?
Mr. Savage: That is not a fair question. There are a lot of really bad ones.
Mr. Backus: It's hard to pick, I know.
Mr. Savage: You know, there are far more bad ones than there are good ones. There
are some really bad ones. It's probably more valuable to
spend some time talking about some good ones.
It's a lot more fun to talk about the winners, and more
There was a
company that we invested in at Riggs Capital Partners, called SpeechWorks.
What really got my interest up in SpeechWorks was the simplicity
and focus and reality of their value proposition, both from a
customer standpoint and from an investor standpoint. We invested
in them years ago, and they are now a public company. This will be
instructive because it differentiates strategy from value
produces industrial-strength speech recognition software. Their
strategy was based on the following. They said that the number of
cycles necessary to recognize speech is going down. The algorithms
are getting better. There are only a handful of good algorithms
out there anyway, as proprietary technology and they had their
hands on some of it. At the same time, Moore's
Law is perpetually going on. They had charted this out years
before and said, "Listen, at some point these two lines are
going to cross. It's going to become inexpensive for commodity
hardware to be able to recognize voice." That was their
strategy, and they built the company around it.
From a value
proposition standpoint, they would go out to call centers. Their
customers were typically big companies with big call centers, such
as Amtrak, United Airlines, and Continental Airlines, that receive
lots and lots of calls and spend lots and lots of dollars in their
call centers. The value proposition to their customers was as
simple as this: “You buy a Windows NT box or Linux box -- a
piece of commodity hardware -- you put our software on it, and you
take two people out of your call center.” It was that simple.
That kind of
thing gets your attention as an investor because it gets the
attention of the buying agent. Call centers spend millions and
millions of dollars a year on expensive phone calls. They got it
right. It is a very customer-centric value proposition, which is
clearly important for a company to be successful. There is a big
differentiator between a customer's value proposition and that
from an investor standpoint. For an investor, a big piece of it
is: Will this make money? A very compelling value proposition from
the standpoint of a customer is: Is it cheaper, faster, better?
Cheaper is not a sustainable advantage, necessarily. Lower costs
are a sustainable advantage, but not a cheaper price. A cheaper
price just means it's less profitable. Less profitable is not
interesting from the standpoint of an investor. What SpeechWorks
had that was interesting was a compelling value proposition,
proprietary rights to one of the two pieces of core technology out
there, and a demonstrable ability to generate revenue and profits
That is what I
consider an example of a good value proposition. Some other time
we could have a bunch of yucks over the bad ones.
Mr. Backus: I'll see if Matt or Venkat wants to cough up an example of a bad value
proposition . . .
Mr. Haley: I'll talk about some of my bad ideas.
At Intrinsa, we found a way
to simulate software so that we could find defects without having
to have test cases. It seemed like a good thing. The value
proposition that I constructed -- I was the marketing founder --
was that we could go to engineering managers and tell them that
for $40,000 they could buy this software that would make sure they
had fewer defects in the software that they shipped. It seemed
like an obvious thing.
quantifiable, however, so we read all the books and came up with
all the numbers about how much defects cost, how much more they
cost the later you found them, etc., etc. What we found as we made
a few deals was that the sales cycle was exceedingly long because
we made the mistake of saying we had no competitors. We had no
competitors and we had a value proposition that promised infinity.
What we did
that eventually made this into a very profitable company was to go
back and retune the value proposition. We had a value proposition
for engineers: “You're going to be able to check in code that is
better than all of your peers' code, and you'll be able to
identify whether it's your problem or someone else's problem if
the build doesn't work.” We went to a value proposition for
build managers: “When you are doing the build at night, you will
know exactly which code caused the problem.” We went to
engineering managers with a different proposition. It costs $4,000
per seat for the engineer; it costs $50,000 a seat for the build
master. “Your builds will be cleaner, your bug percentage will
fall much faster as you ship the product.” Breaking it into
those things took our price from $40,000 per team of 10 to about
$130,000. It cut our sales cycle from about six months to about
At first we got
it wrong. It was too broad and looked like it was too good to be
true. Everybody knew it was an impossible problem. When we got it
focused on what they got out of it and broke it into the two kinds
of buyers, the sales cycle went down, the price went up, and our
customers were a heck of a lot happier.