Home >  Business

Thursday, October 31, 2002

By Steve N. Czetli

Technology companies are notorious for pouring disproportionate resources into research and development while skimping on the business side, particularly sales and marketing.

And they always pay a price, including lost revenues, failure to attract customers and misperceptions about the product. In a workshop called "What's Holding Back Your Sales? The Quest to Eliminate Revenue Inhibitors," veteran technology marketer and Aceda CEO Suzy Teele identified how to avoid some of the most common marketing and sales errors made by technology companies:

Selling everything to everybody. Failure to focus sales and marketing efforts on the most promising market segment can result in spreading your resources so thinly that they aren't effective anywhere.

Selling something that's hard to understand. The inability to clearly articulate the value of your product is a common mistake.

Not building a whole product. Incomplete products are frequently rushed to market without the full complement of ancillary items needed to succeed in the marketplace.

Not matching your sales strategy and processes to your sales environment. There are a variety of sales channels and approaches available for products -- telephone sales, field sales, catalog, online, retail store and so on. For some products, multiple channels make sense; for others, only a few do.

Not using the right business partner strategy. Strategic business partners, whether they are distributors, users or resellers of your product, can give your business a powerful boost if they are properly selected.

Being too optimistic with sales opportunities. Entrepreneurs' enthusiasm for their own products can distort their perception of how the rest of the world sees them.

Not recognizing and filling team gaps. The work force in most early-stage technology companies includes a preponderance of technologists, but a successful business requires capable, experienced professionals in all areas.

Not leveraging your hidden assets. "Hidden assets" include your current customer base, your good will, your vendor relationships, customer experience and so on.

Exit strategies

During the years spent building a business, exiting it well may seem remote and unimportant, but successfully executing a departure requires years of planning and combined expertise in business, accounting and law. Suzanne Caplan, entrepreneur, author and business strategy advisor with Crossroads Advisors; attorney Alan Cech and CPA David Wilke offered their advice on successful exist strategies last week at a Duquesne University Small Business Development Center workshop.

Among Caplan's tips: Have a business evaluation; make improvements to the income statement and balance sheet; sell excess assets; cut back on lifestyle payments; and make equipment and environmental improvements, "Just as if you were dressing up a house for sale with a new coat of paint."

Mechanisms for exiting a business were identified as: IPO; succession; sale to an outsider; merger with another company; insider sale; or sale of assets.

Cech said a frequent failing of owners on their way out is to not recognize and protect all their assets. Commonly overlooked assets with value can include: company trade name and/or logo; telephone numbers and Web sites; key employees; and trade secrets.

In addition to copyright and name registration, steps that companies should take to protect assets might include: Limiting access to computer programs and passwords for sensitive items; monitoring e-mail; controlling photocopiers; stamping confidential materials; securing employee agreements; conducting exit interviews; and inserting "dummy entries" on customer lists to track unauthorized use.

Wilke said that when it comes to putting a value on your company, there are three main methods:

Asset valuation: The intrinsic value in a liquidation sale.

Income valuation: This by far is the most common method and is used for most going concerns. It involves selling for a multiple of past earnings.

Market valuation: "What comparable businesses have sold for, which is not unlike the approach used for valuing houses," said Wilke.

Wilke also identified five myths about valuing a company:

Businesses in my industry always sell for twice annual revenue. "There are no absolutes when it comes to selling a business."

Valuations should be done only when you're ready to sell, or it's required by a lender. "Nonsense. Every owner should have a valuation done months if not a few years before selling to get a handle on what can be done to improve the value of the company."

My competitor sold his for three times revenue and mine is worth twice as much. "The worth of a business depends on three factors," said Wilke. "How much cash it generates today, the expected growth in cash/revenue in the future and the rate of return required by prospective buyers."

The business worth depends on what the valuation is used for. "The value of a business is its fair market value, and is what a willing buyer would pay to a willing seller."

Your business loses money so it's not worth that much. "This is where the seller has to document those 'discretionary' expenses for the buyer."

One thing all presenters agreed on: Sellers always must be ready to walk away from any deal.

Dilutive financings

One of the reasons venture capitalists are holding onto their cash so tightly these days is recent experience with dilutive financings -- or "cram downs" as they're often called. Cram downs work like this. For investor-backed technology companies that didn't go under in the dot.com bust, the alternative is to go back to investors for new capital. The problem is, the same companies today are valued much lower, so new investors get more stock and control for less money. That devalues the stock of earlier investors. And yet, without the new money, the company could tank and the stock held by earlier investors would be worth nothing. This is not an enviable position to be in.

No new solutions were offered for this dilemma at a role-playing demonstration of how dilutive financings work at the October MIT Enterprise Forum, but the dilemmas and conflicts such actions create was made crystal clear. In confronting a cram down, early investors have to weigh losses on their investment offered by a new investor against how they might fare in court-supervised liquidation or reorganization. Directors who also are early investors face conflicts of interest regarding their investment vs. the company's survival. The CEO, played by Larry Weidman of TimeSys, characterized his conflict this way: "This presents us with a terrible situation. We have an allegiance to those early stage investors and creditors. Plus, we want to know what role there is for the management team."

And that, said David Jaffe, a panelist and business lawyer specializing in venture capital and restructuring transactions, is why venture funding sources are approaching new companies these days with renewed wariness.

Former Pittsburgh Press business editor Steve N. Czetli edits and publishes TechyVent/Pittsburgh, a free, regional e-mail newsletter that recommends and provides detailed information on the region's most useful business events. For more information on these and other events go to newsletter.techyvent.com