Street Smarts

I’ve been asked a few times what I meant by the phrase “Street Smarts” that I mentioned in Action #3 in the note titled “Your next 5 months as CEO” so I am going to go into more detail below given its importance…

I’ll use a version of the DIKW Pyramid that I modified to illustrate.  I find that looking at the pyramid in this way bridges the gap between Information and Wisdom given the wide use of CRM and Machine Learning solutions available today (Note that I added 3 new categories to the Pyramid: ‘Background Knowledge’, ‘Prediction’ and ‘Intuition’).

Regarding the weather example in the graphic below: Machine learning can be used to ‘Predict’ the weather but this is not really ‘Wisdom’ (knowing the right thing to do) and we are also likely a few years away from a computer having ‘Intuition’ (something that one considers likely from instinctive feelings rather than conscious reasoning).  The key differentiator, and what I have referred to in the previous article as ‘Street Smarts’, is the ‘Background Knowledge’ that encompasses a general understanding of how the physical world works, how human motives and behaviors work and knowledge of common facts that an average professional working in this field possesses.  It’s the experience and knowledge of success, and potential difficulties and dangers of the vertical. This usually requires a lot of experience and it’s why your best employees almost always have great situational awareness.

Now, let’s relate the Pyramid to the case study outlined in the previous article.

Getting ‘Data’ on the housing market such as After Repair Values (ARV), tax and mortgage records is quite easy.  Overlaying where your company has been successful on to that data turns it into ‘Information’ and provides you with the ability to build Algorithms that you can easily program into your CRM and Marketing Automation systems as ‘Foreground Knowledge’.

As the new CEO you must grow the business and that requires you to choose new markets to push into.  Can you rely on ‘Foreground Knowlege’ analytics to predict those markets? Maybe, but you won’t know how to be successful in those new markets without a thorough understanding of the ‘Background Knowledge’. As a side note… This always reminds me of the following quote:

Everyone has a plan until they get punched in the mouth

– Mike Tyson

As a new CEO it is very important for you to separate the ‘Foreground Knowlege’ from the ‘Background Knowlege’ used to make decisions at every stage of the real sales process. 

In our case study, the ‘Foreground Knowlege’ was straight forward… If there was a low probability of recession in next 6 months, and a property’s ARV was between 150k and 500k, and the property had been owned for more than 10 years, and the owner was behind on their mortgage or tax payments then the property may be good to purchase, fix & flip. This would be very easy to code into a simple formula to program into the CRM. The data was also very easy to come by given all the history available on past transactions. As an example:

However, what criteria for decisions were the employess really making? When asked, they were considering items such as — If the property was in an area that they had worked in before, would the job require permits, would there be a lot of capital at risk, was the location within 50 miles of a disposition manager, would it be fixed and listed in early summer or spring (best times to sell), was the owner temperament pleasant, and was the property vacant — only then would they consider it a good purchase, fix & flip.

These items are a bit more difficult to assess from available market data, but required if you are to have any ‘Wisdom’ about the items required to grow the market or to succeed in a new market.

This example outlines only one of the many decision points that needed to be understood to determine if a new market was appropriate and how to setup that new market for success.

Warning: If you leave it entirely up to the data people in your company to guide decisions you will likely fail. Only you can get the company to truely understand the ‘Background Knowlege’ (Street Smarts) required for success by asking a lot of questions. Consider using the ‘Five Whys’ technique.

As you deconstruct each of the stage gates in the company’s real sales process you will hopefully gain the ‘Intuition’ required to know when the market is changing and how to react to those changes.

Good luck! —a bit of luck never hurts when you are a new CEO.

Your next 5 months as CEO…

You have now been the CEO for 30 days and you followed the process outlined in the article “Your First 30 Days As CEO” as much was possible. You understand your inherited business and you are not impressed.  But you realize you would probably say this about every business you go into repair—because someone else created the mess.  Guess what? It’s now your mess because you are the CEO.  You pause, then realize that every business you will repair will have both a different set of complex challenges yet the same 2 causes: Poor leadership that led to poor management (never forget… Leaders deal with management shortfalls…).

Most complex challenges however start with revenue – it’s been flat or going down…   Why?  Your first month of digging into the data should give you what you need to understand the causes.   It may be due to brand issues, lack of focus, lack of good market analytics, lack of rich customer prospect data for targeting or generally just not keeping technically up with the market… It may be due to being out done by competition or poor sales management, lack of product market fit, quality, customer satisfaction etc.  It may also be due to lack of investment, making the wrong strategic bets or lack of strategic planning.  Who knows—there are way too many issues to outline but I am confident in saying that the skill of (or lack of…) leadership had a big part to play…

There are 5 Actions below to help you stay strategic at this stage—none or all may be applicable to your situation, but my hope is that they help you take your strategy to the next level.   I’ll use a recent experience (repairing a real estate wholesale business) to provide some color on how I used each of these actions. 

Case Study Background

My team was brought into the referenced company by the co-founders.  The company had a well-known regional brand because it ran localize television commercials for 15 years and transacted in over 3 thousand properties.  However, the company was struggling to grow, and other competitors were coming into the market using the same model this company pioneered and taking away market share.  The company built their business with both wholesale and Fix & Flip transactions.  

  • Wholesaling real estate is when a company puts a distressed home under contract with the intent to “assign” that contract to another buyer. The wholesaler doesn’t plan on fixing up or selling the property and never takes ownership of the property (hence no debt is leveraged for property acquisitions). Instead, they market the home to potential buyers for a higher price than they have the property under contract for. 
  • In contrast, Fixing and Flipping real estate consists of buying a property that needs repair and fixing it up before reselling it for a profit.  The “fix & flip” scenario is profitable to investors because the average homebuyer lacks the time and funds for repairs and renovations, so they look for a property that is ready to move into. Also, most traditional mortgage lenders require the home to be habitable with no significant repairs. 

Every city has a set of real estate investors—just Google “buy home for cash” and you will find several in your area.  The industry refers to most of these companies as “bandits” because of the “bandit signs” that they use for marketing.  However, the company I am referring to here was past the ‘bandit’ stage regarding their maturity.

The real estate wholesale sub-vertical is fascinating because it is simple (real estate transactions) yet so complex given it’s a 2-sided marketplace with multiple stage gates on both sides.  The most interesting thing is that success-at-scale is nuanced and difficult to see.  The vertical is also unique in many ways:

  • Scale: The vertical contains everything from people purchasing a home every couple months (Husband and wife teams that watch too much FYI and HGTV and mom and pop construction companies looking to keep crews busy) to sophisticated franchises, hedge funds and REITs (examples: http://www.triconcapital.com/ , https://www.frontyardresidential.com/, https://rentprogress.com/). 
  • Ways to make money: Beyond the obvious strategies of wholesaling, Fix & Flip and Fix to Rent there are people making money in many unique ways given the financials involved and the number of transactions.  There are people making money teaching ‘how to invest in real estate’ seminars, running master-mind groups such as https://thecollectivegenius.com/, selling data to investors such as https://www.attomdata.com/, selling technology tools like vertical CRM solutions to bandits, making loans, offering title services—this list is long.
  • Debt: A pure wholesaler never takes ownership of a property hence they take on little to no debt; a company doing Fix & Flip transactions usually has to take on a small amount of debt to take possession of the property, afford the construction and pay the utilities/taxes while they own the property. However, a company doing Fix to Rent transactions usually has to take on a great deal of debt.
  • Breadth of Communication: To be good your organization must be able to communicate effectively at all ends of the spectrum… On the Disposition side (selling properties) the team must be able to communicate across a spectrum—from construction employees with 9th grade educations to MBA types at hedge funds.  On the Acquisition side (finding properties to put under contract to wholesale or purchase) the team is dealing with all types of hard personal issues (people going through recent divorces, dealing with uncurable diseases or the recent death of a family member) and mental states (many sellers are hoarders and are embarrassed by their state of affairs and the last thing they want is for many people to visit their homes).

Results of our first 30 days

So, we built the scorecard referenced in the “First 30 Days” article … If you were to look at the company as a ‘lifestyle business’ that would throw off enough cash to make the founders comfortable then more items in the scorecard would be yellow (At Market) but we were brought in to turn the organization into a GROWTH company and from this perspective it was A LOT redder than most… There were times when I personally wondered if a growth-oriented turnaround was even possible, but the one thing the company had going for it was that it was bringing in revenue and covering expenses. …and in the business of repairing organizations–revenue heals many wounds.  There were also some bright spots in one of the most important categories—people.

One of the most useful deep dives from the “First 30 Days” article was the “Sales: Do a deep dive on sales stages” exercise. When evaluating how the organization worked (and eventually comparing it to how it should work) we did a deep dive on the organization’s sales stages (none of which were in the outdated CRM—the current CRM was used to capture the opportunity notes, some call logs, contact info and if the opportunity was alive or dead).  Here is how the organization really worked: marketing programs were used to find sellers of properties that fit a profile (~70% of the ARV minus repairs), those sellers are nurtured through a sales process and based on the sellers circumstances (need to sell in the next ~30 days) a decision is made to purchase or assign the property.  Then a purchase contract (with an expiration date) is created with the seller.  This is how inventory is created and is referred to as the ‘Acquisition’ process.   Then the property either gets marketed to buyers list (wholesale) or fixed up and listed on the MLS (fix & flip)—this is referred to as the ‘Disposition’ process. If you have ever purchased or sold real estate, you know how complex the process is and all the unexpected fees that take a bite out of the transaction (every state has different laws and fees).  When we evaluated the stages we were amazed by how many hands touched each stage of an opportunity and the business logic used at each stage (most of which was in people heads versus algorithms in a system).  Here is a list of the real stages and what we eventually built into the new CRM:

Over the course of the first 30 days I personally filled at least 3 notebooks, but I only have time here to outline my summary notes.  Here is what I wrote down on day 30:

In today’s world where tech is inexpensive, and DATA IS EVERYTHING. When you see an organization that is not deep into harvesting and leveraging data (about its industry, its suppliers, its customers, it’s competition, and most important itself) you should worry. This is basic 101 for growth companies—if this is not part of the company’s DNA then it’s toast.   … and this company:

  • Was not using data to drive their marketing (targeting) strategy
  • Could not track marketing spend to results or doing any type of A/B testing
  • Was not using computer algorithms to make decisions
  • Could not track how and why people perform or didn’t perform
  • Could not track how long key process were taking within the company to find bottlenecks and issues
  • Did not have consistent approaches to on-boarding, off-boarding, compensating, or managing employees
  • Was not capitalizing on symbiotic revenue streams
  • Could not tell at any moment in time where the company was on its P&L or budget
  • …and most importantly did not really understand the variables of success.  They didn’t understand the variable that made the big companies in this space successful. …and at a micro level they didn’t understand the variables that made them successful with their suppliers and customers (if profit was the only variable of success) so those variables could be scaled and replicated. I’ll refer to this as street smarts.  Most execs kind of know what these variables are but only the successful execs can crisply articulate them and more importantly make them programmatic KPIs that drive systems and business logic.

They were also committing the #1 sin of good old management 101—consistent listening and communicating…

Revenue was flat because the co-founders basically mismanaged the opportunity.  Over the course of the last 15 years (time this company was in business) other entrepreneurs-built companies in the same vertical worth well over 1B.  So, step 1 here was stabilization and getting the company to Par (basic 101… rebuilding the company DNA), step 2 would be growth…

Actions: The Repair Begins

You will find that there is always going to be a great deal more to do than you can afford to do in order to turn the organization the right direction and light its fire.  You will need to pick your battles and prioritize the items with the maximum return but the least cost.  One challenge may be that one item requires another item, so you must choose wisely. Remember, Leaders deal with management shortfalls…

Action #1 – Establish a consistent protocol for transparent/honest communication with employees

Your employees have the best ideas… they know how things should be run… or at least they know how things should not be run… there needs to be a consistent forum where people can state their mind without fear of retribution.  You as the new CEO need to own and moderate this forum.  Repeat back what you heard at the last discussion, talk about how the feedback has shaped your thinking or actions or why the company is not going to proceed down a certain path.   In the company we are using as a case study here we were small enough where we could do mandatory Friday lunches and bring in other offices via zoom meetings.   We went around the group (much like a SCRUM) and asked people to speak about good/bad issues from the current week, plans for next week and blockers that may inhibit effectiveness.  Your job as the CEO is to make sure that the team is being honest and open and talking about hard issues.   You must participate in this forum as well and speak to what was good/bad for you this week and what your plans are for next week and what the blockers may be that might inhibit your effectiveness. Obviously with a bigger team you must be creative in your approach however the need is the same—be consistent, listen, use the data or be honest why you are taking a different path, communicate plans and positive/negative company performance. BE HONEST… BE TRANSPARENT…

People want to work for a stable company where they are treated fairly, where they have a future, where they are heard and where their teammates and work are intellectually stimulating.   They also want to know that they are fairly compensated for their hard work and the more they perform the more they make.  It’s your job to create this environment if you want the company to scale.

Action #2 — Track, measure and automate success

If a growth company is to scale and leverage technology and automation at all levels it must invest wisely in the platforms that run the company such as the financial system, the CRM, the Call Telephony Integration (CTI) system, the marketing automation, document management, analytics etc. and the systems need to be tightly coupled yet flexible enough to quickly change with ever changing business processes.

With our reference company the current CTI, CRM and document management/electronic signing systems had to go, and much more sophisticated platforms needed to be brought in.  We chose Salesforce.com, RingCentral & HelloSign and built out the object models and business logic to map the company’s real stage gates.  This was not a cheap or easy undertaking, but it was a necessary step to get the fundamentals of the company to work at scale.  Widgets and reports were created to show everyone the performance of the company at the macro level (how’s the month looking, the quarter, the year—based on the pipeline and probabilities) and the micro level (how an individual was performing & how they compare to their peers (# deals, margins, type of deals etc.)).  Notifications were created for handoffs between Acquisition, Disposition and finance teammates and partners.  Reports were automated for opportunities with issues or business processes taking too long to complete. Automation was created if checkboxes were checked (example: automatic customer or supplier emails at certain stages with pertinent status updates).

Your company’s technology platforms must work for the team versus being a tool for management and they must be mobile.  API’s need to be programmed in to prepopulate data (in real estate as an example, API data from companies like ATTOM), the systems should algorithmically help with the decisions and no communication, action, decision, event, spending, result should go untracked/measured from the creation of inventory to the sales of inventory to the support of customers and performance of partners.  There is a reason that Salesforce.com purchased and tightly coupled Pardot (marketing automation), Datorama (marketing intelligence), Tableau (Analytics) and made an app exchange that allows third parties like RingCentral and HelloSign to integrate seamlessly into the platform—it’s because customers, partners and suppliers expect this from all companies.

With tightly coupled systems you will be able to determine:

  • What is the performance of all levels of marketing spend (cost per lead)
  • What percent of leads turn into discussions
  • How many times the sales team needs to reach out to a lead
  • What times and mediums (SMS, call, email etc.) work or don’t work to contact a prospect
  • How fast does a lead needs to be contacted
  • What percent of discussions turn into appointments, what causes them to and not-to tun into appointments
  • What percent of appointments turn into contracts, what causes them to and not-to turn into contracts
  • What percent of contracts turn into revenue, what causes them to and not-to turn into revenue
  • Of the leads that turned into revenue, what was the lead origination? How much was spent on marketing and overhead to acquire the opportunities revenue?

This list can go on forever, but I think you get the point…

Action #3 – You should now clearly understand what makes the company successful and why (street smarts). It’s now time to make it programmatic and then do more of it.

When we asked the employees of the referenced company “when we were successful, why were we successful?”, we heard -“we are on TV”, “we have the best SEO and are the first to show up on a Google search”, “people know our jingle”, “we have the best BBB ratings and Google/Facebook ratings”… but they really didn’t know because they didn’t ask the people they purchase houses from or the people they sold houses to. They didn’t measure the attribution of a lead—did the customer see the TV ad… then do a Google search… then read a direct mail flier… or was there an article they were reading that made them fill out a form on the website?  The reality was that they were successful on the Acquisition side because of the companies honest and ethical track record; and they were successful on the Disposition side because Assignment buyers thought there was enough margin left in the property for a construction company to make a profit if they performed the Fix & Flip.

When we asked the employees of the company “what motivated sellers to sell to us?”, we heard –Divorce, Disease, Death and Financial Distress…. This always came up in the initial call as the seller usually discloses it on their own—now with a good CRM you can record this and measure if its accurate and how much of it is driving sales—or is something else we don’t understand driving sales this month?   However, the team was correct–these sellers are motivated to sell in the next 30 days because of a life changing event and they don’t want to deal with a realtor because they don’t want people visiting the house and they don’t want this to take time and they don’t want to spend money fixing the issues with the property.   We also found out how much empathy for the sellers situation was important–afterall this was likly one of the sellers biggest financial transactions and it was coinsiding with a life changing event… and that would be overwealming for anyone.

Once we understood these very basic success variables:

  • We started talking to data providers like Experian, ATTOM, Quantarium etc. for target marketing, we tuned sales scripts, we reflected how we solve the pain in content for SEO/PPC (adwords) and began to tune messaging. 
  • We built algorithms into the CRM to help the Inside Sales Rep (ISR) determine a go – no-go decision for an appointment.  This all started with the After-Repair Value (ARV) minus a high-level repair estimate minus some fixed costs to see if an Assignment is plausible; Then it looks at the mortgage to see if the seller would get anything out of a transaction.  Then it factored in what the seller was expecting out of the transaction.   This is all done in just a few minutes and automated using simple algorithms programmed into the CRM.  
  • We built out other algorithms to specify the deal type and range the Home Visit Specialist (HVS) could offer the seller and enabled the Seller to electronically sign the sales contract on a tablet that the HVS brings with them to the meeting.  Those docs then get automatically stored in the CRM along with the pictures of the property. 

Then we went a bit deeper and asked the employees, what makes a great property to purchase versus assign, they said the following:

  • Probability of recession in next 6 months under 30% = 0 (good); else = 1 (bad) (use this link)
  • Correct ARV (predictability of pricing) – commodity area we know w/more than 3 examples = 0 (good); non-commodity area = 1 (bad)
  • Accuracy of Rehab — commodity house w/non-permit rehab = 0 (good); permit rehab = 1 (bad)
  • Amount of all up-capital risk (Cost of managing bills, loans, paperwork, insurance, maintenance over contract length) is <30k = 0 (good); else = 1 (bad)
  • Location within 50 miles of a dispositions manager = 0 (good); else = 1 (bad)
  • Time or year for list/exit early summer spring = 0; late summer & winter = 1 (bad)
  • Owner temperament pleasant = 0 (good); else = 1 (bad)
  • Property vacant yes = 0 (good); else = 1 (bad)

It’s easy to turn such a list into an algorithm in a CRM with a weighted risk score that tells an HVS to move forward with a purchase or not.

Once the deal type was locked (Assignment or Fix & Flip) and the sales contract was signed then Dispositions would be notified by the CRM and either marketing or construction began—either way different processes in the CRM needed kicked off and different costs needed to be tracked in the financial systems.

A good CRM with tightly coupled tools and well thought out business processes is worth its weight in gold—but it is also key to survival in todays business world and is the price of entry (at Par).  However, for true growth, algorithms need to be built that work for your company based on the street smarts that made you successful up to this point.

“If you can’t explain it to a six year old, you don’t understand it yourself.” –Einstein

Action #4 – You should also now clearly understand the characteristics of a company in your vertical at the next stage of success.  It’s time you begin acting like one of those companies!

Who are the companies at the next stage of success?  It’s hard to even call them competitors because it’s likely you don’t see them because you don’t act like them.  However, the exercise of the “First 30 Days” should have made you aware of who the next stage companies are and what characteristics they possess.   For this reference company the biggest characteristic that identified these companies was the number of transactions per month (properties purchase/sold). 

However, these stage III companies approached the market differently and these nuanced characteristics would be the most important items to understand if we were to move the company from point A to point B.

If you talk to the companies at stage II you will find that they all believe that the most important thing to get right is to buy the property at the right price and if this happens there will always be a buyer (If we get the Supply right, then the Demand will follow). This may be the truth; however, it is a very unsophisticated way of looking at business and blinds you to the next stage of success. Companies at stage III understand the Demand and then work to find the Supply.  It’s a nuance but a very important nuance that would drive big change in how a successful company in this vertical operates. This required the company to track where buyers transact, what kind of properties they were interested in, what range of pricing, how much construction they were willing to do, how much money they were willing to bring to the closing table, how often they purchased properties etc.…. It also required the company to hire a sales team to constantly speak to those buyers.  It also required the company to market to find new buyers that may be interested in future transactions.  All programmatically done with marketing automation, a tightly coupled high end CRM and a new buyers marketplace portal built on Heroku (yes, another Salesforce.com platform).

How hard will it be for you to get your new company to operate like one of the sophisticated players in your vertical?  What KPI’s do they care about and how do those differ from the KPI’s your team currently monitors?  Figuring this out, acting on it and having it pivot the company’s business practices may be one of the keys to your success.

Action #5 – You should also now understand your customers inhibitors of purchasing—It’s now time to remove those barriers and if possible, create symbiotic revenue streams and gain competitive intelligence as part of your business model

With the reference company we found that the 2 biggest inhibiters to a wholesale buyer purchasing a property from the assignment inventory was:

  1. How much room was in the deal for the buyer to make money—hence we were transparent with our math (sales price + repairs = ARV)
  2. How much money the buyer had to bring to the closing table—hence we started a lending business (symbiotic revenue stream). 

This new lending business would also provide a great of intel into how the market is working in general given the buyers were also getting loans to purchase other competitor’s properties.

What are your company’s biggest inhibitors to purchasing your products/services? Could you be in the business of solving for those bottlenecks? If you were in that business, how much competitive intel would that provide you on your market?

(Bonus) Action #6 – Remove the bad apples, stop doing things you shouldn’t be doing, double down on the things that are beginning to work

You may be able to do this earlier, and it may be a necessary action to contain costs in order to reinvest in change.  Just be consistent in your communication with the organization and be transparent with what you are changing and why.  By removing bad apples, I mean people.  Once you start performing the bad apples likely weed themselves out versus need to be told to go…  Especially if you are leveraging SCRUM to manage your new business.  

In the referenced company—many of the low performers left on their own and new people with a growth-oriented outlook joined the company and those new high performers naturally made everyone else want to perform at their very best.   I don’t know if the referenced company will ever be a growth company, but we did provide the co-founders a foundation for them to build a growth-oriented company.   My fear for them is that poor leadership led them to this place and if they don’t get this piece right, they won’t exist in a couple years.   

In Summary

Every company is different and has its own challenges.  You would not be there if it wasn’t for leadership and management challenges that probably caused many other issues limiting stability and scalability. Your mission is to quickly fix the leadership void and then start managing the change required to gain stability and scale. Never forget, leaders deal with management shortfalls. Good luck!

Spinning out

Over the past couple of years, I’ve been called in by executives, bankers, and investors to determine if an entity (company, university or government) should spin out some technology into a new business. Some have already made up their minds and others are in the fact-finding stage.  This is the process I use to suss it all out…

The first thing you must do is figure out if the entity has given this spinout a lot of thought or is this just an idea? To find out you must get their answers to 11 questions. You are trying to figure out the level of depth in their thought process—is it cursory or at a grand level of depth?

  1. The Problem: What is the business problem that a NewCo would use this IP to solve?
  2. The Solution: How does the IP solve the problem?
  3. The Value: How much impact would the solution have on a company’s cost savings or increased productivity or increased security etc.
  4. The Market Size: How big is the market for the solution?
  5. The Timing: Why is now a good time for this type of solution?
  6. The Proof: What proof/milestones have been achieved that prove there is a market for the solution?  
  7. The Plan: What does the entity see as NewCo’s strategy for taking the solution to market?
  8. The Competition: Who else is out there selling a similar solution? How well are they doing? What does this IP have that others are missing?
  9. The Obstacles: What obstacles would be in the way of NewCo’s success?
  10. The Team: What team members would go with the IP (if any at all)?
  11. The Financial Model: How much cost would it take to build a NewCo and how much value could it return over what time frame?

If the entity is experienced and has sold or licensed IP in the past, or has funded companies as subsidiaries or new entities previously, they likely have thought through these 11 items in quite a bit of detail and understand the value of their asset and who in the market is the likely ‘acquirers of’ / ’investors in’ such an asset. If not, then there is market-analysis work to do first to determine if this exercise is an event worth the energy. 

The second thing you must do is understand ‘why’–the Motivation.  Why would the entity spinout IP versus capitalizing on its value?  It’s easy to understand why a university or government would spin tech out (they can’t capitalize on it easily) but for a corporation to do it, there must be a good reason. 

  • Is it easier and cheaper for R&D to be done outside the company?
  • Is it a deviation from corporate priorities (example: we do R&D for the government)?
  • It’s used internally with great value, but the tech would have even more value to the entity if thousands of other companies were using it as well.

It’s important to understand the underlying motivations so you can begin to understand the dynamics of the situation.

The third item to figure out is if the entity has an expectation of value?  Some entities have divested of a lot of IP in the past and for others, this may be the first time.  You must figure out if the entity’s expectations are reasonable.

Last, does the entity have a business model in mind? Do they just want to sell the IP to a buyer, or do they want to fund a startup? …or is the answer somewhere in between (license the technology to NewCo for a % of sales as one example). You must figure out if they want a short or long-term return, and do they understand the ramifications (additional investment may be required; legal fees etc.).

Market Analysis

Let’s go a little deeper into item 1 above as it will begin to shape the entire conversation with the entity.

What category does this IP fit in, regarding the tech ecosystem? A great place to start is Crunchbase.

As an example, let’s say that the IP in question helps the entity’s corporate employees communicate better on tasks, in and between, corporate silos.  You dig into CrunchBase and find 475 companies competing in the ‘Task Management’ category and another 2,400 competing in the ‘Collaboration’ category and 108 companies with both. Obviously, there are many solutions in each of these sub-categories solving different aspects of collaboration for different audiences and there is a lot of overlap, so the sub-categories are difficult to navigate but you can ascertain there is a great deal of competition in each of the collaboration submarkets.

Are there market leaders leveraging similar IP? One easy way to tell is if Gartner, Forrester, IDC or another large trusted enterprise research organizations has created a market guide.

If we take our task management example a bit further, we might see a few big horizontal areas where the tech is applicable (possibly Project Management, CRM and IT Service Management) and who some of the dominant players in the market are today. Gartner does a nice job of showing this in something they call a magic quadrant. 

You can see that the market (at least in the past) really splits between two areas:

  • Externally facing: Customer Relationship Management (CRM) – Salesforce.com is the leader
  • Internally facing: IT Services Management (ITSM), PM, HR, Product Development – ServiceNow, Planview, and Atlassian are market leaders

You can also build some market reference points on these leaders.  For example, ServiceNow finished 2018 with about $2.8 billion in annual revenue (and Q2 revenue was up 45%) and Salesforce increased its market share in 2017 by more percentage points than the rest of the top twenty CRM vendors combined.

If enterprise solutions are being sold with similar IP you can generally get access to market size data that the Enterprise Research Analysts have published—it might cost you a Gartner subscription but there is great value in the research.

Who are the new market challengers that are doing something with similar IP? Every space is being disintermediated in some way, shape or form so you need to understand how the market where your IP fits is changing and how much is being invested in the changing landscape.

With our example, you will see that companies like Asana and Trello are having a major impact on the future of the space.  You can also see that a great deal of funding is going into these new platforms from well-known venture capital companies. You can find all this data at no-cost in Crunchbase.

Looking at both market leaders and challengers will help you start to understand the ‘problems’ being solved, the ‘solutions’ being used/sold, the ‘value’ being created, and the ‘pricing’ being used by similar IP in the market.

Are there changes on the horizon for the future of the markets where this IP fits? Once you dig into the enterprise plays and compare the market-challengers you will soon see if any patterns emerge.   This could start to provide you a view into ‘timing’ and market adoption and will allow you to determine if your IP is too old or is it perfectly timed for where the market is going to be in a few years.  This will also help you to start formulating some of the obstacles with the IP.

If we continue with our same task management example, you will see that the market is moving toward platforms that enable many solutions that are tightly integrated.  The market has coined the term Platform-as-a-Serve (PaaS) for the shift.  Gartner even has a magic quadrant referencing the platform enablers for the shift.

And if you dig into the market challengers to this platform shift you will additionally find all the Function-as-a-Service (FaaS) or Serverless discussions.

Timing. As a new company, if you are late to the market, you will likely lose. Only fast followers that differentiate primarily based on a superior cost structure due to scale can win as a follower.  If you follow Pete Flint’s NfX model for startup timing “it’s all about who enters the market closest to the critical mass point. It’s at this point when technology, economic and cultural forces can combine to enable explosive growth”. 

With our task management example, given the onset of FaaS and current enterprise companies already fully entrenched in PaaS the IP would have to already be written with FaaS in mind to have a chance at competing with the momentum of the challengers or the entrenchment of the enterprise PaaS solution….or the idea would have to be so unique that a rewrite of the code would be worth the effort/cost.

Proof.  You must be able to prove there is value for this IP in the market and to the best extent possible minimize risks. Simple questions that need to be answered are as follows:

  • Who is using the IP today? Is there or can there be a detailed case study written? Can the value be quantified with the current use case? Have others seen, requested or been given access to the IP and what is their feedback?
  • How much has been invested to build the current IP (in dollars and time)? How big was the team? What are the skills of each of the people on the team? When was the IP last updated? How well is the IP documented? Are there patents from the company or others that infringe on the IP (you must do a patent review prior to next steps—do a preliminary review here).
  • Is the current IP part of a Continuous Delivery process and is it well documented?
  • What languages were used to build the IP? What open-source libraries? What are the licenses of each of those libraries? Has an inventory of the code been documented by a group such as Black Duck?  Are there any proprietary libraries being leveraged that lock the IP into a certain platform (such as AWS)?

With our task management example, the code is being used by the entity so there is a great deal of information that can be gathered and used. The code also would come with its first customer (the entity).  If the entity isn’t willing to continue to be the first customer then this may be a warning sign and should be discussed.

Plan. What strategies are potentially applicable to build a company around the IP?  An easy way to start digging into opportunities for different strategies is to leverage the “Blue Ocean Strategy” and to dig into different uncontested markets for the IP.  Are there areas in the market that are uncontested, and the IP is a perfect fit?

You also have to know how the IP lines up with a Lean Startup  Minimum Viable Product (MVP) for the uncontested market and how long it will be until the IP is read to put in front of customers to test assumptions.  This is critical for early decision making.

With our previous example, it’s difficult to find uncontested space given how big the entrenched players are and how much energy (VC $) is going into the hundreds of challengers. There may be a play for AI, IoT or Consumers—and then again, there may be an uncontested space that’s not well understood still available.

Team. How big was the team that built the IP? What are the skills of each of the people on the team? Where are they located? How are they compensated? What are they doing now? Are any of the people that built the IP willing to move with the IP?

Financial Model.  Given most IP today is delivered via the Cloud it would be good to have some idea of the cost of building such a company.  The spreadsheet outlined in this post by Gary Gaspar (and in the comments) is good enough to start getting a handle on what it would likely cost to get such a company testing the uncontested spaces you found previously.

At the end of the day, the more you know about the market for the IP and the opportunities the better decision you will make about what to do with it in the market.

However, never forget the golden rule: Building a company is NEVER about the idea… and it’s not about the plan… It’s ALL about the team and how the plan is Executed!

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