Maximising the return for your startup

One of the most interesting problems in a technology startup can be figuring out where to enter the value chain. This real example shows the thinking needed to maximise the return for your company.

An electronics company had a revolutionary component for mobile networks. Thinking traditionally - they would be sold to form part of an assembly made by another company that would be sold to a systems integrator who would deliver the network for a mobile operator.

The overall savings in a network rollout by using this product would be in the order of 100’s of millions of dollars – by allowing the removal or down-speccing of other systems.

Okay you know enough to analyse the potential deals – but put your sales and psychology heads on please.

Where should they try to sell this product and for how much?

Sell to the company making the current components.

The individidual component that would be replaced costs around $100 each.

First, are the manufacturers of this component going to want to change to this new device? They might but they will have investments in existing devices, documentation etc..

If they do go for it, are they going to suddenly be able to charge $1000 each? I doubt it personally. They might try for a small premium but the massive savings this component allows will be lost to the startup. It’s a similar argument for the company making the assemblies. They might be able to charge a small premium but again, the massive savings are being left on the desk of the mobile operators.

Sell to the system integrators

Okay so these guys are in constant war over prices and winning new contracts. They try to shave the costs down as low as possible to win the next deal. So if they buy the components, they will use the overall system savings to reduce their contract prices. So they might win more work but they don’t make better margins because of the product. Again, the money is left on the desk of the mobile operators.

There’s a pattern here right? The mobile operators are the right place to start in the value chain. If you can’t initially work with them then the next step is the systems integrators etc..

Look for an early strategic purchase of the startup

When I see a technology that provides a knockout blow, I try to look at the tier one companies (the usual suspects) for an obvious buyer – someone who might want to really hurt the competition. However, it is also worth looking at the tier two companies to see if there is a company that is desperate to make the step up. Would an exclusive deal enable them to make that leap? If so, are they capable of paying a premium for the company either now or early on in it’s life?

Copyright Richard A D Jones 2005