One of my most remarkable realization in business in the year of 2013 is that when a deal unites these three pillars into one, it is more likely to be a good deal. Seems simple – but it took me time, efforts, observations, and other people’s money to learn it not the hard way but not with a cheap price.
As human’s mind wants easy answers, people often fail for the trap of one single key to open many doors. The reality from my experience often happens so that to open a door needs a solution with a combination of factors (and some case with even combination of solutions). Thus, the dogma I realize is people saying: “It’s a great market, let’s jump in and catch the trend” and “It’s a great product, everybody will need one” – and that I you see many clone businesses to fail and product-centric companies to disappear. The first idea in my mind is that a single competitive advantage is now no longer fashionable – it has to be a combination. The second idea is that if it is a combination then what will be included into that combination? This is where the world gets its beauty: as two people look at the same thing and see it differently, there are so many potential well-crafted combinations can solve a problem. The answer to most business questions will be “it depends” on how what stage the market is, how rivals are doing, what technology is on the ground, or where the government(s) is heading to. Thus, it has been an intriguing task to find/think out a framework that provides me a good enough angle to look at the business. A framework that has to be both simple enough and covers and separates all critical factors out to guide the thinking. Not quite sure when I have got the idea above of (1) market, (2) product, (3) management team – but to look back, the framework provides many straight answers for previously-unanswered and previously-the-answer-is-to-complex-to-be-trusted questions of the deals I did and the deals I observed.
Why these three? First, we need an existing market or need to create one to sell almost anything. Second, we need a good product(s) to capitalize the market. Third, we need a solid management team to make that happen. Looking into it from a different angle, I can almost answer any question on why a business fail by relating to one of the three factors above. For market, maybe the product is good but too advance that the market doesn’t exit just yet (timing) – such as social network sites before Facebook (Friends Reunited, Friendster, MySpace, etc). Or maybe the whole market just crashes because a crisis happen somewhere in the world (I have been in a business that when the financial crisis happened in last few years, the global commodities price of the goods we were created dropped 50% and created a severe pressure into the business with gross margin of only 15%). We simply can’t do business without a market as if we can’t sell the product and get back the cash, the business will soon on cash pressure and we have no cash left to pay anything (labors, supplies) that help making the products. Some businesses operate with a vision of waiting for the market to pick up (Vietnam e-commerce industry, Vietnam online-payment systems, etc) – but it is a tricky situation as you never know if the market pick-up first or the business runs out of cash first. My experience goes against this situation as most of the case I know, the business has a great management team and a great product but cannot pick-up as the market just doesn’t enable (case of e-commerce industry in not only Vietnam but also ASEAN-wide with problems of delivery and payment system). Sometimes the macro factor is so sophisticated that the change comes so slowly. Everyone in Vietnam knows e-commerce doesn’t take-off just yet because of payment system and delivery issues. However, to make delivery happens smoothly without the risk of losing the goods during shipping stage we will need at least these factors: (1) better infrastructure, especially in big cities with many alleys, (2) better arranging of housing addresses, (3) educational level of the population, and much more. All big tasks. For payment system, I have worked and have formal business conversations with at least 2 payment platforms as well as looked into the industry since 2010. What remains in my head is passing through financial regulatory framework and integrating into banking system are so difficult that 4 years have passed and the progress has been so marginal.
The next question is so how about e-commerce industry in Vietnam? Answer is pretty easy, as the market doesn’t enable, most businesses die out (including B2B, B2C, P2P, group-buying, etc) by running out of cash, the livings are not happy as the business doesn’t shoot up as they expected. Everyone waits to see when the market enable. When it does happen, the winner will take it all. Yet, a critical idea to bear in mind is it’s not that the waitings can get the result for certain. At the time the market enables, a foreign giant may come with a massive strike (Amazon, Rakuten, etc), or maybe the business has been sold right a night before with frustration and cash pressure. And finally, we can’t eliminate the business risk is always there as with the case eBay controlled China’s e-commerce market with roughly 85% market share after acquiring Each Net in 2004; only 2 years later, Alibaba claimed the battlefield in 2006 with 67% market share.
The lesson for me is that I will not engage into a-future-market, unless I really really feel the time for market is so near, so near that I can’t hardly move away from it. Else I won’t bored looking into it. It is much better to patiently wait and develop a scientific analysis of drivers that will enable the market comparing to jumping into it. And if I do engage into such a market; cost-control, cash-burn rate, market drivers, and a stop-loss point will be critical topic to think twice and triple check.
The second pillar is product. Business fails for a single simple yet powerful reason: run out of cash. The business runs out of cash because either it fails to create a good product (a product that noone wants to buy) or it fails to sell. It is critical to keep this idea in mind because it is a completely two different issues. We do not only need a good product but we also do need to sell it out and take the cash back (take the cash back is critical in B2B business). I have been into a business that we continuously strive to keep cash positive because we could not get cash positive from operating activities for a long period of time. Our product was an alternative to an existing product in the market. We were optimistic and the rival was worried. Yet the market’s status quo was so high that it took us so long to verify the product and find the right form to sell the product. On the sales side, we partnered with a wrong distributor that both couldn’t break into the market and couldn’t pay us cash. Lacking of cash is the most stress situation in business. That is where distressed investment and venture capital share the same characteristics: as the business continuously consume cash and temporarily cannot return cash positive from operating activities, the management has to be very action oriented in order to get the business turn cash positive before it runs out of cash.
On another angle, there are two sources of cash for a business: cash from operating and cash from financing. I think here is where a part of the start-up/business community in Vietnam has been quite wrong on a fundamental perspective. Going out and talking with many start-up entrepreneurs I hear so many “valuation” and so less “revenue”. Should the owner care more about revenue or valuation? For most of the time, the answer is revenue. Because when the business gets no revenue, cash from financing (equity and debt) won’t be available to bail it out forever. The business is a healthy one only when its revenue stream is strong and all of those revenue turns into cash. Finally, valuation is cyclical and is effected by many uncontrollable factors such as recent market-wide performance and industry perspective, meanwhile a severe drop in revenue will ensure a more than just a “severe drop” in valuation. Thus, the true work for entrepreneurs is to create the product and sell the goddamn thing (as noted, never forget collecting the money is critical and a separation business from just merely sign the contract and ship the product out, especially B2B).
Thirdly, we need a good management team to bridge the good product into a good market. Management team to me is the final piece of the deal. The reason is many heroes died out there because of they were born into the wrong period so I never bet into people factor alone (rather bet into the market if I have to). Management team’s task is simple: to realize the business. To realize the business through a specific management team, there are two questions to answer: (1) “can we trust the management team to let them do it?” and (2) “can they do it?” Answering these two questions have never been easy, especially an ambiguous, inefficient, ineffective such as Vietnam. Partnership risk (that leads to key-man risk) is substantial. And when it happens, it has been so painful to get over all of the troubles and consequences.
On the final notice, what is the most critical factor among these three? To me, market has been the most difficult and most important puzzle. Thinking about the market at a larger sense, we will see it is not only where the clients are, but also all of the macro factors affect into it. Probably as far as what Iran will do with its nuclear program. A war on Middle Earth potentially shifts cost structure dramatically as it affects natural gas and oil – and in turn, change buying behaviors of clients, both industrial and consumer market. Government directions with shifts in subsidies program may create cost advantage for one country and in turn cost disadvantage for another country. I have been in a business that rivals from China always have 7% cost advantage comparing to us because they’ve got government subsidies. A change in technology can kill an industry, like what we are observing electronic news companies eats up advertising from paper-based news company. When we get the market we can change the product as the business evolve, when we get the product and the market we can change the management team. It does happen but it is so rare that a management team build a product first and then create the whole market. However, but as it is rare doesn’t mean it won’t happen – as I just bought a T-shirt in Pratunam Market in Bangkok with the quote: “Never give up on your dreams, keep sleeping!”
5:30 PM – Jan 4th 2014, Ko Phi Phi, Thailand