Interview with Kenneth Purfey, CFO, Identification Solutions
Situation: At the January Consumer Electronics Show, it was evident that a hot market for 2011 will be low cost enabling devices to monitor patient medical conditions via smartphone. These devices can improve early detection of disease and lower medical costs. However, the bureaucratic inertia of major medical providers can inhibit the adoption of disruptive technologies. What can you do to accelerate consumer acceptance of a new device?
Let’s take a particular device as an example – an inexpensive ultrasound device that can both provide the results of a breast scan for cancer and transmit the results to your physician.
A device like this can be emotional for some women, and they may be reluctant to use a product not recommended by their doctor. It is therefore important to gain physician acceptance of the device. You can achieve this by:
Publishing medical studies demonstrating the efficacy of the device.
Building and leveraging relationships with medical societies and groups through while papers, and presentations at meetings by champions for the device.
Participating in high profile events such as American Cancer Society events or the Susan G. Komen Race for the Cure.
Consumer awareness of the device can be built through:
Targeted advertisements in women’s magazines.
Gaining the support of high profile women spokespersons who have experienced and recovered from breast cancer. This can generate radio and television talk show appearances.
Infomercials via television and the Internet.
Generating discussion about the device on disease-specific web sites to generate viral marketing.
Do not be afraid of researching non-traditional activities. Recently, it was discovered that there is significant potential for a device like this in portions of the Muslim world, where women won’t see a male doctor, and unfortunately few female doctors are available. This results in breast cancer death rates three times higher than those seen in the West.
Situation: The Company wants to enter a new market, but does not know much about it. Jim Collins advises understanding the brutal facts of any business as an essential part of strategy. How do you research the brutal facts of a business or market?
Advice from the CEOs:
Determine the key players in the market, and closely observe them – their mistakes and successes. Identify and interview clients and look for gaps in products and services offered. Use this research to develop a differential advantage for your product/service.
Use allied resources. For a general contractor this includes real estate professionals and other allied professionals who know the marketplace and the performance/reputation of other contractors.
Business consulting firms conduct surveys of markets. Look for and purchase published surveys. If you participate in their surveys you can get the results at a reduced cost.
Trade magazines and business journals like the San Jose/Silicon Valley Business Journal publishes surveys of the “Top 25” local businesses by industry. These help to assess local competition and gather information about revenues, principals, etc.
Leverage industry associations. Attend conventions and learn the lay of the land from the attending sales people.
Leverage Internet resources: Hoovers.com, Dunn & Bradstreet, HarrisInfo.com, and IndustryBuildingBlocks.com.
Have your best sales reps talk to customers in the new market about their needs and desires, and their current suppliers. Ask them to gather information and present to marketing and sales competitive reviews of the market based on what they learn.
Situation: The medical device industry faces uncertainty due to potential changes in reimbursement, increased regulation accompanying health care reform, longer FDA approval timelines and the economy. How does this impact strategy for an early stage medical device company?
First and foremost it puts a premium on focus. We compete in a market dominated by large incumbents. When introducing new products in the past we would have blanketed the market to maximize early market share. Now we are being much more selective in terms of where we compete and putting more effort into targeted geographies.
This focus is accompanied by more caution and control of spending. We will only hire a new sales rep, for example, if we are assured that there is a significant customer base in the market that rep will serve.
Similarly, we are being much more cautious in our capital equipment decisions, and if an employee leaves we do not automatically replace that individual.
In terms of price planning, where in the past we would have counted on annual price increases, we now plan for the potential of prices decreasing over time to reflect new pressure on reimbursement and cost containment. As another example, in 2012 there will be a new tax on medical device companies. We assume that this will reduce our margins where in the past we might have passed it on to the buyer. Reduced margins will also impact our new product investment strategy.
The big change in long-range planning is that we are focused on slow, sustainable growth – maintaining both gross and net margins and profitability. This is a major change from five years ago when our focus was on maximizing rapid market penetration for new products. We want to be self-sufficient financially and thus avoid having to rely upon future fund-raising rounds.
Situation: The Company struggles with differential pricing. They want to be fair to clients but feel that a one-price policy limits growth. What tiered pricing models work, and how are they rationalized?
Advice from the CEOs:
Differential pricing by client demand.
For high value services, you must have a compelling value proposition.
Research comparative premium pricing for similar value propositions and set prices accordingly.
For price sensitive clients, offer two alternatives:
Senior staff services at one price or associate services under supervision for a lower price. Let the client choose between price and quality.
Differential pricing by market risk.
Early stage clients want high service but may not be able to pay bills. This justifies a premium price, as you are not assured of collecting for services. The differential is a risk premium that covers non-payment risk.
Well-established clients are less risky, and support lower pricing due to a lower risk of non-payment and are assigned a lower risk premium.
Differential pricing for bundled vs. non- bundled services.
If a client purchases individual services, then there is a set cost for each service.
However, if a client wants to purchase a bundle of services, then it is reasonable to discount the bundle. You are not necessarily charging less for the bundle, because you have now received additional business at a lower acquisition cost. Your “discount” reflects the savings that you have enjoyed in reduced marketing and sales cost.
Key Words: Pricing, Pricing Models, Fairness, Value Proposition, Service Pricing, Market Risk, Bundled Services, Risk Premium
Interview with Sandy Lawrence, Past CEO, Therative, Inc.
Situation: The technology sector is growing following a couple of lean years. Whether you want to fund a new company, or a new effort within a smaller company, what are the best avenues to capital? How has the game changed?
Funding and credit markets are opening but still tight. The bar has been raised because too many people are chasing too few available dollars.
The venture capital sector has consolidated. Over 80% of current focus is on technology, software and medical. Under 20% goes to the consumer sector.
It is important to target VCs who specialize in your technology, market and business model.
Research current VC portfolios.
Angels now act more like VCs – particularly structured angel groups.
Initial investments are typically under $1 million.
If you have a technology, investigate the grant world – e.g., NIH or DARPA. These organizations fund research, but not marketing, etc.
Look for specific programs or RFPs that align with your technology.
Target your grant request toward prototype development and studies.
Search LinkedIn for military people who can introduce you to contacts within programs like DARPA.
Investigate SBA Grants, and foundations with an interest in your technology or application.
Foundations sometimes will grant funds ($100k) to support the work of individual scientists and researchers.
Call on friends and family who believe in you and your work.
Whoever you approach, these rules apply:
Do your homework. Choose sources that align with your project and profile.
Presentations must be crisp and easily understood. Investing in professional assistance is wise.
Be able to make your case in 15 minutes or less. The first minutes are most crucial, so have your ‘elevator’ pitch perfected.
Your model and financials must support a high multiple exit, 5-10x their investment in a reasonable period of time (~5 years).
Team, Team, Team – credentials, experience, presentation – be a team with whom the investor can work.
Situation: The Company is seeing an upswing in work and backlog, but doesn’t have cash on hand to support the work. The bank won’t increase our credit line. How can we increase cash flow and better position ourselves with the bank?
Advice from the CEOs:
First, try to speed payments from customers or delay payment to vendors.
Add a schedule of values to contracts to prompt earlier payment. Sweeten early pay terms.
Ask for money up front to cover out of pocket costs.
Ask vendors for additional time. They’d rather be paid later than not paid at all and can be surprisingly supportive if approached honestly.
Negotiate terms with customers and suppliers in advance. This gives you additional information to take to your bank.
Slow down longer pay term sales by raising prices to finance your cash flow needs.
Study the ratios that your bank requires in your line of credit agreement. Adjust assets and expenses to fit these requirements.
Can you time your sales between quarters to smooth performance?
Update inventory counts. Look for uncounted inventory.
Look at your equipment. Have you been expensing or depreciating it? Shifting big items to a depreciated basis can benefit cash flow statements.
Once you’ve gathered this information, see if your accountant can update or restate recent statements. You may be able to generate enough impact to go back to your current bank or approach a new bank to secure a larger credit line.
Interview with G.K. Chitta, CEO, INSTA Intelligence Technologies
Situation: Fast growing companies often find it difficult to scale internal IT management to keep pace with database growth. There are typically 1-3 people in charge of dB management in a small to medium-sized business. Crisis hits when there is an abrupt system shutdown for up to 48 hours and a significant disruption to company operations. How can this be avoided?
The difficulty is that small infrastructure teams often don’t have the range of skills to diagnose dB issues. Calling Oracle, SAP, etc. for assistance gets expensive fast.
One option is to outsource business intelligence and dB management to a specialist. Quality offshore resources exist that can take over support of company BI and dB management, offering a full suite of services from anti-virus to preventative diagnosis of subtle misalignments.
For example, INSTA replicates the dB in a remote data center so that they can monitor the system for errors, develop solutions, and remotely resolves errors with no interruption to users.
In addition, some outsourced specialists include calls to Oracle, SAP and so forth as necessary to resolve problems at no cost to the client.
In a recent pilot study in a company with 5 servers, the offshore outsource partner provided a full suite of services and was able to increase uptime from 95-97% on a daily basis to 99.97%. This level of performance should be the goal.
Your outsource provider should have 24/7/365 support services, and
Should provide you with a service-level agreement (SLA) prioritizing issues so that the most critical issues are resolved fastest.
Situation: The industry is changing and the Company must adapt both structure and focus. This may require a layoff of staff not aligned with the new focus. How do you maintain morale in the face of uncertainty and possible layoffs?
Advice from the CEOs:
Ask for employee input as to industry trends and what possible directions for the company.
Employees are closer to the customer than the CEO and have valuable insights.
Gather input in small group meetings to prompt discussion and ideas.
Make this a research talk. Leverage the “wisdom of the crowd.”
Research other industries that have undergone similar changes.
What strategies did the most successful companies pursue? Could these work for you?
If faced with protracted uncertainty, what did they do while waiting for market clarity?
If a layoff is necessary, conduct it in one day:
Monday is better than Friday.
Do it early in the day. Give final checks the day of the layoff.
Provide instructions for filing for unemployment assistance via the Internet.
Hold a company meeting for remaining staff immediately after the layoffs. Focus your message on the future and positioning the company for the future.
Prepare a brief summary of your message, to distribute as a take-away.
Be prepared for a grieving process following the layoff. Consider outside assistance on grieving to overview the process.
Following the company meeting, have key employees conduct smaller group meetings to lead discussions and allay fears about the layoff. Fully prep these individuals about the situation with written responses to likely questions.
The benefit of a Monday layoff is that you will see everyone on Tuesday, and the team can continue to address their concerns.