The Power of Unfair Advantage

How to Create It, Build it, and Use It to Maximum Effect

John L. Nesheim

• Publisher: Free Press
• Year: 2005
• eBook ISBN: 9780743286619
• Topic: Negocios y empresa
• Subtopic: Negocios en general

A Silicon Valley veteran and author of the bestseller High Tech Start Up reveals the nature of unfair advantage -- that holy grail for every company, the mysterious quality that separates successful businesses from the nine out of ten that fail -- and then shows how to create an unfair advantage, build it into a business plan, and use it to maximum effect.
Nesheim's first book, originally self-published during Silicon Valley's wild west days in the 1990s, quickly moved from underground hit to business bestseller. He witnessed the incredible highs and lows of the Internet bubble, and he got an intimate look at why some companies weathered the storm while others went under. Now, in The Power of Unfair Advantage, Nesheim shows you how to bring the pioneer spirit to your new enterprise -- whether you are starting a new company or trying to breathe new life into an old dog. Unfair advantage is an enduring but often overlooked dynamic and a crucial aspect of any successful business endeavor.
To show you how to attain unfair advantage over your competitors, he begins with a clear model: Outsource everything you are not good at, concentrate on those things that can be differentiated, and strive for a unique, consistent difference that cannot be copied. Integrating these maxims with other essential elements, he demonstrates, with dozens of case studies, how to orchestrate unfair advantage through marketing, sales, engineering, and operations.
Unfair advantage can take many forms. Pager maker RIM rocketed to the top of the mobile wireless email market with Blackberry by employing an unfair advantage that it alone possessed -- pager technology and pager infrastructure. Alternately, an unfair advantage can come from a unique relationship with a strategic alliance partner, as when Flextronics pulled Handspring out of a life-threatening crisis.
The Power of Unfair Advantage is an essential handbook for every manager who is responsible for introducing a new product or service and every entrepreneur and would-be who plans to start a company. Unfair advantage is here to stay -- learn how to lasso its power, rise above the competition, and build a flourishing, long-lasting business.

Part I
	What Unfair Advantage Is

Example 1-13Investment Decision: DT and Nice2Kids

“Good morning, fellow Rough Riders. Today is the day we decide on Nice2Kids. It is time to write a check or say goodbye. You may not like the company name, but that will probably change, regardless of who invests.”

The partners chuckled at DT’s remarks. He had brought the Nice2Kids deal to Plitheron Ventures.

“This one has been pretty well dissected during the past six weeks. And as usual, you worked me over pretty hard. Each of you did your worst to me along the way, as usual.” The partners laughed.

A few weeks ago, DT had invited Kim to present his idea at the Plitheron office. The team included Rachel, the company’s chief technologist, and Peter Jones, the head of the laboratory. They presented their slides in about half an hour with few interruptions by DT. He used the rest of the hour to ask penetrating questions. Each presenter had responded to DT’s questions without being intimidated or defensive.

DT had made some suggestions for improving the company’s strategy, particularly possibly altering the choices of large corporate partners and patent lawyer. Kim and his core team thought the suggestions were excellent. They were impressed by DT’s openness about his track record as lead investor of several well-known life science start-ups. He had told them about some fiascos as well as winners and had suggested Kim contact the CEOs to learn more about how Plitheron Ventures works with start-ups. Kim thought it would be awesome to get DT to be on their board of directors.

After the presentation at the Plitheron office, DT had casually asked if the Nice2Kids team could present their idea the following Tuesday at eleven in the morning to Jean-Claude.

Unknown to Kim, Jean-Claude was the partner who was notorious for giving DT the hardest time about investing. So when Kim and his people finished that presentation, they knew what it felt like to try to catch spears thrown at you. Jean-Claude had been curt, loud, and opinionated, interrupting, asking stinging questions, and challenging the presenters. It had hurt, but as DT escorted them to the door, he grinned and said to Kim, “Nice work. I’ll call you.” Kim and his team gave out a loud sigh of relief in the parking lot.

A few minutes later, he was driving home with Rachel and Peter Jones when his cell phone rang. It was DT. “Hi, Kim, I wanted to tell you that we talked it over and would like you to present Nice2Kids to our all-partners meeting this coming Monday afternoon at two. Can you make it?”

“Of course,” Kim said. “This is exciting!”

“Yes, it is,” said DT. “We are all looking forward to seeing you and your people. We have a few ideas about how we can accelerate your time to FDA tests. Come ready to start at 10:00 a.m. See you then.”

Like many other venture capital firms, Plitheron’s partners met Mondays behind closed doors and would later emerge to listen to one start-up presentation in anticipation of making an investment decision.

The Nice2Kids team had presented very well and had responded to negative criticism without becoming rattled. After they left the Plitheron office, Kim felt the partners of Plitheron were very likely to be investing as the lead venture firm funding Nice2Kids.

DT said goodbye to Kim and the presenters and closed the door. He turned to face the partners.

“I think we should do this deal. What do you think?” DT said. Susan responded, “I really like Kim; he’s a good guy. He might survive beyond the B round.”

“Right,” grunted Jean-Claude. “And his technology person—she is an ace. She needs a lot more understanding about how a business is run, but I know a coach who can help with that.”

“And the technology is awesome!” exclaimed Bill. “Their strategy is focused and clearly hard to duplicate. One of our big pharmaceutical partners in Europe would be keen to take a look at them. I think this business could take the lead and dominate their market. So shall we invest in this one?”

“Well, it sure is better than the mediocre leadership and competitive mess of GeneZTech,” sighed Susan. “What a great idea they have! But what a confusing marketing plan! They are going to need a lot of help finding the right marketing vice president. That won’t be easy for a core team with such inexperience.”

“Do I hear a go for Nice2Kids and a no for GeneZTech?” inquired DT.

“Feels good to me,” Susan exclaimed. “How about you Jean-Claude?”

“D’accord,” responded Jean-Claude.

“Ditto, should be a great one,” said Bill.

“Guess that settles it then,” said DT. “I’ll call the law firm and getMario started on the term sheet today.”

The decision was a go, a yes. The partners got excited. They saw an unfair advantage. Nice2Kids was funded. That is how investing decisions are done in the real world. After the time-consuming, detailed fact finding, the moment comes for a go or no go decision. That is where emotions come into play. Emotions complete the deliberate investigation process. The investor’s decision is made rationally, looking at issues and facts and then deciding in the face of great risks and unknowns and dreams of huge financial returns and waves of fame. Yes, the final decision is made with powerful emotions racing through the soul of the investor. Investors talk about adrenaline rushes, fear and wild enthusiasm running through them at that moment. It never ceases to amaze me how emotional the final decision is.

Storytelling

People enjoy listening to stories. So do investors, employees, and the media. “A long time ago, in a land far away” begins a classic epic that stirs the imagination of readers as the tale unfolds. Stories enthrall listeners as a visionary hero sets off on a great adventure, vowing to do good, expecting to encounter difficulties and dangers on the way to the goal. The leader of a small band of loyal followers begins the long trek in spite of many unknowns, large risks, and evil forces. Along the way, the leader and his trusted companions have fun in spite of what they encounter. In the end, the band finds a hidden treasure. They end up sticking together and forging deep relations that last forever. The reader is treated to a delightful epic, a true adventure.

The story of a great new enterprise has the same ingredients. It is filled with exciting chapters that are stirring to listen to. Presented chapter by chapter, it draws in the audience, inspiring them with a vision for a new enterprise. You want them to believe as you believe. You have an idea that could do a lot of good for many. Your trusty band of entrepreneurs has the abilities and courage to overcome unexpected surprises, including attacks by stomping giants and small, crafty start-up competitors. Everyone gets to share in the buried treasure.

“In the end, I have to admit that the best storytellers get the money,” said one of the icons of Silicon Valley. “You have to get investors’ attention in the first 30 seconds,” said a veteran employee of several new enterprises. “If you see glassy eyes in the first 5 minutes, you might as well just stop and walk out. You have lost them.”

Your response might be: “What do the great investors mean by the importance of telling exciting stories? What is new enterprise storytelling all about? Isn’t a new enterprise about high technology, the laws of physics and biology, and patents, and the honest facts about how things work? What about truth and integrity? And where do management and leadership and execution of plans fit in? Surely this is not about making up a fictional story, is it?”

In response to those good questions, consider two different groups of people. They disagree about storytelling for new enterprises. Both groups acknowledge an effective story triggers emotional responses that lead to a decision by the listeners. The first group says entrepreneurs should never tell a story because a story is something fictitious, made up by a dreamer. Stay away from storytelling. Instead, stick to hard facts and present your company accurately using proven numbers and researched data. The second group says a start-up is all about the future and unknowns. Your job is to paint a picture of how you think it will turn out. Describe the future using all the storytelling tools available: colored slides, graphics, human drama, lights, sound, videos, even put on uniforms or costumes and dance if you think that will work.

So who is right?

I like to imagine a story about a new enterprise as a story told by excited parents hoping for the healthy birth of an eagerly expected child. Theirs is a story about dreams for a healthy birth and robust growth of the child, the new enterprise. Like a real child, the future of the new enterprise is described in glowing terms. The founding team speculates about the best outcome. They believe good will come from the new venture. They believe in their plan with a personal passion. They eagerly answer questions about the soon-to-arrive fledgling. They are pregnant with ideas and dreams of a first child. They are doting parents-to-be.

Risk

Storytellers also describe associated uncertainties and risks. That triggers sharp emotional responses in listeners. Adrenaline starts to flow. Hearts start pumping. People get excited. Once the story grabs the attention of the audience, they want to hear more.

You must carefully include the risks of your new enterprise in your presentation because the experienced audience expects them. After the Internet era bubble popped, investors, employees, and the media were burned. The venture community became the world’s most skeptical listeners. They became major doubters. They were shocked by many bankruptcies of what they thought were great ideas. The results of all the hard work and spirited innovation disappointed first-time entrepreneurs and their backers. Now they view the future of a new enterprise with deep skepticism. Battle-scarred veterans see the world of new enterprises much like extreme sports: only a few succeed in a very special world of ultimate risk that produces amazing results only after years of hard, painful work. The rest of the herd crashes and burns. As a result, the risks in new enterprise stories are carefully scrutinized and examined before stakeholders commit to support a new enterprise.

Source:John L. Nesheim, High Tech Start Up

(New York: Free Press, 2000), figure 1.1.

Figure 1-1Chances of an Idea Getting to IPO

Due Diligence

When stakeholders spend time scrutinizing the facts behind your story, they go through a process referred to as due diligence checking. It is not a time of fun for entrepreneurs. The presentation and submitted business plan are challenged, dug into, day after day and week after week, until the core team is weary. Questions follow questions. Requests for more information seem endless. People get intense, in your face, rough with their questions and demands for instantaneous answers. Everything is expected immediately, as if you had nothing else to do. Emotions run high. You get poked to see how high you can jump. You are deliberately insulted to see how you deal with difficult people. Your fellow managers are jabbed and kicked verbally to see how they think on their feet in moments of stress. Due diligence checking is one of the facts of life for leaders of new enterprises. Expect it, and just get it done as quickly as you can.

When telling your story, beware not to leave out risks of technology, competitors, and other dangers. That sets the stage for rejection. During due diligence checking, if underlying support for important parts of your story is discovered missing—elements that your audience believes are critical—the investors will quickly cool. They will no longer answer emails. They forget you and become captivated by the next alluring story told by others.

Technology

Technology is an important part of your story, but there have been many engineers who were surprised that investors do not rely on a technology breakthrough to make a company successful. First-time engineers are confident that their new technology will bethe thing, the big breakthrough that will excite investors who will shower them with money. Then their company can become the next giant killer. But when the engineers presented their technology in all its powerful glory to investors, they were surprised to be asked for responses to questions such as, “What would the competitive advantage of the company be without counting on technological dominance?” Even worse, people wanted to know details about how the first products would be marketed and sold. And they asked to talk to real customers. And the questions went on and on, as if the technology was a minor part of the story. It seems common sense to many first-time entrepreneurs that the first company with the great new technology would win big. But experienced investors see matters differently.

Ask yourself what you remember about the history of technology breakthroughs. What happened to the best technology each time the pioneer brought it to market? History is filled with examples that end the same way: the first company with the new technology loses. The first to exploit it wins.

Veterans around the world agree: The next best mouse trap is not what gets the money. More is required—a lot more. It all adds up to unfair advantage.

To make it clearer, let’s listen in on a real telephone conversation (only the names are disguised) between a veteran start-up coach, Mike, and Woody, a respected venture capitalist. They know each other well. Mike has decided to give Woody a call because Mike has been asked to advise the founders of a new enterprise called Zargan.

Table 1-3First Technology Loses

• Univacintroduced the first electronic computer.IBM followed later and went on to dominate that new market.
• Altairproduced the 8800, the first personal computer.Apple became the leader of that new category with its Apple II.
• Valid Logictransformed inventions of its founders into the first computer...

Table of contents

• Cover
• Colophon
• Also by John L. Nesheim
• Title Page
• Copyright
• Contents
• Preface
• Introduction
• Part I: What Unfair Advantage Is
• 1 What Is an Unfair Advantage?
• 2 What Are the Parts of an Unfair Advantage?
• Part II Creating Unfair Advantage
• 3 Building Business Plans with Unfair Advantages
• 4 How to Assemble an Unfair Advantage
• 5 The Beginning: The Executive Summary
• 6 Customer Need and Business Opportunity
• 7 The New Enterprise Strategic Mind
• 8 Focus: Concentration of Resources
• 9 Types of Strategies
• 10 Marketing
• 11 Sales
• 12 Business Development
• 13 Strategic Partners
• 14 Customer Support
• 15 Engineering and Technology
• 16 Legal and Intellectual Property
• 17 Manufacturing, Outsourcing, and Internet Operations
• 18 Information Services
• 19 Management and Key Personnel
• 20 Facilities and Administration
• 21 Financial Plan
• 22 Valuation and Ownership
• Part III Applying Unfair Advantage
• 23 Surfing Disruptive Technology Waves
• 24 Going World-Class
• 25 Why Giants Fail to Crush New Enterprises
• 26 Venture Capital Firms Apply Unfair Advantage
• 27 Giant Corporations Apply Unfair Advantage
• 28 MBA Schools Apply Unfair Advantage
• 29 How Countries Apply Unfair Advantage
• 30 Spotting Weaknesses and Adding Strengths
• 31 Concluding Remarks and Challenges
• Appendixes
• Appendix A Business Plan Outline
• Appendix BScoring Sheet for Written Business Plan
• Appendix CScoring Sheet forPresentation of Business Plan
• Appendix DValuation Tables and Graphics
• Appendixes
• Appendix FNeed and Opportunityof Datamed
• Appendix GFamous Marketing Wars: Strategic Examples
• Appendix HMarketing Comparedwith Selling
• Endnotes
• Bibliography
• Examples
• Figures
• Tables
• Acknowledgments
• Index
• About the Author