Resources/Papers/Strategy for Start-ups and Spin-outs

Synthetic Resources, a Manifestation of a Digital World

The last five years certainly have demonstrated the power of synthetic resources in driving business creation and growth at a fundamental level.  A major factor driving the creation and use of synthetic resources is the increasing focus on and awareness of information as being separate from resources themselves, which enables resources to be more modular.  This modularity lends itself to speed and flexibility because resources can be assembled just prior to use, much in the same way that objects (kernels of code) can be reused and tweaked.  Objects' contrast with programming done in second-generation languages is instructive.

For example, let's define outside funding as a synthetic financial resource.  Anyone with experience in launching both venture-backed and bootstrapped start-ups knows that they exist on different planets.  The limitations of the bootstrapped business, I would argue, are more organic; they are usually a function of how the core business is functioning.  By contrast, limitations imposed by VCs can come from many courts, none of which may have anything to do with the start-up: a meltdown elsewhere in the portfolio, a new investment that poses synergies or possible competitive pressures, or a home run in a related area.  Generally, the limitations on the venture-backed business planet often come down to one thing: the start-up executives' ability to convince VCs to continue funding the business.  

A key advantage of synthetic finance is that the business can develop its ability to build and launch its value proposition somewhat free of the obligation to manage itself as a function of the cash it brings in.  Often, the CEO of a funded start-up dedicates him/herself to building the team, guiding the team's efforts to build the company's core value, and fund-raising.  

However, synthetic finance has a significant cost, but this cost has a non-financial benefit.  The CEO (sometimes the CFO) is almost full-time on preparing a roadshow and pitching the company to prospective investors for the "next round" of funding.  Still, to conduct successful roadshows, the CEO must remain focused on the developing business's value proposition and how that proposition will play/is playing in the market.  Therefore, this aligns the CEO's function with the strategy of the business and its competitive advantage.  

In some cases, this contrasts sharply with a bootstrapped start-up's CEO, who is often an engineer or marketing executive that is fulfilling that core function and focusing on the business's strategy on a more part-time basis.  S/He might not be able to afford to fill out the executive team as quickly but will usually retain more ownership in the company. 

Of course, the bootstrapped start-up may have a significant advantage in an era of financial uncertainty: if the company is self-sustaining and growing more slowly, it may prevail over funded start-ups if a financial shock interrupts synthetic financial resources. Of course, the market has little regard for these details; it will usually reward the company that presents the best value proposition at the appropriate time.

The Digital Business Executive

Here, I use the term "digital business executive" at some peril because it might seem to suggest that there is another kind of executive, when increasingly there is not.  In this case, however, it has merit because a "digital executive" denotes a matter of degree of focus on digital approaches, which most often entail the use of synthetic resources.  Executives of start-ups--and, often to a lesser extent, spin-offs--usually have a keen understanding of modular, synthetic resources as a core competency. 

Synthetic resources have driven down transaction costs.  Executives are no longer required to be dragged down by their businesses' inherent weak points (which means their competitors must not be, either ;-).  Because the business and the relationships that surround it are moving faster, mistakes lead more quickly to a success or demise.  This has raised the stakes for business leaders, for it puts a premium on executives who possess "network vision."  Not only must leaders deeply understand the core business but also they need to perceive how peripheral developments impact their businesses' value propositions. 

Launching a Digital Business

Having provided strategic advice to executives of start-ups, spin-outs and hybrids, I am fascinated by the "plus ça change paradox."  Of course, business has not fundamentally changed in many ways: for example, managers still seek to obtain the most value at the lowest cost.  On the other hand, everything has changed: a business can be financed, staffed, promoted and serviced entirely with synthetic resources!  Entire parts of the business can be changed out very quickly (being modular); therefore a critical success factor is calibrating strategy to optimize the use of synthetic and organic resources.

Let us define organic resources as those that are not procured from the outside, that are core to the company.  Organic resources are the engine that creates the company's fundamental value.  They are the critical focus of the company's highest competence and uniqueness.  In fact, if comparable organic resources can easily be procured from outside, the company is in trouble!

In many instances, a company may use synthetic resources for finance, operations (such as shipping), services (third party credit, factoring), HR (temporary, interim workers), billing (third party) and technology support.  All of these functions were formerly handled by businesses as a "cost of doing business."  One of the key benefits of using synthetic resources is that the leaders of the business can maintain their focus on creating and building the company's ability to deliver its core value; their focus is on what makes the company unique.

The Strategy Multiplier

Strategy is the glue that holds networks together.  The fundamental value of synthetic resources is two-fold: 1) competent providers enable the business to function and 2) the company's executives are able to keep their focus on creating the company's core value.  Of course, if a company uses synthetic resources, by no means can it take these benefits for granted, but it should expect them.  The basic exchange is, "We get these services for a fair price, and the services enable our company to function well."

However, the value-add of synthetic resources is the ability to align the strategy of the company with that of its synthetic resources.  The fundamental relationship is as above, but more value can be created through strategic affinities that, for example, arise from technology or a marketing focus on certain customer segments.  Seen from this perspective, a company can actually lose competitive advantage if its relationships with synthetic resources merely deliver the core value, minus the strategic value-add.

The Strategy Imperative

In the "digital environment," the value of strategy has increased in step with the degree and frequency of change that digital businesses face.  For the funded start-up, strategy is the CEO's calling card in fund-raising and in growing the business quickly and in a sustainable manner.  It is the key to creating value with strategic alliances (synthetic resources).  If that were not enough, it is also critical to determining how digital businesses optimize their use of organic and synthetic resources.  

If we define the quintessential digital business as a node of a modular network that leverages organic and synthetic resources to create value, we quickly realize that the executives who best know how to manage many variables will enjoy the most success over time.  The modular nature of the business engenders the ability to effect profound change on the business very quickly.  

So what is strategy?  In the context of this discussion, let's say that it is a rigorous process by which executives: 1) define the business's unique selling proposition relative to market demand and supply; 2) determine how the business will deliver its value proposition.  For example, if it is a technology business, the strategy will have to take into account the entire technology solution that customers will use to derive business value.  Because virtually no business can deliver the entire solution, the strategy will often include a "build versus buy" discussion around technology: "What part of the entire solution to we want to own, and what can we partner out?"  This may be far from obvious in the early stages of the business, which may be introducing a new concept to the market, and "the entire technology solution" may not be clear, to anyone.  

Usually, the strategy will have to predict the market's adoption of the solution.  The company will have to lay out the adoption of the entire solution as well as its part of the entire solution.  It will specify the role of strategic alliances, which are virtually indispensable to the digital business because they provide complementary parts of the entire technology solution.  The strategy will also have to deal with organic resources explicitly, which is why the business's management team is such a focus of investors: the management team contains the bulk of the organic resources in the early days.  

In addition, the strategy must explain threats and contingency plans that the company will employ when its network of alliances is disturbed (maybe a key alliance goes under, changes strategy or becomes a competitor) or the mix of organic resources is altered (a key management team member leaves).

Lastly, the exercise of creating and managing the strategy is invaluable in itself.  Because digital businesses are beset by so many variables and changes, the strategy is the touchstone of the business's leaders and workers.  It is the focus of the business, which we have defined a network of ambition and resources.  

On the other hand, one might say, "If I can change things about my business so painlessly and quickly, why waste time planning?  Isn't it all about improvising, anyway?"  In my observation, the best improvisation occurs when someone has a mastery of, or at least a solid grounding in, what s/he's doing.  The mastery is often invisible in a brilliant team that is performing in its prime.  In fact, thinking through and understanding causality relevant to the business is extremely valuable because, if done correctly, it builds executives' network vision.

Network Vision

In conclusion, the unique value of a company boils down to two things, each of which is hard-wired to network vision.  First, the company uses organic resources to create hard-to-reproduce, unique value, and the ability for someone else to create or invalidate the company's unique value is often a function of the network.  Second, the company must use the network to deliver the value (via strategic alliances and customers).  Executives must have a strong sense of what business they are in so that they can build their company quickly, and on solid ground.

Network vision is peripheral vision.  If no one delivers the entire solution, the executives must be hyperaware of their business's network configuration.  For example, it is a strength and a weakness to depend on strategic alliances to deliver the solution to the customer.  Alliances will enable the business to get the solution to market more quickly, yet if one of the alliances blows out of the network for some reason, the executives must have a contingency plan.  That often means observing alliances as if they are a part of the core business, which means looking at their networks and success with their own customers, their own efforts at getting funding, etc.  Perhaps it is like driving too fast on a busy freeway; peripheral vision is absolutely vital to success.

A vital part of the network vision is understanding why, where and how the business fits into a business world that is changing at an increasing pace.  This must be revisited continuously because the modular network within which the business exists is ever changing.  What luck that everyone has the same challenge!