From the start-up's perspective, the primary goal for the entrepreneur should be to understand where the sweet spots are in the value creation cycle and to clearly understand how they are going to achieve them.
Using bar codes as an example, the now twenty-year long bar code adoption cycle began with the introduction of innovative technology. First, labels and readers were developed, then software to clean and manage the data and finally applications that use the information to solve real business problems, such as shipment track and trace.
Accelerating the cycle to more quickly reach the optimal value creation sweet spots will yield a larger variety of investment and/or exit options for the entrepreneur. As an example, for the early stage bar code label and reader companies, developing close partnerships with up-stream data cleansing, applications and consulting companies helped keep the earlier technology tied to the later solutions, enhancing the value add for all parties.
In the case of RFID, the clear sweet spots today are complete auto-ID solutions(hardware,software,process change, etc.) that have solid ROI for a customer based on technologies that will not become obsolete in a few years.
From the investor's perspective, the trick is not to tie your investments to a technology or a company that is destined for the dust bin.
In the early stages of innovation, many often superior technologies and companies lose out to mediocre, but workable solutions because the superior players fail to gain market acceptance.
- How can you tell if a technology is likely to not win adherents? The primary test is whether the major, early adopter customers--such as Wal-Mart and Proctor & Gamble for RFID--support the technology platform. If key customers are moving in a different direction, you can be sure that their suppliers will have to follow.
- How can you tell if a company is likely to fail in the long term? Applying the NIH(Not Invented Here) test is one way of seeing whether the start-up can quickly adapt to the fast-changing market conditions inherent in an innovative technology environment. The NIH test involves determining if the start-up is actively looking for ways to partner with hardware, software and consulting partners who collectively can deliver ROI enhancing solutions to customers. NIH prone companies often feel that they can do it all themselves and somehow capture an out sized amount of value being created in that market space. It is a risky strategy, one that more often than not fails in the execution.
Investors should ask a few questions on go-forward strategy early in the process to ensure that the potential investment is not headed down the NIH path so as to avoid misery in later years.
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