Friday afternoons are always days that I tend to wax philosophic. This Friday’s musings got kicked off by a post that a good friend shared with me about GAFAnomics, basically a shrine to Google, Apple, Facebook and Amazon as pillars for the “new economy”. Not to take anything away from the success of these companies, but I have heard this song and dance before.
In the mid to late 1990’s, I worked for SBC Communications as part of the team that launched wireless markets in Houston and Austin. If you’re old enough to remember this period, you will recall that telecom giants were in hot pursuit of market share. In Houston alone there were about five competing carriers for cellular services. The model, as it still is today, for wireless carriers is to “buy down” subscribers by selling the phone itself below cost with an annual (or multi-year) commitment for service. Telecom companies understood that the customer lifetime value (CLV or CLTV) far exceeded the customer acquisition cost (CAC) taken on the device sale, which created a huge return on investment (ROI) (if any of these terms sound familiar is because they were not invented in Silicon Valley).
In the early days of the telecom wars, there was so much ramp between existing market adoption and market saturation that acquiring good returns was like shooting fish in a barrel. Towards the late 1990’s, competition had increased so dramatically (remember the 5 carriers in Houston I mentioned above) that the CAC for new subscribers increased dramatically and the CLTV of those subscribers dropped horrifically. CLTV decline was mostly brought on by the nature of the hyper-competition: declining average revenue per subscriber (ARPU) driven by a race to the bottom on plan rates and increased churn and retention costs to keep subscribers. Calculated returns declined rapidly causing valuations to drop enough to put many telecoms out of existence. By the early 2000’s, things were looking particularly bleak.
Fast-forward to today and you have so many investors and entrepreneurs simply chasing Unicorns, hoping against hope for something magical to happen. Chasing market share for the sake of owning a market is folly and a path to ruin. Bill Gurley’s recent post is a warning shot across the bow for the marketplace, unlikely to be heeded by many. The thing about beauty contests is that although so many enter them to win, only one does.
So how do to you avoid getting yourself stuck in a bad spot? Here are some thoughts:
- Know your market’s economics and find a path to profitability and cash flow as early as possible. Chasing market share is costly and is extremely difficult to do unless you are in the very early stages of the market adoption cycle. This doesn’t mean that growth isn’t critical: it is! The growth just needs to make sense and have a profit path in sight.
- Align yourself with smart and rational investors. Chasing dumb money isn’t going to end well for anyone so don’t do it. Instead, feel comfortable with down rounds and value-added investors who might disagree with you from time-to-time.
- Maintain a culture of innovation and don’t be afraid to fail. Make sure you see a path to profits and return on those innovations. This means that talent management and organization culture matter and shouldn’t be an afterthought.
- Business model assumptions matter. They’ll likely be wrong at first and that’s okay. It’s not about getting it exactly right as much as directionally heading towards the bullseye. This requires systems, processes and business intelligence earlier rather than when you get around to it, which you never will if you wait.
Josh Tabin is the Managing Director for vcfo Houston. As a technology strategy group, HR consulting firm and a top financial consulting firm, vcfo provides contract CFO and CFO consulting services, HR outsourcing and interim HR services. Additionally, we provide technology strategies, consulting and cost-effective recruiting solutions. Whether you seek part-time, interim, project-based or full-time support, vcfo’s customizable engagement model will fit your specific business needs. To learn more about vcfo, contact Josh at firstname.lastname@example.org.