When investing in emerging software markets, it is difficult to make a lot of money unless you own one of the top three companies in a particular segment. One simple reason is that there are usually not more than three or four meaningful public players that would have an interest in and be in position to acquire you. The “strategic acquisition” binge in the market typically happens quickly and then the universe of would-be acquirers moves on. As a result, it is very important to be in a position to be visible to would-be acquirers.
It is typical in an emerging market for technology providers to show confusing signals to the acquiring community. In most instances the early-stage emerging market will demonstrate market parity among solutions providers making one indistinguishable from the other. Why does this happen? The regular explanation is that customers in early-stage emerging markets have not, on average, had enough time to think about the broad scope of their new initiatives. What this means is that they regularly put out RFPs for technology that reflect narrow and immature ways of thinking. In this context, products whose functionality is narrow but can fit the market’s currently narrow needs are highly competitive. These products can also be sold for less as they require less payroll to develop given their narrower scope. Which product would you rather buy….? …The one that does what I think I need today and costs a heck of a lot less than the other one. We see this all the time. This is why so many technology providers can plausibly declare victory early on (and most try to).
So in the early-stages of an emerging market…many companies can favorably and equally answer the question..“Who is you customer?” They can do so because of narrow scope issues explained above and the fact that software price is still a heavy consideration to buyers. At this time…it is too early to sell or even try and sell you company- generally because price competition among solution providers is still too relevant.
Price competition is still a factor because... .there is an undereveloped connection. The scope of the average RFP (usually drafted by operations personnel) is much narrower than the vision of company’s senior management (i.e. this is the underdeveloped connection). At a time when the RFP more thoroughly includes senior management’s vision, price ceases to work well among competing software vendors and thereafter technology leaders start to emerge. Something about the technology then comes into play in the acquisition price (i.e. ease of implementation, adoptability, etc). It is not much longer after this that companies get bought. In my opinion if you go more than 18 months where price is the competitive driver, you are in a bad space for any number of reasons.
Monday, March 6
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