Platt Perspective on Business and Technology

Pure research, applied research and development, and business models 8

Posted in strategy and planning by Timothy Platt on November 8, 2017

This is my 8th installment to a series in which I discuss contexts and circumstances – and business models and their execution, where it would be cost-effective and prudent for a business to actively participate in applied and even pure research, as a means of creating its own next-step future (see Business Strategy and Operations – 4, postings 664 and loosely following for Parts 1-7.)

I have been discussing in this series, both a basic research-as-product business model and at least one possible path forward that an enterprise might pursue when building according to it. And as a part of that narrative progression, I focused in Part 6 on questions and issues that more specifically relate to planning for and starting such a research-as-product offering business. Then I began a discussion of earliest stage considerations for expanding and growing such a business from that initial start in Part 7.

I have predicated this series on a presumption that effective researchers with business development and management skills and an entrepreneurial spirit, can make this type of business enterprise work, and even very successfully and certainly:

• When serving the needs of client businesses that operate in rapidly advancing industries and sectors, where next step innovation is a key to their ongoing success,
• And where competitive pressures limit what they can afford to do in-house, to their core essentials, and where it would not and could not be cost-effective to develop or maintain effective research capabilities or their supportive facilities in-house too.

An ideal such client business would acutely see need for effective solutions to specific research problems that would help them advance what they do in-house in fulfilling their business model and producing their value defining products and services. But they would not see it as cost effective to build or maintain the infrastructure for this research in-house too. The pace of change that we see going into this 21st century indicates a significant and growing need for this type of business-to-business support service, and that is a need and source of it that I have been addressing here.

I have assumed as a given that such a venture has been launched and that it has begun to prove itself, and bring in revenue. It has even reached a point where its owners and founders are beginning to seriously think in terms of next steps, as proof of principle success has started to flow in, in the form of incoming revenue and even overt profitability, with liquidity coming in exceeding liquidity flowing out from expenses and bills paid. My narrative development goal for this posting is to at least begin a discussion of what does and can happen as a business reaches a point in its development where it is consistently bringing in genuine profits. And this brings me to the concluding note that I added to the end of Part 7, as a foretaste of what I would address here, as my primary focus of attention:

• “I am going to continue that discussion in a next series installment, where I will at least begin to consider the issues of business models and exit strategies, and short-term and long-term and in-between planning. And in anticipation of that, I note here that ‘exit strategy’ does not necessarily mean the founding owners of a business selling it off and walking away from it. This term more generally encompasses transitions from startup and early stage into reliable ongoing profitability, and exiting from what might be considered a business’ infancy into its first real growth phase.”

I begin address that very complex and far-reaching set of issues by noting and discussing a basic orienting point of distinction that would fundamentally shape both the thinking and the planning of such a business’ owners: profitability versus growth.

Most owners and founders do in fact seek to find an effective balance between these goals:

• With their taking personal salaries if nothing else for themselves, and with their rewarding their key team members for risk and sacrifice made as they contributed to the effort to start this venture and bring it to profitability,
• While still plowing profits achieved back into the business to grow it into realizing the opportunities that its initial success have made possible.

Think of this as planning and executing for an effective short-term here and now, while also planning for a long-term future and with both sides to that showing real success. These two objectives: profitability and growth can and frequently do work well together, but at heart they represent competing goals and any successful accommodation between them represents arriving at a successful dynamic balance between them, that would be reviewed and rebalanced on an ongoing basis as part of the overall strategic process and its operational implementation.

I mentioned the exit strategy of building to sell, in my notes as repeated above, for what I would begin to discuss here. And I added in that context that this was only one of many possible exit strategies that the owners of a new and newly successful business venture might pursue. But let me begin with that one, and to in effect get it out of the way if nothing else. Besides, any reasonable discussion of that specific exit strategy approach, as addressed for purposes of this series, will at least introduce several of the basic factors that would have to be thought through and planned for, for essentially any exit and I add next-step entrance strategy that business owners might pursue here.

To keep this discussion more focused and straightforward and to at least limit the digressions in it, I assume that all equity and therefore all decision making power in this business remains in the hands of the original founding owners, and unencumbered by other voices or perspectives: with no angel or venture capital investors involved who would be in a position to claim equity shares and a voice in any exit strategy decisions. To be more explicit in this, I also specifically add that these owners have not offered what amounts to equity, and even as “non-voting shares” to others in their founding and growing team, as promissory notes from their early “pre-reliable salary” days. “Non-voting” in and of itself can be challenged in court and certainly if the owners of record of a business, who have also entered into these agreements with employees and managers, seek to pursue exit strategy decisions that recipients of this compensatory equity claim, would see as limiting or abrogating their share of the business and its value to them. So I assume in what follows, at least for now, that owners can make decisions and take actions here, without concern on their part of second guessing or reversal from “their” side of any negotiating table.

A startup’s founders and owners can decide to accept an offer of buy-out from a larger and more established company that they did not anticipate and that they were not planning for – and even if they have planned out in detail, next step forward growth and development plans for their business, and with them at the helm. In this case, it is likely that they have made every reasonable and achievable effort that they can, to build out their business for long-term growth and success as a stand-alone entity. But at least in my experience and from my study of this exit strategy and how it plays out, business founders and owners can at the very least arrive at a decision to build to sell, and from early on in its initial development as a startup, as they come to see potential profitability from that, too.

These entrepreneurs at least come to plan and build their ventures to sell, and they put their growth and development effort into building their venture towards becoming an attractive potential acquisition for target companies that they would want to sell to. That, among other things means focusing on and prioritizing on building out and developing resources and capabilities that would fit into and support their unique defining source of value – which any new business owners would want to do, but in this case without making corresponding levels of investment in all of the more behind the scenes, and more generic infrastructure systems that a larger acquiring business would have and would want to provide for their new acquisitions from their own preexisting systems.

I am going to continue this discussion in a next series installment where I will add a few more thoughts about this divestiture-oriented exit strategy. But the key point that I would offer in summary of what I have written of it here, that I will be building from in further and more general exit strategy discussion is that:

• Exit strategies planned for and prepared for, shape the decision making and the prioritization processes for what is done and how, and to what degree and in what way, for essentially everything that would go into building a new venture.

To cite a specific example there, of topical relevance in our increasingly business-to-business connected context, this among other details means deciding where and even if to outsource specific business functions, as a means of achieving balance sheet and business effectiveness. Cost-effectiveness and business effectiveness and what they operationally mean, depend in large part on overall business planning and business goals, and on the actual business model in play as being thought through and executed.

That point and the logic behind it will prove to be important when considering other types of exit strategy too. I will also begin to consider other types of exit strategies in my next installment to this series, as they can arise as a new venture first becomes more consistently profitable and as it enters what could be its first real growth phase.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 4, and also at Page 1, Page 2 and Page 3 of that directory.

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