Platt Perspective on Business and Technology

Pure research, applied research and development, and business models 15

Posted in strategy and planning by Timothy Platt on October 26, 2018

This is my 15th 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 and its Page 5 continuation, postings 664 and loosely following for Parts 1-14.)

I have been successively discussing each of a set of possible approaches for funding the early capital development and growth of a new research-oriented business venture, since Part 8. And for a variety of reasons I have pursued that narrative in what many would see as a reversed order. More specifically, I began this line of discussion by successively raising and considering four possible approaches to more rapidly building out and expanding a new venture, that would all center on bringing in specific sources of outside funding. And I have held off on discussing what for many if not most would be the basic default alternative to them, until last in this narrative progression: organic growth that is based upon and benchmarked by the actual cash flows that the business itself generates, and on liquid reserves that the founders and owners of this business would be able to bring to the table themselves.

The outside funding-sourced options that I have considered up to here are:

1. A venture capital-backed one,
2. An angel investor-backed one,
3. A crowd source-backed one, and
4. A friends and family-backed one (elements of which might also apply to the basic default model scenario.)

And after addressing them in turn, and in the above-listed order listed, I began to pivot my overall discussion here towards the more standard default one in Part 14. My focus there was the need to prepare for a more endogenously oriented, default growth and development model, in the event that outside funding cannot be secured, at least under terms that a new business’ founders and owners might find acceptable. And my goal here is to more explicitly discuss this organic growth option itself and in explicit detail, and as a viable and even preferred business development option in its own right. But why have I taken this approach, and certainly if it is as contrarian as I suggest that it is, as I outline what I have been doing here?

I at least begin this posting by addressing that question, in order to more fully put the organic development model in perspective. That has traditionally been the most commonly pursued approach to early stage growth and development for a new business venture. Why not start with it and offer alternatives to it as alternatives, and with a more traditional game plan laid out here and in place as a starting point for considering them?

My primary reason for this reorganization of approaches and option prioritizations can be found in Option 3 of my above list, and certainly in an age where online social media and social media-supported businesses and business activities have become so important – and so routinely expected.

• How many new business founders see themselves as building a new venture that would grow and function in an explicitly online and social media-driven context?
• And how many of these entrepreneurs see it as both necessary and inevitable that they would build their new businesses with this type of market context firmly in mind?
• How many would see it as both necessary and inevitable that they would plan and execute their businesses with the strengths and opportunities, and yes the weaknesses and limitations of this type of environmental context firmly held in mind?

New entrepreneurs, and certainly any who have grown up in an online connected world and who see themselves as living in a social media connected world, would essentially automatically answer those questions with the power and ubiquity of social media as a given, and with its relevance to them and their planning assumed as an axiomatic truth.

Venture capital and angel investors remain important and will continue to be so, as will family and friend-supported funding. Option 3, however, has changed both the dynamics of business development and the expectations as to what is and should be possible from that. And that can essentially axiomatically be presumed true because:

• Crowd sourcing can in principle, raise large amounts of liquid capital and very quickly,
• And because individual investors who enter into it do not hold significant equity in the ventures that they would help to fund in this way. As such, they do not come to hold large voices in the businesses that they invest in either. That, among other things means that this funding can come with few strings attached, beyond an eventual requirement to pay back what was raised to those investors, which might mean cash repayment, repayment in the form of products or services offered, or repayment through any of a variety of other mechanisms as might have been loosely outlined in an initial crowd sourcing pitch.
• And this is also true because crowd sourced funding is also a powerful tool for getting the word out and for developing crowd sourced marketing and sales opportunities. In that, social media driven fundraising becomes social media driven gorilla marketing too.

Entrepreneurs who see online social media-based and enhanced connectedness as part of the essential framework that they would build their business into, see social media and the options and opportunities that it can create, as essential drivers of all that they would do. If they do not do social media as well as their competitors can in this, they will lose as a result and in any competitive struggle that they enter into with them. If they can find ways to use and to leverage social media better than their competition can, they will win and their business will grow and thrive as a result.

Option 3 cannot and will not always work, and even for ventures that would seem in prospect to be naturals for it. I discussed that in Part 14, in the course of reconsidering all four of the above listed outside funding options. But regardless of that, the existence of this option shapes expectations, and business planning and the business development processes that come out if it.

With this note of observation and expectation added, I (finally) turn to consider my admittedly conservatively positioned default option: organic growth. And I do so by stating that simple prudence would dictate that a true default option approach here should be a conservative one and regardless of how it is viewed in any particular new business venture context. And I begin that by repeating part of the lead-in text that I offered at the end of Part 14 in anticipation of this posting:

• “I am going to continue this discussion in a next series installment where I will delve into some of the basic details of the organic growth model. And I will do so from both a strategic planning and prioritization perspective, and from a second approach as well that is inextricably connected to it if it to offer value: a bookkeeping and accounting perspective.”

I in fact begin this discussion from that bookkeeping and accounting perspective, and by citing a basic resource that I have already offered here in this blog as a more generally applicable startup and early stage business resource: my series: Understanding and Navigating Burn Rate, as can be found at Startups and Early Stage Businesses as postings 67-78.

I focused there on the issues of fiscal prudence and building a new business within the constraints of the resources that are available. Think of that series as being default, organic growth-centric and as holding that business development approach as an axiomatic assumption. That was very intentional, and I have cited that series since then as a basic grounding approach that would only be deviated from as a matter of planned out and carefully considered decision. Think of this posting, and certainly this second half of it as representing a specific case in point consideration of how and why a business’ founders would in fact deviate from the accounting and bookkeeping, and cash flow approach offered there.

One of the core elements of any fiscal resources analysis of business options, has traditionally been a three scenarios modeling approach. Business planners simultaneously consider:

• An optimistic possible path forward in which everything proceeds smoothly and cost-effectively,
• A more pessimistic one in which at least some significant delays and other challenges arise that would add friction and cost to a new business’ growth and development,
• And a normative development scenario that would generally fall in between the first two as listed here.

I would argue that long-term, the most important benefit of this type of exercise can be found in just identifying in at least foreseeable detail, the problems and challenges, and the possible favorable opportunities that might arise, and with an at least first-cut awareness of their likelihood and of how they might specifically arise.

Carrying out this budget and finances-oriented exercise, at least potentially increases the possibility that the founders of a business would build within their means and in ways that keep their new enterprise solvent and running. But just as importantly, the more clearly they see and understand the issues: good and bad that they might face in this venture, the more proactively effective they can be in avoiding the adversely challenging possibilities that they see as potentially coming, while increasing their chances of capturing the positive value of the more favorable opportunities that they might face.

To pick up on one possible adversity here, to take that point out of the abstract, consider a new business that would manufacture and sell an at least relatively disruptively new product to a New-demanding market. And one of their potential choke points, as considered in this tripartite fiscally framed analysis is the fact that they will have to be able to secure a steady and reliable source of a specific part that would go into their finished product, that would not be cost-effective for them to manufacture themselves, because that would require their developing and supporting a specialized assembly line just for that one part. But this is a specialized part and only so many potential supply chain partner businesses are even prepared to be able to provide it. What happens if they enter into a contractual agreement with one of them, to meet this to-them essential need, and then this supplier suddenly finds itself either unable or unwilling to meet this commitment? I write here of what is sometimes referred to as a single point of failure problem, where all of a crucial business flow, goes through a single option bottleneck – and that bottleneck might close down.

Simply thinking through and seeking to quantify the likelihood and the consequences of possibilities like this: here a negative but the positives too, can bring into focus the wider range of options that might be faced. Really thinking through that complex of issues, in the case of my working example here, is where the founders of this enterprise would at least know enough to more fully consider the merits of seeking out alternative sourcing for this special part, and from before this would become a problem: not just reactively and when their own assembly lines might be in danger of shutting down too.

I have referred to the organic growth model here, as a more conservative approach and it certainly can be, and because of how it takes ranges of possible risk-creating variables off of the table for this type of analysis. But it also takes sources of possible benefits off of the table too. If growing a business within its means and as an enterprise that can stand on its own feet is conservative, when would deviating from that approach make the most sense? My answer to that is simple as a matter of abstract principle, while anything but that when addressed in any specific real-world instance:

• When realistically anticipatable risks are more likely to exceed anticipatable benefits if an outside funding source is considered, it makes more sense to follow an organic growth model.
• But when the benefits faced from breaking away from the organic development model exceed the potential costs and risks that might be anticipated from doing so, it would make sense to seek outside funding and break away from the organic growth model as a working approach.

Let’s consider a specific case in point example there, to take that out of the abstract. It is true that a single innovator might be the only one who sees all of need and opportunity and way, for arriving at New and particularly for a genuinely novel, disruptively new innovation opportunity. But if the underlying problem: the underlying need that it would address, is at all known and if it is something that others see positive potential in resolving too, then any would-be innovator has to assume that they are in a race to complete and bring their New to market first. And they should assume that this is a close race and that if they allow even just slight avoidable delays in what they do, they will lose it.

And this brings me back to the outside funding options that I began this narrative thread with, as means of accelerating the pace that a new venture be able to bring its New to market, and hopefully first and with enough of a lead time over its direct competitors for that, so as to be able to build a first mover advantage there. And this brings this narrative from the outside funded alternatives that I have considered here to the default organic growth model and now back to them again.

I am going to continue this narrative in my next installment to this series, building from here, and very explicitly so, from the lines of discussion offered in Part 14 of this series. More specifically, I briefly outlined in Part 14 how outside funding as assumed in those four scenarios might not come through. My goal for the next installment here, is to at least briefly look into the there-black box of What might happen (or not), to consider the underlying mechanisms in place that would suggest the Why and How of that.

My goal for this series has been to at least briefly sketch out a set of issues that would arise for a research oriented business venture as it seeks to develop from its initial planning day one through at least the beginning steps of its first real growth phase. And in this, I have at least tacitly assumed that the boundaries between the key phases of this development process as discussed here, can be at least somewhat fluid and uncertain. When, for example, has a new business really become consistently profitable? That might be easier to determine if for example, a new venture of this type were to land a large and long-term contract with a major client, and particularly if that client did not insist on exclusivity of service from them, leaving them further room and opportunity to grow. But few businesses find themselves facing that type of secure business flow possibility, and certainly without facing real pressures to their simply becoming a new venture acquisition by such a larger and more established business. I will develop my next posting with uncertainties in mind and as realities that would have to be accounted for in any business development planning.

I have already included in this blog a relatively lengthy series on business scalability per se, that begins with consideration of startups and business beginnings, but that ranges far beyond that in scope (see: Moving Past Early Stage and the Challenge of Scalability, as can be found at Startups and Early Stage Businesses, postings 96 and loosely following, for its Parts 1-35.) My goal for this series and for where to go in it from here, is to conclude the more entirely-early business development phase of this discussion as I have been offering here, and then move on to offer a more long-term scalability perspective on these enterprises: one that focuses more specifically on research-oriented enterprises with their particular issues and as they seek to grow into successful enterprises per se, than I pursued in my above-cited scalability series.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 5, and also at Page 1, Page 2, Page 3 and Page 4 of that directory.

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