43North competition is a must-see event

The 2016 rendition of the 43North competition for $5 million dollars was outstanding.  I attended the Thursday round-of-ten and am glad I did. The competitors were prepared, the businesses were interesting, the judges were polite as well as diligent, and the stage was audience friendly.

There were a couple of glitches in last year’s competition.

Last year’s cadre of combatants had several immature businesses, not bad ideas, just immature.  However, there here were more than a few that deserved the money and the attention. ACV Auctions was the crown jewel of last year’s competition. I had earlier reported that one of the judges was permitted to invest in ACV Auctions before the finals. I was not able to verify that assertion. Dan Magnuszewski told me that they now have 40 employees at ACV. These hires are good news for 43North and the Western New York economy.

The layout of the stage last year was an issue. The audience could only see what was going on by viewing the large screens. It was very disengaging. They corrected this, and I must say that this year’s competition was great entertainment and educational.

The following presents an overview of each of the competitors and how they fared. I graded each of the competitors and ranked them and then sent my rankings to Tom Ulbrich of CEL and Sam Marrazzo of SuperiorGroup by 5pm on October 27th. The finals started at 6:30 pm that evening. The 43North Judges composite ranking was inferred from the email press release and Sunday Buffalo News article. They did not put the $500,000 names in alphabetical order, so I assumed that this was a composite judge ranking.

Here are the results with my ranking.

  1. $1,000,0000 Oncolinxcombines an antibody that only targets tumor cancer cells with a toxin (Azonafide) that kills cancer cells.  Great idea and many pharmaceutical partners. I ranked them 1.
  1. $600,000 HigherMe assists in finding, screening and hiring employees for retailers. Rob Hunter is an outstanding presenter. Tim Cook should hire him for launch days. I did not think the judges would rank HigherMe this high. I was wrong, and I actually agree with the judges after further reflection. I ranked them 6.
  1. $500,000 Asarasi  produces organic water that is bottled by Mayer Brothers as a byproduct of maple syrup production. Great story with significant sustainability implications. I ranked them 3.
  1. $500,000 UltraCell Insulation produces water-resistant building insulation from recycled corrugated cardboard. Now you have a use for those Amazon boxes. Great sustainability idea. I ranked them 5.
  1. $500,000 PathoVax  is a vaccine that targets all human papillomavirus viruses (HPV) that can cause cancers and other diseases. This looked like a no-brainer challenge for first place. But maybe the judges have better insight into this business than I did. I ranked them 2.
  1. $500,000 Formarum is a device that uses the existing swimming pool circulation system to chlorinate and disinfect swimming pools. It has an app, and it is self-monitoring.This was my favorite creative idea in the competition. This idea is so simple, yet powerful enough to be adapted to a wide variety of applications. Beautiful design and just cool. I ranked them 4.
  1. $500,000 WeDidIt assist nonprofits in mining existing donors to develop specialized targeting strategies and to assist with the entire fund-raising process. They can garner a tremendous amount of information from the email addresses of existing donors. I ranked them 7.
  1. $500,000 Bounce Imaging has a throwable 360-degree camera that can be used for first responders for disasters, fires, and police situations. Very intriguing idea. Getting local Buffalo police testimony was a good tactic. I would want 2 or 3 of these cameras in each responding vehicle. Might be a little pricey, at $2,300 plus. I ranked them 9.
  1. $10,000 The Wealth Factory design games to improve financial literacy to assist in preparing students to meet the financial core standards. This will be an important way for students to become more engaged in education. One of the judges does not play games. Ok, but if you want to understand the Millennials and Generation Z, you need to try them. They received $10,000 as the People’s Choice Winner. I ranked them 8.
  1. $0.00 Arthena is a crowdfunding platform that offers investors to invest  investing in artwork funds such as emerging art, modern masters, and contemporary art.  I think the judges were unsure about the concept and giving the 43North imprimatur.  This will probably end-up be making some people millions. Too many questions about this. I ranked them 10.
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Using Pivoting and Real Options to Evolve a Business Model

Nothing is certain, except death, taxes and business decline. It does not matter how much money the current business is making; there is a life cycle for products and technologies, and eventually the business will decline without constant re-priming. Re-priming is essentially an investment decision involving the selection of the right product, the right people, and the right technologies at the right time. Real options theory can help with that decision.

Real options theory can be traced to a 1977 paper by Stewart Myers. They are called real options because they are investment decisions in tangible, real things such as a tangible asset, a product, machine or even a process since a process can be perceived. The real options investment decisions for a startup are:

  1. Concentrate on executing the existing business model. Focus on selling your existing products and versions.
  2. Add more versions to your exiting product line. The current product line looks viable, but needs fine tuning and freshening.
  3. Redirect the business in a new direction. Use existing competencies and acquire additional competencies to develop a new product line. Your existing products are not attracting customers.
  4. Abandon the current business. Fail fast and go back to the drawing board.

A real option is a decision or choice to invest a little or a lot in a corporate asset such as a business model, a product, or a technology. Real options look very much like the relatively recent concept of pivoting a startup. Eric Ries introduced the concept of pivoting and changing business direction in his 2011 book The Lean Startup.

“Companies that cannot bring themselves to pivot to a new direction on the basis of feedback from the marketplace can get stuck in the land of the living dead, neither growing enough, nor dying, consuming resources and commitment from employees and other stakeholders but not moving ahead. pp. 151-152”

The problem with the pivot concept is that it is a bit simplistic and parochial. The problem with the real options concept, when it is applied rigorously in its academic manifestation, is that it is too abstract and mathematically complex because it is based on stock options concepts.

An Enhanced Pivoting Model that Draws on Real Options

I have expanded on the pivot concept to take advantage of the more comprehensive real options approach by extending the basketball analogy. In basketball the pivot gives you the opportunity to get into the triple threat position. In the triple threat position the player can either pass, shoot or dribble. Check out Kobe Bryant in the triple threat position.). Each game is a continuous series of decisions to shoot, pass or dribble. Each season involves games against some of the same opponents and new opponents with the same shoot pass and dribble decisions. Finally, if the game is too tough, the player and the entire team can just walk off the court, albeit a radical, though sometimes prudent strategy in some situations.

The essence of the model (see Figure 1) is that founders should modify their business model based on the market potential and the degree to which the current founders and employees have core competencies and domain expertise in a particular area.

  1. Shoot: Go with the current business model and grow the business as quickly as possible.
  2. Dribble: Try to get in a better position by modifying and tweaking the current business model using versioning and identifying appropriate market niches. Identify mashup artists, and marketing expertise. Focus on product design and prototyping.
  3. Pass: Dramatically change the current business model. Use some or all of the core concepts of the existing model. Conduct intense R&D and acquire talent and perhaps even acquire a business with the desired core competencies. Get ready to receive the ball and be in the triple threat position develop a new and improved business model.
  4. Abandon the game & fail fast. Leave the game and walk off the court. Your position and perhaps your game is not good enough to compete effectively in this situation. Try to improve your game (domain knowledge).  You might even have to find a new court to compete on and introduce a new business model that draws on previous experience and new domain knowledge.

Triple threat

Figure 1: The Triple Threat Pivot Model

Market Potential and Core Competencies

Market potential refers to the size and the growth rate of a market. The size and growth potential of a market accounts to a large extent the attractiveness of a market and often drives the decision making process for startups and legacy businesses. Questions to be answered include determining the absolute size of the market, how much of the market can be reached and your potential to gain market share.

Core competencies are the knowledge, expertise and capabilities of the founders, employees and contained in existing processes. Pivoting and going in a new direction and embracing a new business model is often the key to business survival. But there are implications, because new investments can interact positively or negatively with existing skills and assets of the firm.

(The basic idea behind the model was published in Decision Support Systems.) 

Examples of pivoting over the last 150 years

As noted earlier, nothing is certain, except death, taxes and business decline. As illustrated in Table 1, many old and new economy companies have pivoted their way to success. Survival requires adaptation. It is truly a pivot or perish world and pivoters will inherit the revenues.

Real options analysis can be very technical, requiring a significant amount of financial and technical scrutiny. However, using complicated calculations is overkill for startups and small to medium-sized businesses. Real options concepts are nevertheless important.

The takeaway from the perspective of the entrepreneur is that you need to experiment and also need to diversify your portfolio of products and projects under consideration. You need to be constantly aware of the pivot. This does not mean that you have to actually buy machinery, make products, and constantly modify your business processes, but it does mean that you should learn-about many products and technologies related to your business and learn-by-doing and experimenting when an opportunity looks promising. As noted in the previous post, you might consider implementing a Chief Illuminati Officer function and start investing in options to keep your company viable.

Table 1: Old and New Economy Pivots

Company Name Initial Business Current Business
American Express Started as express mail business in Buffalo New York 1850 with merger of Wells and Company and Livingston, Fargo and Company Financial services corporation
Apple Launched in 1976 they introduced the Apple I computer. Sells computers, phones software and  sundry electronics items
AT&T Telephone company established in 1874 to protect Bell patent Currently a voice, data and internet communications company
Blockbuster Video and Entertainment Started in 1985 as a home movie and game rental business. Company is non-existent. Casualty of Netflix and Redbox. Had an unsuccessful pivot to online rental.
Coca Cola Launched in 1886 to combat morphine addiction. French Wine Coca made of coca, kola nut, and alcohol. Multinational manufacturer, distributor, and retailer of beverages, concentrates and syrups.
DuPont Launched as a gunpowder company in 1802. Chemical company producing neoprene, nylon, Corian, Teflon, Mylar Kevlar, Tyvek, Lycra and refrigerants among others.
Facebook Started in 2003 as Facemash it was used to compare the hotness of people pictures Large social networking company
Flickr Started in 2004 as a developer of MMORPG tools and migrated to a chat room with photo sharing Video and photo hosting
IBM Established in 1911 as Computer-Tabulating-Recording Company.  Sold scales, time recorders, meat and cheese slicers, tabulators and punched cards. Designs & manufactures hardware and software, and offers infrastructure, hosting and consulting services for IT and emerging technologies.
Nike Started in 1964 as Blue Ribbon Sports by when Phillip Knight distributed Tiger and Asics shoes out of his car. Designer, manufacturer and distributor of sports footwear, apparel, equipment and sports services.
PayPal Started in 1998 as Confinity a Palm Pilot and cryptography company After merger with Elon Musk’s X.com focused on money service
Pfizer Established in 1849 and produced an anti-parasitic for expelling worms and citric acid as a flavoring and preservative Multinational pharmaceutical.
Procter and Gamble Launched in 1837.  Sold soap and candles. Sold Pringles in 2009 and, Jif and Folgers around 2001 Multinational consumer goods company selling pet foods, cleaning agents, & personal care products.
Twitter Launched in 2005 as a podcasting syndicate for audio and video content. Large microblogging company
YouTube Initially conceptualized in 2005 as a video version of online dating site. Video sharing website