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MANAGEMENT: CEO's -Thinking like a VC
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-Thinking like a VC

By Marwan Emile Faddoul (Managing Partner, NFG Consulting LLC)

BT 201508 08 Management o FEMALE CEO facebookIt is not enough to sell in a business, especially if we want to sustain our position in the market. For that, we have to work hard and keep improving ourselves on a daily basis. Market demand and competition make the task hard to keep a similar trend. Eventually, we have to invest regularly in our company. When I say invest, I mean in our staff, our products/services and in new markets (whether local or overseas).

A few years ago, I was visiting a friend, Eric, an owner of a well know fragrance manufacturing company here in China. During our conversation, he told me that he was interested in expanding to overseas, specifically in the United States. I asked him why he wanted to enter this market, why not another market. He shared with me the story of his friend, a reliable and successful business person who had opened a shop in New York City and was able to make tonnes of money out of his business, a business that compliments Eric's business. He added that his decision to expand to the US was primarily based on his friend's idea. I asked Eric if he had any other documents or information that would back his decision, his answer was simple, NO!

I kept silent for a few minutes and then told Eric that expanding to the United States might end up being the right thing for your business. However, if you want to take the risk and invest in a new market that you don't know much about, or even in a different innovative line of business, you should think like a venture capitalist.

Eric looked at me and said: Why like a VC?

BT 201508 11 Management HLI replied: Eric, I know that your current products are among the best in the PRC market and your company has a very good reputation. However, we as entrepreneurs and owners of a company tend to get a little too close to our products and services and are not able to clearly see the market opportunity and the strategy to achieve it. At the end, it is important to ask a lot of hard questions about the business model, value proposition, go to market strategy, competition, and risk. When investing in a new line of business or expanding overseas,we, just like VC's have common goals: to maximize return and reduce risk.

I added that as VC's, leaders and CEO's should base their investment decisions on several important criteria:

Having the right people: CEO's should be looking for entrepreneurial teams that have some combination of brilliant technical innovation, insightful go-to-market strategy, relevant domain experience, and an obvious leader who could grow into being the head of a division or even a future CEO.

Focusing on time. Maybe it's the number of customers or a certain revenue figure, but the question is how long we'll need to hit those targets. Successful CEO's use time as a hard boundary to help recognize when something isn't working.

Developing a detailed financial projection. Unfortunately many owners of companies look at competitors to see how much they have raised in some similar projects, and often end up short on cash at a very early stage of the expansion process.

Focusing on the technical risk. It is important to raise questions about the company's vision, about customer behaviour, about the target market, and about competitors, eventually making sure to cover all aspects of our business prior to investment.

I turned to Eric and said: if you take your case for example, considerable elements should be taken into account.

First of all, from a demographical perspective. Is the American market interested in buying your type of products? Tastes in fragrances differ from region to region.

Second, from a geographical perspective. Does US law require special certification like FDA approval? If so, are there any fees to pay and tests to prepare, and what is the required time to finish these procedures? Moreover, can transportation be an issue? Does cold weather or heat affect the products during shipment, and if it does, how can you overcome this obstacle?

BT 201508 10 Management bigstock Clapping Business People 46194028Third, from a strategic angle. Even if you have the capacity to produce different types of fragrances, will it be cost effective to purchase all the raw materials, knowing that many of these might have to be purchased from overseas? What should be your profit margin? And do you care about making profit in this market? One strategy is to sell your goods in a country with no profit and even with losses, with the intention of making a name for yourself. In the long run, you sell your products to other countries at a higher price.

Finally, supposing we do our due diligence, we are still taking a risk in something new. I advised Eric, to zoom out and focus on the big picture.

Venture capitalists always invest in a basket of different start-up companies, fully knowing that most will fail. A few might break even and one or two might be successes. But one big success can pay back the costs of all the failures.

It is the same with prototypes in business. The leading innovators run many different pilots and measure progress carefully. They chop the losers but pour more resources into the successful trials. That way they are first to market with the real winners.

At the end of our conversation, I told Eric to close his eyes, and said: "pretend to be a venture capitalist that has a hundred million dollars to spend on investments in companies related to your line of business. You need to turn that in to half a billion dollars in ten years. What companies would you invest in? What do they have in common with your business? And would your company make the cut?"


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