When asked if their company sales matched the excellence of their products, many entrepreneurs, technology based companies or healthcare companies, the
answer to that question is a resounding, NO! There is an exception to this with
the rapid rise of the new economy, new media, highly scalable companies like Open Table, Uber, Airbnb, YouTube, and others.
In their case, their prospective customers highly value their
newness, their breaking the mold, their non-establishment approach. They are
viewed as doing what they do far better than the technology establishment
stalwarts. The notable exception to this is Apple who has been able to
transcend old establishment and be accepted as both old and new economy.
But I digress. Back to topic. Most companies that sell to other
companies, or B2B companies are evaluated by their potential customers in a
traditional risk reward analysis. Or using computer terminology, their buying
decisions are made using a legacy system. It was once said that no one ever got
fired for making an IBM decision.
Let's look at this legacy buying model and see exactly why your
company's sales do not match the elegance of your solution.
One of our healthcare clients insisted that we read CROSSING THE
CHASM by Geoffrey Moore to give us greater perspective on his company's
situation. By the way, if you are a smaller technology based or healthcare
company selling in the B2B space, this should be required reading.
Our client was a two year old company selling a cutting edge,
on-line nurse shift bidding and self scheduling system to hospitals. This is a
great product. The ROI's were easily quantifiable. The handful of installed
accounts loved it. Most importantly, it had a positive effect on the nursing
staff's morale. This alone could justify the cost of the system.
Our client had some very encouraging early success selling his solution
to some of the more progressive hospitals. They received some outstanding early
PR. After that initial success, however, our little edgy technology based
company hit the wall.
The sales cycle went from six months to beyond twelve months.
Cash flow became an issue and, to top it off, a generously funded venture
backed competitor with well known industry executives was aggressively
developing this new market.
What was happening? Our clients were very smart people and
figured out what was happening. They knew that they would have to make some
difficult and dramatic decisions in short order. Turns out the majority of
hospitals are legacy buyers and make buying decisions based on a risk avoidance
paradigm.
Our client's early success was realized as a result of selling
to the small minority of early adapters in their industry. These are the
pioneers that don't mind the arrows in their backs from heading out West with
new products or new vendors.
Legacy buyers, however, do not value references that are early
adapters. They are known to have a much higher risk tolerance than the
traditional majority. Below are some buying criteria from these legacy buyers:
1. Big is good. Bigger is better. Buying inferior technology
solutions from a blue chip publicly traded company wins most of the time.
2. Old is good. There is no replacement for experience and the
grey haired company beats the gelled hair Tech Wizard company more often than
not.
3. Industry Cred means everything. If you are a company that
adapted your product from success in another vertical market and you are
entering our space, the old familiar face carries the most weight.
4. Will the little guy be in business next year? The failure
rate for the sub $ million company is a thousand times greater than for the $
billion company. This change in technology is painful enough. Do I want to risk
having to do it over again in a year?
5. If I have problems, the big guy can fill the skies with blue
suits until my problem is solved. The little guys cannot appropriately respond
to my problem.
This is a punishing gauntlet for the small companies and it is
amazing that any new companies survive in this environment. Let's look at a few
of the "crossing the chasm" strategies that have been effective in
swaying legacy buyers decision making in favor of the smaller provider with
superior technology.
A. A well-known executive from an established healthcare company
is put at the helm of the new company. The thinking from the buyer is that if
he did it once, he can do it again.
B. Get an industry-recognized authority to endorse your solution
or, better yet, have them join your board or advisory council.
C. Close a deal with a conservative, well respected customer and
make them your marquee account with all the trimmings - i.e. a contract with a
favored nations clause, the technology or computer code held in escrow with
specific instructions if you go out of business, case studies and Public
Relations glorifying the progressive decision maker, and providing an equity
stake in your company are some examples.
D. Forging a strategic alliance, joint marketing agreement or
resellers agreement with an industry giant. All of a sudden your small company
risk factors have been eliminated and it has only cost you 30%-50% of revenue
on each sale they make.
E. Sell your company to the best strategic buyer. Sometimes the
best solution is to sell your company to the best strategic buyer for your
greatest economic value. This is the most difficult decision for an
entrepreneur to make. Below are some of the market dynamics that would point to
that decision. Note: several of these factors influenced our entrepreneurial
clients to ultimately sell their business to an industry giant.
You see your window of opportunity closing rapidly. You may have
great technology and the market is starting to recognize the value of the
solution. However, you have a small competitor that was just acquired by a big
industry player. The bad news is you probably have to sell to remain
competitive. The good news is that the market will likely bid up the value of
your company to offset the competitive move of the big buyer.
The strategic alliance is with the right company, but the sales
force has no sense of urgency or no focus on selling your product. The large
company lacks the commitment to drive your sales. An amazing thing happens with
an acquisition. The CEO is out to prove that his decision was the right one. He
will make his decision right. All of a sudden there is laser focus on
integrating this new product and driving sales.
You have created a strategic alliance and poured your company's
resources into educating, supporting, and evangelizing your product. Whoops,
you have counted on this golden goose and it has not met your expectations.
Also you have neglected your other business development and sales efforts while
focusing on this partner.
Many large healthcare companies now employ a try it before you
buy it approach to M&A. They find a good technology, formalize a strategic
alliance, dangle the carrot of massive distribution and expect the small
company to educate and integrate with his sales force. Often this relationship
drains the financial performance of the smaller company. If you decide to sell
at this point your value to another potential buyer has been diminished.
Do not despair. If you have demonstrated a cultural fit and have
helped your products work in conjunction with the big company's product suite,
you have largely eliminated post acquisition integration risk. This can often
more than offset any short-term profit erosion you may have suffered.
It is not easy for the smaller healthcare company to reach
critical mass in this very competitive and conservative environment. Working
harder will not necessarily get you where you need to be. Step back and look at
your environment through the eyes of your buyers. Implement some of these
strategies to remove the risk barriers to doing business with your company. Now
you have created an opportunity for your sales to match the elegance of your
technology solution.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
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