William Wang and the 21st Century Business Model

“Thus, what is of supreme importance in war is to attack the enemy's strategy.”
Sun Tzu

It is hard to imagine how someone could start an HDTV company in 2002 to compete with Sony, Samsung and Sharp.  And start it with less than $1M in total capital ($600,000 to be exact)!!  Can’t be done!

William Wang did it.  In just 7 years Vizio became the second largest supplier of televisions in North America.  He didn’t just compete with the giants, he won!  I am not going to spend time recounting the journey.  A couple good links to the William Wang story are below:

http://www.sbnonline.com/Local/Article/14706/77/0/The_big_picture.aspx

http://www.inc.com/magazine/20070601/hidi-wang.html

What I will observe is that William understood the disruptive business environment in the 21^st century and the opportunity it created.  Old business models are increasing vulnerable.  This is spectacularly evident in industries like music, media, newspapers, travel etc. where old businesses are collapsing.  The common thread is that contemporary cost structures are radically lower than they were in the past.  William recognized that this opportunity also existed in consumer manufacturing and he created the most successful and visible model (so far) for this sector.

The keys to his success:

He understood his strategic opportunity.

He knew what he HAD to do himself and outsourced everything else.

He recruited partners (not just suppliers) and distributed the risk and reward.

He built a culture that conserves cash and delights customers.

Strategy

Deliver a lower cost product by building a lower cost company.  Focus on quality and customer service. Control and promote the brand.

Outsourcing

Build a lower cost company by outsourcing everything to partners who have scale.  Scale yields low unit cost. Ride on the partners scale while the business is small.  Outsourcing to large partners helps create a fundamentally lower cost structure.  Further, outsourcing supports easier scaling and provides better flexibility to respond to changing market circumstances.  Keep direct control of customer service and the brand.  William Wang built a $2 billion business with fewer than 100 employees.

Partners

Recruit partners who have a critical interest in participating in your opportunity and are willing to take some of the risk in return for some of the reward.  This reduces the capital requirements and is key to getting the benefit of the partners scale when you are small.  The partners make an investment in the business either directly or through advantageous business relationships that conserve capital and reduce costs.  We will address the difference between a partner and a supplier/distributor in later posts.

Culture

To create a low cost company, you must create a low cost culture.  EVERYONE must embrace the  premise - in words attributed to Tom Perkins - that “Cash is more important than your F#$%^@& mother”.  There are no deep pockets around to put in more money.  The company has to pay its bills with the money it receives from its customers.  Culture can focus on the company stock price or on the company cash flow.  The employees can be "Traders" or "Owners".  Ask yourself - do the employees of your company care more about the share price or the weekly cash flow?  Venture Capital has created a pervasive Trader culture among management and employees in the technology sector.  Owner and Trader cultures result in huge differences in the attitudes, behaviors and actions of the people who make up the company.  We will focus further on Owner and Trader cultures in future posts.

By innovating and executing in these key areas, William Wang not only created a company which beat the incumbents, he created a cultural, operational and financial competitive advantage that his competition cannot overcome.  He defeated the enemy's strategy!

Back to the Future? - How about Forward to the Past!

I just finished watching the first 4 episodes the so-called smackdown on TechCrunch featuring Dave McClure and Dave Hornik pissing at each other about the validity of the Super Angel vs. mainstream VC investment models.  Frankly there isn't much difference and my conclusion is that it was "much ado about nothing."  I think both models can work if they are scaled appropriately for the opportunity space and are well run by thoughtful and skilled professionals.

The mainstream venture model evolved over 40+ years to the point where huge firms investing huge funds became the norm.  The industry is massively overbuilt.  Returns have been negative for 10 years.  There is, and will continue to be, major downsizing.  Most (greater than 50%) of the mainstream firms will go away.  Many of the remaining firms will look to invest overseas.  There will never again be the kind of returns generated in the 90s because the technology industry is more mature, there is less white-space to conquer and paths to market are dominated by large and successful firms who extract a lot of the value.  Mainstream venture capital is a significantly tougher business than it was in the 1990s.  It will probably be 2015 or later before the industry is right-sized and modest positive returns start to reappear across the category.  Conclusion - nothing wrong with the model if it is sized to the opportunity space.

Super-angel funds are, in-fact, nothing of the sort.  Angels are investors invest their own money and, overwhelmingly, they made that money by being successsful entrepreneurs themselves.  Super-angels are really just micro VC funds.  They raise money just like mainstream VCs.  They just raise less money, invest in deals at lower valuations and look for exits in the sub - $100M range.  They also make the claims that they are "seasoned entrepreneurs" and provide special help to their portfolio companies (Hmmm - maybe).  Oddly this model looks EXACTLY like a the mainstream VC funds of the early 1980s.  Duh!!

There is a current opportunity for these funds because the mainstream firms have too much money under management to support small scale investment and small scale exits.  This space is nowhere near as overbuilt as mainstream venture capital so there is less of a supply/demand disequilibrium.   It is also supported by the ecology because the larger technology firms are having trouble innovating and are looking to buy early-stage innovation at early-stage prices.  Early-stage exits are a defeat for mainstream venture firms.  They are a victory for super-angel firms.  Conclusion - probably a better space in the short term for companies, limiteds and investors who are happy playing on a smaller chessboard and not committed to changing the world. 

What both firms have in common is that they exist to buy and sell equities.  They both buy from entrepreneurs and they both sell to acquirers or (very infrequently these days) to public shareholders.  They are, at their very core, traders.  Their job is to buy low and sell high.  This fundamental truth about the venture business informs every action they take whether mainstream or super-angel.  It also informs the culture of the businesses they create.  Everyone is looking for a pot of gold at the end of the rainbow - the life changing - all consuming - EXIT!!  The nature of their business model demands it.  These are close-end funds.  They have to return money - cash - to their investors and they have to do it in a fixed period of time.

In this blog over the next several months I am going to explore another - even more ancient - model for company creation.  This is art and practice of building and running a business for POSITIVE CASH FLOW.  Before there was venture capital and before there were EXITS, people built businesses to make money so they could pay their bills.  I will argue that re-discovering this model drives a corporate culture which is much healthier, more robust and more survivable than the EXIT-focused culture created by the venture capital model.  I will also argue that the cash flow model can engage the employees, the critical human capital asset of every business, to significantly greater efficacy than equity models.  Lastly, I will argue that we can modestly scale this model to the point that it can become a significant factor in new business creation.

We will follow the early success this model has had in a couple of businesses and, with luck, the later success it will have as the effort proceeds.   The first part of this adventure will start next week.