Author: Chris Young, PhD

From my experiences, I have noticed that many CEO’s seeking incremental value, either for equity or debt financing or for an exit, do so by presenting their company in a way that emphasizes broad objectives, addressing a very large market opportunity.  Logically, this seems to make sense, and by most standards, is the role of the CEO or the visionary within a company.  However, I want to take the contrarian position here.

Many companies that I have interviewed for a capital raise or an exit, have historically been companies with revenue between $10m and $100m USD and profitable or close to profitability, and most of these companies were information or technology based.  Although most of these companies were founded by addressing the needs of one type of client, I noticed a common thread occurring in most; the phenomenon of “client creep.”   Client Creep occurs when early stage companies lose focus on their core clients to serve a broader client base, in hopes of driving incremental sales.   Although most CEO’s will not admit to losing focus of their core client, they have in most instances, done just that, in exchange for incremental revenue across the business.  The exchange of incremental clients and a higher revenue base seems to justify the possibility of future cancels or the loss of some core clients.

The challenge employing this multiple product strategy is that it is focused on the short-term, losing sight of the greater value created by employing a strategy focused on the SINGULARITY OF PURPOSE (SOP).  The SOP is a strategy that was, and still is, used by many of the great companies, such as Microsoft, Intel, Cisco, Goldman Sachs and others and is a strategy currently employed (so it appears) with LinkedIn, Facebook, Twitter, Tesla and others.  The basic idea of the SOP is simply to focus on one product, adding to that product in an iterative process that continually improves the offering (in the strategy literature this is referred to as Fit). Microsoft was successful, originally, by focusing on the operating system, Intel the micro-processor, Cisco the router, Goldman Sachs the M&A deal.  What all of these companies got right, in the beginning, was their insular, passionate drive to make the best product or service possible, and serving a market that was discrete and known.

It seems that many of the high-value companies today are following similar course.  Take for instance Twitter (despite its recent market turbulence). Since the founding, Twitter has focused on iterative changes to its Twitter feed, offering the best and most entrenched one to many, open communication solutions, serving millions of customers globally.  Facebook, has done the same, yet focused on a one to many closed-private, communication solution.   As we have seen in the financial markets, both of these companies have established envious value.  Sure, there are many other attributes driving these companies, but the SOP, has helped these companies create a one product solution that drives extreme client penetration.  Another company with a similar story is Tesla.  Although Tesla has multiple automobile models, the company is focused on becoming the number one provider of electric vehicles.  The company is focused on providing a transformational shift in the auto industry, by creating the most well designed, company owned sales and service model.  Unlike the legacy auto manufacturers, such as Ford, GM, Honda, etc.., Tesla is transforming the entire process of producing and selling electric automobiles.  Other companies with SOP is Uber and AirBnB, both companies pushing one service offering.

In the past, when I discussed the SOP with my clients, the feedback was, “Well that is fine and well, but I need to drive revenue, so that the business is sustainable, in the near term.”  I always admired CEO’s with this mindset, because it helps the investor understand the virtues of the CEO.  Though I admire this virtue, I also caution these business leaders to be careful of client creep and advise that the only way to avoid client creep is to ensure your strategy is predicated on driving one idea or product.  If the business is not sustainable into the future, based upon one product or idea, I was always cautious of investing in it.  The CEO has to have conviction for the product and product strategy.

Today, when I value companies, I spend considerable time learning about and understanding the vision for the product(s).  When there are multiple products, with minimal revenue per product, I tend to fall back on using a higher discount rate, thus lowering the overall value of the subject company.   My point is that, although there may be multiple products, with each driving revenues, the overall value of the company may be lower, because of the greater risk of executing and the heightened possibility of losing core customers.  Now, you may argue that it is prudent to have a diversification of products, to alleviate the chances of a revenue decline, if one particular product faces a market challenge or some other unknown event.  Again, although this is a great idea, the prudent investors have already planned for diversification of their portfolio, so there is limited need to engage in this type of activity.

The SOP is an idea that is best suited for early stage companies seeking capital or an early stage company approached by a strategic buyer, in a market where large opportunities exist. CEO’s should be careful when presenting their vision, and should be careful of underestimating the amount of capital needed to drive rapid growth in a one product company.  Rather than presenting a strategy with multiple products, so to avoid additional capital needs and dilution, CEO’s should focus on driving a one product strategy, seeking the proper amount of capital needed to ensure success. In the end, greater shareholder value will be created by lessening the chance of execution risk, improving client satisfaction, and by increasing the chances of creating a transformational product that will permeate the global culture.