December 3, 2005

Attenuate Goliath’s Financial Resource Strength

Posted in David vs. Goliath, finance, management at 7:42 am by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

Financial resources are probably a large company’s greatest strength vs. the emerging growth company. They have more staying power and a larger bank account than the emerging growth company. If they choose to (or are just clumsy), they can severely hurt the economics of any product market that they enter.

Attenuating the large company’s financial resource strength…

With respect to financial resources, all you can really do is to set up your company not to run out of cash, even in the difficult situations. Some thoughts:

  1. From day one, set your pricing and business model at a point of efficiency that will be difficult for the large company to meet. This will reduce the large company’s interest in the market and set you up in a very economically defensible position if the large company does enter your market (see “Aiming Toward the Economic Singularity” for some ideas on this).
  2. Get cash flow positive as soon as possible. If you need or want to invest in growth and can’t be cash flow positive, be in a position to either
    • Dial down the investment expenses quickly, or
    • Have plenty of cash to make sure that you do not end up in a tough financial situation, or
    • If you do not want idle cash, make sure that you have deep enough pockets (your own, your bank and investors) to ride through a market storm (I would be careful relying on others to fund you during a storm, however…it is not a good time to request capital).
  3. Develop several contingency plans for the business and make sure that you can successfully get through those scenarios financially. These plans should include the scenario of a large company coming into your market and underpricing you (even if you follow the advice in point 1 above).
  4. If you have developed to a point that this issue has become important, you probably need a strong CFO (or equivalent analytical talent) to help you understand the cost model of the business and how you can continue to make it more efficient. The CFO should develop a model (with both activity metrics and economic metrics) for the business based on historical calibration points (this is important, as a model that has not been calibrated isn’t accurate!). The model can be used for various purposes:
    • Determining the efficiency of various groups and processes (to find opportunities for improvement)
    • To chart progress vs. predicted progress and understand the implications (this is highly valuable!)
    • Determining cash flow under various business growth scenarios
    • Determining cash needs during a tough market situation
    • Determining opportunities to reduce the price paid by users.

None of this is particularly difficult and part of running a well oiled long-term business. The major point is that you can take steps to have plenty of cash to get through good times and, more importantly, bad times. If you take these steps and have enough cash to get through the tough times, you will attenuate Goliath’s financial resources strength!


1 Comment »

  1. […] Significant financial resources […]

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