Jussi Nukari Backround Jyväskylä Science Park, Director, ICT Sector mobile:

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1 Global Software Business JYU: November 6, 23, 8:3-1 am Jussi Nukari Jyväskylä Science Park - Growth Center for Software Industry and Wireless Applications Jussi Nukari Backround Jyväskylä Science Park, Director, ICT Sector jussi.nukari@jsp.fi, mobile: JSP Planning in Business plan and business development with tens of ICT companies Growth Strategy for Finnish Software Industry (in Finnish) (Author, 1999) Launching Your Software Business in America (Editor, 21) Globaali liiketoiminta (Global Business) (author) in the Book Ohjelmistoliiketoiminta (Software Business), Eero Hyvönen (Editor) Global Business Development and Marketing Programs (Pilot Software & Global Software I&II (6+ SMEs), Global Software III starting (Founder, management team, 1998-) SPIN (Software Product Industry Technology Program) of Tekes, The National Technology Agency (Program Manager, 2-23) Board and Advisory Member of several companies

2 The content of the presentation 1. Jyväskylä Science Park in brief 2. Global ICT business, software segment as a part of ICT 3. Basics of the software (product) business 4. Finnish Software Industry Survey 23 and Future Globalization Challenges 5. Israeli Software Industry 6. Born Global phenomena 7. Aspects to take into account when growing the software company Jyväskylä Science Park Ltd Mission Statement To promote business opportunities for companies utilising new knowledge and technology.

3 Year 22 in brief Revenue 11,9 MEUR 8,7 MEUR External funding 8,5 % 77 % Personnel 3 3 In Science Park companies employees New incubator companies 11 1 Feasibility, seed, venture capital 1,29 M Jyväskylä Science Park Business development Technology development Facility services JSP Facilities Oy

4 Personnel Revenue and personnel of the incubator companies Revenue 1 euroa Science Park Area in Jyväskylä

5 Innova 6. Viveca 2. Agora 7. Ylistö Ohjelmakaari 8. Nokia Oyj 4. Ylistö TietoEnator Oyj 5. Survontie 9 1. Visma Software ICT Sector of Jyväskylä Centre of Expertise - Focuses to Enhance the Competitiveness of the ICT companies in the Region 1. Research Based on Company Needs and Technology Transfer 2. Training the Personnel of the Companies, esp. SMEs Internationalization: Pilot and Global Software (6+ companies) Mentoring The Entrepreneurs ICT Project Manager 3. Securing the Availability of Skilled Personnel JUY s applied science and Information Technology JUY s Master s Programs (partly EU funded) JUY s Master s Programs II 2- (partly EU funded) 4. Exploiting and Developing the Infrastructure (including Incubator and Facilities)

6 Global ICT business, software segment as a part of ICT ICT Market 22, 2441 B (EITO22) Rest of World 25 % Europe 29 % Japan 13 % USA 33 % Copyright 22, Jussi Nukari. All rights reserved.

7 ICT Markets ( B) in 21 by Regions & Some Countries (EITO 22 and OECD IT Outlook 22) USA Europe 284 Japan Copyright 22, Jussi Nukari. All rights reserved. 551 Rest of World Germany UK France China Italy Brasil India Finland Major Regional ICT Markets ( 268 B) & Finland by Segment, 23 Finland Rest of World Japan USA Eastern Europe Western Europe % 2 % 4 % 6 % 8 % 1 % ICT Equipment Software IT Services Carrier Services Copyright 22, Jussi Nukari. All rights reserved.

8 Major Regional ICT Markets & Finland by Segment ( 2,292 T), 21 Finland Rest of World Japan USA Finnish market is under.5% in all ICT segments The company cannot grow big in Finnish home market Eastern Europe Western Europe ICT Equipment Software IT Services Carrier Services CAGR of ICT segments (OECD s share %; OECD IT Outlook 22) 16. % 14. % 12. % 1. % 8. % 6. % 4. % 2. %. % 15.9 % 13.8 % 12.3 % 12.7 % 9.5 % 7.1 % 5.7 % 5 % software Carrier services ICT equipment IT Services Copyright 22, Jussi Nukari. All rights reserved. OECD others

9 Software Product Market ( 223 B) by Regions 21 Rest of World 14 % Japan 8 % Western Europe 3 % Eastern Europe 1 % USA 47 % Copyright 22, Jussi Nukari. All rights reserved. Worldwide software product markets in 21 ( 223 B) by some countries (EITO22, OECD IT Outlook 22) China India Israel USA Japan Germany UK France Copyright 22, Jussi Nukari. All rights reserved. Canada Netherland Australia Switzerland Sweden Spain Belgium Denmark Austria Norway Finland Korea Irland

10 Western European ICT market growth by segment, 21-23, in % ,5 9, 5 3,4 2,2 3, 3,7 4,6 4,9 5,4 4,1 1,1 3, ,1-6,8 Total ICT equipment -1,5 Software products IT services Carrier services Total ICT Source: EITO Update 22 in cooperation with IDC Market value 22: 641 billion Euro Growth Scenarios for Software Products Industry (Coming back to +1% annual growth in 24 would double the business by 21) B % + 1% + 8% % + 3% /3/7*8% /3/7*1% /3/7*12%

11 Worldwide software market 1999 ($ 154,9 B) by segments (OECD IT Outlook, 22) Application software ($ 75,9 B) 49 % 32 % System infrastructure software ($ 49,6 B) Copyright 22, Jussi Nukari. All rights reserved. 19 % Software development tools ($ 29,4 B) Worldwide software market 1999 ($ 154,9 B) by (sub)segments (OECD IT Outlook, System Infrastructure Software $ 49,6 B 22) System level: Operating Systems System level: other software Middleware System management $ B share % 3.4 % 3.5 % 9.1 % 32 % Security % 19 % Software Development Tools Database management tools Components, objects and development environments % 5.6 % 49 % $ 29,4 B Development life cycle management Internet tools %.3 % Cross-industry business, ERP % Application Software $ 75,9 B Other cross-industry business Vertical industry business: CAD/CAM/CAE Other vertical industry business % 6.2 % 16.2 % Copyright 22, Jussi Nukari. All rights reserved. Consumer and home %

12 Worldwide software markets 1999 ($154,9 B) and forecasted CAGR (OECD IT Outlook, 22) Infrastructure software Development tools Application software $ B % 32.9 % 11. % 21. % 11.2 % 16.3 % 11.9 % 34.1 % 18.5 % 4. % 35. % 3. % 25. % 2. % 11.8 % % % % 5. %. % OS & other system software Middleware System management Security DB systems Components, objects and dev. environments Development life cycle management Internet tools ERP & other horisontal Vertical applications Consumer & home Copyright 22, Jussi Nukari. All rights reserved. Basics of the software (product) business

13 Finnish Software Industry Survey 23: The focus of the survey: software product business Software product business is business around software products, where customer tailored parts are not an essential part of the whole software Own software product business is software product business, which is based on company s self developed and maintained software products Definition does not include embedded software such as mobile phones or customer tailored software In Finland software product industry generates approximately 3 % of the whole software industry s revenues Important Object of the trade is software, not a service or an other product The software has been productized Sale units Product business Packaged mass-market software Enterprise Service solutions business Professional services Low Medium High Degree of productization Source: McKinsey 1999 Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio, Secrets of Software Success Management Insights from 1 Software Firms around the World Covering 16 Countries - North America, Europe, Asia Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer,

14 The Segmentation of IT Market (Source: Hoch et al (McKinsey & Company Inc.), Secrets of Software Success, Management Insights from 1 Software Firms around the World, 2) IT MARKET Hardware products Hardware maintenance services Software products and services Processing services (e.g. ADP) and Internet services (e.g. Yahoo) Embedded software including services Software products Professional software services Enterprise solutions Packaged mass-market software Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer, Worldwide Survey 1 Software Firms 45 senior executive interviews 15 % very large (revenues >$1b) 41 % large (revenues <$1b) 32 % midsized (revenues <$5m) 12 % start-ups (revenues <$1m) Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer,

15 Software Industry Categories 24 % Packaged mass-market software 39 % Enterprise solutions 37 % Professional software services (-) Embedded software including services Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer, Dynamics of Businesses PROFESSIONAL SERVICES PRODUCT BUSINESS MARGINAL COSTS Almost constant Almost zero MARKET STRUCTURE Highly fragmeted Drive towards high concentration REGIONAL APPEARANCE CUSTOMER RELATIONSHIP MOST IMPORTANT NUMBER TO WATCH Mainly regional, with increasing tendency to globalization One to one Capacity utilization rate Highly globalized One to few, One to many Market share (installed base) Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer,

16 Relevance of Management Areas PROFESSIONAL SERVICES 1 Human resources 2 Software development 3 Marketing and Sales 4 Strategy PRODUCT BUSINESS 1 Strategy 2 Marketing and Sales 3 Human Resources 4 Software development Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer, Mass-Market Software Mgmt Areas by Priority Marketing Partnering Globalization People management Key Balances to Find within the Top Five Areas Invest in marketing to build dominance Grow the market but share it with partners Invest in fast international expansion Invest in developing and retaining people long term vs vs vs Limit marketing expenses to raise profitability Focus on a smaller market but take it alone Keep organizational focus and profitability Focus on short-term profitability by utilizing people efficiently Development Shorten time to market vs Deliver all features and top quality Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer,

17 Mgmt Areas by Priority Partnering Service strategy Marketing People management Enterprise Solutions Key Balances to Find within the Top Five Areas Grow the market but share it with partners Grow revenues with products and services combined Invest in brand and relationship building to reach market dominance Invest in developing and retaining people long term vs vs vs vs Focus on a smaller market but take it alone Maintain organizational focus in product business only Limit marketing expenses to raise profitability Focus on short-term profitability by utilizing people efficiently Development Shorten time to market vs Deliver all features and top quality Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer, Professional Software Services Mgmt Areas by Priority People mgmt Human resource assignment Key Balances to Find within the Top Five Areas Invest in developing and retaining individuals long term Spend time on future business and reputation building vs vs Focus on short-term profitability by utilizing people efficiently Ensure full capacity utilization Development Keep project schedules vs Deliver all features and top quality Marketing Partnering Invest in personal trust based relationships and keep professional touch Tie up with many product partners and expand quickly vs vs Copyright McKinsey & Company Inc, 1999 Source: Juhani Saukkonen, Oulu Software Custer, Invest in more aggressive brand building Build up deeper relationships with only a few product partners but slow the expansion

18 Strategy for Software Companies What to Think About Based on The Software Business (forthcoming, Free Press/Simon & Schuster, 24) Michael A. Cusumano MIT Sloan School of Management 23 Perspectives on the Software Business EUROPE: Software as a science formal methods, object-oriented design JAPAN: Software as production software factories The USA: Software as a business Microsoft Windows, Netscape Navigator (Source: Michael A. Cusumano, MIT Sloan School of Management ( 23))

19 Strategy: What to Think About 1. Business: Products or Services? 2. Customer: Individuals or Enterprises? Mass or Niche Markets? 3. Products: Horizontal or Vertical? Narrow or Broad & Bundled? 1. Revenue: How Much Recurring? 2. Chasm: Cross, Avoid, or Leapfrog? 3. Platform: Leader or Complementor? 4. Character: Ethical and Responsible? (Source: Michael A. Cusumano, MIT Sloan School of Management ( 23)) Want to be a Products or a Services Company? Definitions Products Company: Most revenues from software license fees (shrinkwrapped packages) Services Company: Most revenues from long-term contracts (customization, consulting, training, system integration, support, maintenance & product upgrades) Product upgrades can be 2-4% of service revenues, usually included as technical support or maintenance

20 Why Make a Choice? Products and Services Companies Require: very different business models (structure of costs, margins) very different strategies (positioning, possibilities) very different capabilities (technical, marketing skills) Hard to be great at both simultaneously? Business Model Contrasts Products Companies: volume, share, scale economies; platforms; incremental upgrades Key: Understanding general customer needs Strategy Model: Printing Press, Best-Seller Book Services Companies: customization projects, scope economies; recurring revenue, account mgt. Key: Understanding specific client needs Strategy Model: Bank, Asset Management

21 Why the Great Attraction of Software Products? Gross margins on product sales of up to 99%!! Cost same to make one copy or one million!! Like a license to print money, or books!! By far, the preferred business model for entrepreneurs and venture capitalists! The Problem with Products Hard to write best-sellers ( killer apps ) In bad economic times, product sales can fall off a cliff i2 s SLF fell from $79 million in 2 to $152 in 22 Software packages can become commodities Example: Average Selling Price for same software license fell $1.5 million in 2 to $4, in 22 Products subject to discretionary IT spending Only guaranteed revenues in bad times may be contracted-for services and maintenance 99% of =

22 Case Siebel Siebel Siebel $ million Products Services Products Services Tot al Siebel % of Total Revenues Products Services (Source: Michael A. Cusumano, MIT Sloan School of Management ( 23)) Case Oracle Oracle Oracle $ million Products Services 1999 = Products Services Total Oracle Products Services (Source: Michael A. Cusumano, MIT Sloan School of Management ( 23))

23 Case SAP SAP SAP million euros Products Services Products Services Total SAP 8 % of Total Revenues Products Services (Source: Michael A. Cusumano, MIT Sloan School of Management ( 23)) Services & Maintenance as Percentage of Total Revenues Business Objects i2 Seibel Peoplesoft Oracle IBM S&S SAP Compuware (Source: Michael A. Cusumano, MIT Sloan School of Management ( 23))

24 Three Business Models % of total Revenues Products Hybrid Solutions Services Products Services (Source: Michael A. Cusumano, MIT Sloan School of Management ( 23)) Finnish Software Industry Survey 23 and Future Globalization Challenges for Finnish Software Product Companies

25 Current state of the software product industry in Finland The overall turnover reached 1 million in 22 Profitability weakened from the previous year Young companies R&D investments have decreased Current capital market situation is limiting operational possibilities of especially young companies 31 % of the internationally operating companies have started exporting in -2 years from the founding of the company Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio, Turnover development of software product business industry ) Total revenues exceeded 1 million in 22 (9 million in 21) Annual growth 14 % Growth achieved in 22 from domestic markets (domestic growth app. 2 %) The value of exports 4 M in 22 despite the challenging economic situation exports remained at the 21 level Growth expectations more moderate than a few years ago Challenging capital market situation and economic downturn has decreased growth expectations Nevertheless companies remain optimistic Million budgeted actual budgeted actual budgeted Export Domestic Overall 1)Exstrapolated to the industry level Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio,

26 Software product business personnel 1) 12 No dramatic changes in the amount of personnel Employs app. 1 software professionals Companies remain cautious in recruiting In responding companies On average 34 % in R&D (in %) 8 % indicated that the skills of recruited personnel respond to the needs of the company * * from the 1999 survey budgeted budgeted Development of software personnel in the industry 1) 23 % 15 % 9 % 2 % Product development 17 % 34 % Sales & Marketing Customer service Product services and delivery Management and governance Other The allocation of tasks (responding companies) Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio, ) Exstrapolated to the industry level International operations (responding companies) Revenues from abroad? Foreign revenues share histogram 6 % 5 % 5 % No 54 % Yes 46 % 4 % 3 % 2 % 2 % 22 % 1 % 7 % % (; 25> (25; 5> (5; 75> (75; 1> Share of revenue from abroad [%] 46 % (76/166) of the responding companies generated revenues from abroad (37 % in 21) Gap between initial foreign sales and full internationalization Growth of geographic coverage to 8,1 countries on average (4,3 in 1999) Average value of exporting 6,5 M / company (median 8 / firm) The overall value of the industry s exports 4 M Annual growth rate for the exports expected to be 42 % during 22-25, while only 24 % for domestic trade Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio,

27 Internationalization Process (responding companies) 31 % of the companies had first international sale in -2 years from the starting of the company Median age at 1st foreign sale app. 5 years Typical foreign markets entry sequence: Sweden, USA, Germany Market entry execution time about 1 months Most frequent operation modes are direct export and foreign retailer/ agent 4% 3% 2% 1% % 31% -2 years Age at First International Sale 23% 3-5 years 15% 13% 1% 6-8 years 5% 3% % years years years years years Age category Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio, Ownership and financing (responding companies) Companies mostly owned by founders and family members (7 %), share of international ownership on average only 6 % 71 % of the -2 year-old companies indicated that the difficulty to find financing is a barrier to entering the business 24 % of the companies announced to have been forced to change their business plan because of the financing situation Capital loans from National Technology Agency (Tekes), debts to domestic banks, debts to Tekes, and trade credit are most common financing sources in addition to equity Foreign investors are present only in 3 % of firms The support value of the foreign investors to the company regarded essentially higher than for the domestic investors Only 3 % of firms intended to seek external financing in (43 % in 21, 47 % in 2) Drop in financing plans caused both by lower confidence and by worse growth prospects Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio,

28 Operational models (responding companies) Significant differences in the revenue sources of the main product For 23 companies with high degree of productization expected higher profit margins Standard product (n=37) Enterprise solutions (n=45) Solution tailors (n=29) Product tailors (n=27) License selling and renting Customer projects and tailoring Maintenance User training Customer installations Other % 2 % 4 % 6 % 8 % 1 % Companies with high degree of productization operate more often in international markets lack of capital has slowed the internationalization Financing mostly R&D by operations is slowing the productization aims of the companies with lower degree of productization Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio, Current state of the industry and development areas Current state Internationalization of the industry is in an early phase Revenue / employee relatively low when compared to top countries Financing situation is currently very challenging Young companies suffer most from the situation Small amount of foreign investors The role of public financing is becoming more important especially for the companies at the early stage of product development Development areas Gaining deeper understanding of the nature of the duplicated product business Strengthening and developing networks and supporting services Making more attractive and favorable environment for foreign private equity investors Finding R&D processes that match the need of the company, product and the environment Improving the knowledge of internationalization (especially by the SMEs) Building of financing channels Sharing of the internationalization risk Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio,

29 Summary Rapidly evolving and developing industry Overall value of the industry reached 1 million in 22 Employed directly 1 software professionals in 22 Economic situation has changed the operational conditions of companies in Finland as well as abroad Growth gained in 22 from domestic markets, exports remained at 21 level Increasing the degree of productization when aiming for international markets is important Very challenging when financing R&D by operations The role of public financing is becoming more and more important Source: Finnish Software Industry Survey 23, HUT/Juhana Hietala, Markku Maula and Jyrki Kontio, VC Investments in Finland Q1- Q3/'3 ICT sector Software All

30 The imperative for Finnish software companies to globalize to be successful High tech (like software) spending in Finland is under,5 % of worldwide spending Finnish high tech market (<.5%) as a part of the global markets (1%) Finland

31 Example: Worldwide market 2 M and in Finland 1 M Revenue from Finland (M ) Foreign revenue (M ) Total revenue (M ) Revenue from Finland (%) Foreign revenue (%) Global market share (%) Global market share (%) Finnish high tech company is forced to be global? Share of revenue (%) coming from international markets

32 1 Global market share of a software company? Example: 33% market share at home (Finland, Sweden, UK, USA) market in 21 (EITO22) vs. share of revenue coming from international markets Global market share (%) 1 15,7% 75+% 97% 98+% 2,2% 1 65% 83+%,35%,16% Share of revenue (%) coming from international markets In order to be a viable company, globalization is an imperative To be successful means globalizing your high tech business If you don t investigate US markets, you may miss the best opportunity Like SAP, a German origin company, became a market leader after entering the US markets Globalization will dramatically increase your chances for a successful exit strategy

33 Israel has grown to a powerhouse of the global software industry Compared to the situation in 199 Revenues are 8-folded to $4+ B Export is 3-folded to more than $3 B Number of employees is 3-folded to 15 Sales per employee has nearly 3-folded up to $273 K 1+ companies are listed in US Stock Exchanges (esp. Nasdaq) Source:

34 Source: Source:

35 Source: VC Investments ($ million) in Israel - Q1 97- Q : 11 2: : 16 2: : : 587 3/Q1-Q3: 576 Q1'97 Q2 Q3 Q4 Q1'98 Q2 Q3 Q4 Q1'99 Q2 Q3 Q4 Q1' Q2 Q3 Q4 Q1'1 Q2 Q3 Q4 Q1'2 Q2 Q3 Q4 Q1'3 Q2 Q3 Total Investments Israeli VCs

36 Capital Raised by Industry Sector Q3/23 (total 19 M) Software 23 % Other 11 % Medical Devices 7 % Biotechnology 2 % Semiconductors 13 % Communicaton & Networking 44 % Some Aspects of the Born Global Phenomena - Accelerated Internationalization

37 Born Global Concept A Born Global software firm is (originally a small firm, which has an internationally oriented management, which is in the high tech industry, and which derives at least 25 % of its income from export within 2 years of its founding. Kest&Ristola, Oulun yliopisto; originally numerous researchers) Accelerated internationalization Interesting study made by Shrader et al, 2 One of the most interesting research conducted so far was done by Shrader et al and the research was reported in 2. The study examined how the risks of accelerated internationalization may be managed in 212 foreign market entries by 87 new ventures based in the U.S. Research data was collected for firms that met the following five conditions 1. they were young ventures; that is, firms six years or younger 2. they were founded between 1983 and they had initial public offerings (IPOs) of stock within six years after founding 4. they were headquartered in the U.S. 5. they reported international sales in year six after founding Findings indicated that ventures managed strategic international risks by exploiting simultaneous tradeoffs among foreign revenue exposure, country risk, and the entry mode commitment in each country. Shrader et al. 2. How New Ventures Exploit Tradeoffs Among International Risk Factors: Lessons for the Accelerated Internationalization of the 21st Century, Academy of Management Journal, Special Interest Forum on Managing in the New Millenium, Entrepreneurship Division, 2.

38 Internationalization Models for SME s External Environment (Favourable/unfavourable domestic market conditions &foreign market conditions, Industry/sector trends, Vicious/virtuous economic cycle) Internal Environment (Firm s human and financial resources, Management competencies, Knowledge-base) Manager s Mental Model Bell, Jim, McNaughton, Rod (2): "Born Global" Firms: A Challenge to Public Policy in Support of Internationalization, Marketing in a Global Economy Proceedings, Bell Jim, McNaughton Rod, Young Stephen (21). Born-again global firms: An extension to the born global phenomenon. Journal of International Management 21(7), pp Traditional Firms Home Market Adopters Knowledge/ Service - intensive Firms Innovators Born Global Firms Knowledge-based Firms Export Mkt. A Increased commitment Lead Mkt. A Lead Mkt. B Lead Home Mkt State of Internationalization Psychically close Client followership or Targeting lead markets Export Mkt. b De-internationalization Export Mkt. n Most distant Lead Mkt. n Home (Knowledge as) Source of Competitive Advantage Top Management Team Firm Level Conditions and Strategies Born Global Companies - Influences on New Venture Internationalization International Experience Technical and Marketing Experience New Venture Experience Management Team Size Growth Objectives Differentiation Focus Low Cost Emphasis Overall Firm Size Age at International Entry By definition, new ventures do not have much organizational experience. A new venture has mainly the experience of its management team and the skills they bring with them to organization. It is believed, that the prior experience of managers can compensate for lack of organizational experience. Industry Conditions Global Integration Technological Change Domestic Competitive Intensity Industry Growth Shrader et al. 2. How New Ventures Exploit Tradeoffs Among International Risk Factors: Lessons for the Accelerated Internationalization of the 21st Century, Academy of Management Journal, Special Interest Forum on Managing in the New Millenium, Entrepreneurship Division, 2.

39 Development alternatives for a new technology start-up company PAIN KILLER? Cashflow Very rare sky rocketing Possible Growth company Evaluation and Planning Seed Start-up Propable Ordinary Time Aspects to take into account when growing your company Companies are designed and created for Exits Serial Entrepreneurship more general in the future Serial Entrepreneur Victor Vurpillat: Money is the mother s milk of a start-up company Market understanding, competition and positioning is crucial

40 Fast growing company should have a target to get VC financing Financed from own sources too big risk, no entry to VC financing Slow R&D, often delays Slow growth, in a longer run targets 1-2% annual growth Doesn t interest top executives, owner make important decisions Ownership in founders hands, no exit plans VC financed VC financing decreases risk Fast R&D, can take advantage of the time window Fast growth Opportunity to develop fast the management, sharing the responsibilities and risks Exit plans, win-win earning logic Otterson, W.W., Barrow, A., Bry, B., Ekstrom, C, Leach, R. (1997). Entrepreneur s Anthology, UCSD Connect, A Division of Extended Studies and Public Programs, University of California, San Diego, Stages of Growth Revenues ($ million) Private Placement Strategic Investors Venture Capital IPO M & A M & A Established Company Solid Growth Financing is on-going Process 2 1 Angel Development Bootstrap Momentum Product Introduction Consulting Launch Birth Seed/Start-up Early Growth (MA, Software Council,Gregory J. Burkus, )

41 Growing The Pie Ownership of the Founders at different stages 1 % 8 % 6 % 4 % 2 % % 1 % ($ 3.) 6 % ($ 3.) Ownership of the Founders Ownership of the Founders 3 % ($ 3 M) Market Capitalization of the Company 2 % ($ 6 M) Capital invested 16,67 % ($ 3 M) Aloitus Creation Käynnistys Start-up 1. Round kierros 2. Round kierros IPO Rosati, Mario (21). Startup Company Valuation Model. In Jacobsen et al. (21). Launching Your Software business in America, Tekes, Helsinki $ millions Stages of a Born Global Company and Engagement to VC Funding Cash Flow IPO 2. Round Seed money 1. Round Time Death Valley CREATING GLOBAL PENETRATING TO LEADING A COMPANY BUSINESS READINESS MARKETS

42 Valuation Parameters Valuation Product Launch Proven Consumer Acceptance Profitability 25M Mezz IPO IPO 5M 1 st Round 2 nd Round Valuation Gap IPO 25M 5M Seed Seed 1 st Round 1 st Round Declining Risk 2 nd Round Traditional, up Cycle to 1998 Recent Bubble time, Cycle Current Slow, 21-2x Cycle Source: Morgan Stanley, Trident Role of market position in success Source: Vesa Wallden / Capman, Global Software Introduction Seminar in Jyväkylä, October 16, 23. Originally: An Empirimetric analysis of 3, business units from more than 3 corporations (

43 1 Eras of IT Architecture ICT Users (million) 1 1 Automate Back-office Automate Front-office Internet Client/Server Mainframe Automate Value Chain Paul Wiefels (The Chasm Companion, Harper Business, 22): The most universally recognized form of marketplace power is dominant market share. Therefore the core chasm prescription is to find a market you can dominate.

44 How to Plan a Market Development Strategy Mass Marketing 1 to 1 Marketing Deal Driven Product to Service Marketing Niche Marketing Life Cycle Marketing Based on the work of Geoffrey Moore

45 Counting with big numbers When the company s revenue is in 23 in Finland $,5 million, the revenue in the USA after 3-4 years could (should) be $3-4 million Exit might be IPO in Nasdaq or HEX or M/A The valuation of the company might go to $5-25 million Home market vs. US Opportunity ($M) and the number of employees is 4+

46 The Personnel and Growth The number of employees increases from 5-8 in 23 (revenue in Finland $,5 M) to 4+ in 27 It s worth looking for new talented and experienced guys to the management of this internationally operated company First CEO from Finland with 5 employees may not be the best guy to make the IPO in Nasdaq (or HEX), most likely CEO has been changed 2-3 times, before company makes its exit (IPO or M&A) The Importance of the Start-up Team Team Leaders Chairman of the Board Achievement Oriented Managers COO Technology Team Leaders CTO Advisory Board (part time) Entrepreneurial team members CEO President CFO VP Marketing VP Engineering Director of Technology Service Providers Providers of capital VP Sales VP Manufacturing Chief Scientist Industry experts & consultants University professors Ballard, S. (21). Choosing Your Start-up Team; originally Baird, M. L. (1999). Engineering Your Start-up. A Guide for the High-Tech Entrepreneur, Professional publications Inc., Belmont, California, USA.

47 Marketing communication needed materials Operation Plan, R&D Plan, Financials Business Plan Short Presentation (6 slides, 5 min.) Two page executive summary Developed in this order 3 sec. elevator pitch Presented in this order Nissley, H. (22). Craft Two Page Executive Summary, Global Software Seminar, Espoo, November 22. Marketing communication The VALUE PROPOSITION A value proposition is a clear, concise series of factual statements on tangible results from your products or services. The more specific your value proposition, the better. A successfully tested and proven value proposition is essential to open more doors and close more sales. Strong value propositions deliver results: increased revenue, faster time to market, decreased costs, improved operational efficiency, increased market share, decreased employee turnover[1], improved customer retention levels. Sales increase, leads are generated, retention rates blossom, and people get it. [1] Revenue in the USA and Turnover in Brittish English are synonyms. In America employee turnover means how much employees have been fired

48 Marketing communication The ELEVATOR PITCH In a world awash with entrepreneurs chasing money to fund their bold ideas, the 'elevator pitch' has become an essential business skill. an elevator pitch is the spiel you deliver to get someone interested in your idea. It is so-called because sometimes, you may have only the length of an elevator ride to pique the interest of a venture capitalist or angel investor To investors the pitch focuses on the size of the opportunity and why you think you can build a great company from this. To customers, the focus is what you can do for them and to potential partners, it's a combination of the two. Elements when starting a born global company Technology Advantage VISION Founder(s) and executive Board of Directors, Advisors experience network and connections Management Global Business Designing, planning, starting marketing communication Product to be developed Globally recognized pilot customer Identifying leading markets

49 Elements when expanding the company s business Readiness in different phases Founder(s) and executive Board of Directors, Advisors experience network & connections Technology Advantage Management VISION Differentiated PRODUCT Global Business Operations, country strategies and penetrating to market Market Entry Market Research Entry alternatives Networking Partner candidates Leading market A Leading market B Leading market N Jyväskylä Growth Center for Software Industry and Wireless Applications