My CEO Life

Economic conditions aroun the world are tough.  The question is now what is the likely impact on small businesses and more importantly those start ups that are reliant on funding to maintain their growth.

To answer this question, I came across a presentation from Sequoia Capita on startups and the economic downturn.

Here are the key messages:

1. The recovery will be long - dont expect a quick turn around
2. There are new realities - raising money on high speculative valuations is a thing of the past and series B and C funding will be very very tough
3. Customer take up of businesses will be slower than projected
4. Expense cuts are a must
5. You have to become cash flow positive

The presentation then goes on to talk about specific actions businesses should take.

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A couple of weeks ago, i wrote the first in a series of articles on going global.  In the first article, titled Going Global - Organic Growth Case Study, i talked about how the REA Group organically entered New Zealand through the establishment of a new site from scratch. The next step is to now look at acquisition based entry to new markets.   

Over the last 2 years, the REA Group has acquired 15 different businesses.  These acquisitions split broadly into capability enhancement, consolidation of existing markets and the entry into new markets.  The acquisitions that were entries to a new market include propertyfinder.com, casa.it, the atHome Group, propertyfinder.ae (UAE), and squarefoot.com.hk.  The first acquisition based entry to a new market was the purchase of propertyfinder.com in the UK. 

The initial experiments with moving into New Zealand demonstrated that there was the chance of creating value in these new markets.  However we also realised that organic entry was really only appropriate where we had an asset that we could leverage (e.g. the traffic to the Australian site) or where the market structure was early stage.  (See Analysis - Four Types of Property Portal Markets on our sister site - www.propertyportalwatch.com)

Therefore we identified that the next step in overseas expansion would have to be through acquisition and that due to the uncertainty associated with early stage markets, we focused on the maturing markets.  

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I was recently asked a question on what i think about outsourcing (to India)?  Well i thought  would talk about outsourcing in general rather than just to India.

Firstly i think outsourcing is a great idea for certain jobs, not all of them.  In particular i think outsourcing in the technology space makes alot of sense.  However, what is required to make outsourcing work?

To me outsourcing is like any other relationship - it has to be built on mutual trust, understanding and respect.  When selecting an outsourcing partner, no matter where they are in the world, they must have these characteristics, as well as the skills, to complete the task at hand.

At the REA Group, we used the team at EarlySail in India to do a chunk of the IT work.  Now this relationship has been built up over a couple of years and was started based on a relationship between my CIO, Chris Vulovic, and the owner of EarlySail - Push Mohta.

We started the relationship by giving them relatively simple work in doing express changes and then slowly ramped it up from there as they became more and more familiar with the REA Group systems and processes.  In addition, we had a team at the REA Group head office that did QA on the work from EarlySail.

The relationship has progressed now to the point where the EarlySail guys are helping with QA and are considered as part of the team.  They have visited Australia and some of the team in Australia have visited them.  Above all, we treat them as any other team member, including inviting them to the annual conferences.

I have so much confidence in the EarlySail team that i am commissioning them to build out the next generation of my latest site www.propertyportalwatch.com.

So any approach to outsourcing takes time and has to be built on trust, understanding and patience.

This is the age old question faced my management when they are growing businesses.  Do i build it from scratch, buy it or something in between.  I have just had a discussion with one of my board members that comes down to this very topic.  He was asking me why are we buying a business when we can build it for less.  On the surface he had a clear point, however once you delved below the covers, it became clear that there is far more to this than just a financial calculation.

So i thought i would give you my 10c on this hairy topic.

I think the answer is simple - what are you trying to acheive?

If you want to build something that is strategically important and provides a competitive advantage then you need to either  build it or buy it (as in a business) and own it, or at least have an option over owning it.  The last thing you want to do is allow your competitors to have access to what makes your business tick.

As for all the rest - let someone else do that hard  work and just implement the results.  E.g. who would want to build an accounting system.  That is why the JD Edwards of the world make money - allowing you and me to customize what they do.

Much of the value is created in how you use a product or a service not the product or service by itself.  A great example is Google maps.  Let them do the hard work and you incorporate them into your site in a way that you think will create the most value.

Suffice to say you can apply the same logic to acquisitions.  You don’t have to own it all today especially if you lose the passion and excitement of the owners / entrepreneurs who will make it happen.