To Keep Your Startup Alive, Keep Creating Value

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Have you ever wondered why seemingly successful companies perish? It seems like they're doing fine on the surface. But many of them fail -- at first slowly. And later, they abruptly collapse.

I have been thinking about this problem for decades ever since the first startup that I worked with, Applied Expert Systems, shut down. Founded by a former MIT computer science professor, the company aimed to replace personal financial planners with a so-called expert system. The product automated the decisions of a planner in helping a client develop a financial plan. But after raising millions in venture capital and hiring dozens of employees, the company introduced a product but too few financial planners were interested in buying it.

Several years later for one of my first consulting projects, I worked with a huge telecommunications giant that attempted to find out why some tech companies survive as waves of new technology are introduced and others perish. My resulting investigation turned into my first book, The Technology Leaders.

I later boiled down the findings of that book to its essence, dubbing it the value cycle: To sustain superior performance, a company must keep its strategy focused on addressing three distinct processes:

Related: Understanding a Business Valuation

1. Create value.

The first stage in the value cycle is to design and market a product that consumers are eager to use because it meets their most important needs better than competing products.

In 1995, Netscape's Mosaic web browser became popular after the company's initial public offering. That widespread popularity suggests to me that Netscape had achieved success in value creation, doing a better job than almost any other browser at that time in helping people visit websites for the first time.

2. Capture value.

The second stage of the value cycle is choosing business activities so that customers are willing to pay for a product at a price high enough above the company's costs to generate sufficient profit and create a return for shareholders after compensating employees and suppliers.

Netscape is a great example of a company that created value but couldn't capture it. How so? Lots of people used its browser but did not pay money for it. Moreover, the other ways that Netscape made money were not sufficient for it to survive an onslaught from Microsoft. So the company ended up being acquired by AOL in 1998 for $4.2 billion.

For a startup to survive, it must at least create and then capture value. 

Related: How to Value Your Startup

3. Renew value.

The final stage in the value cycle is filtering out the noise from the market signals (from changing customer needs, upstart competitors and changing technology) to identify how a company must adapt to stay ahead of competitors.

This value renewal is the most difficult part of the value cycle for startups trying to survive over the long term.

Remember Blockbuster? It rented DVDs and VCRs at retail stores. Then Netflix came along, sending DVDs by mail, making it cheaper and more convenient for consumers to rent movies. Blockbuster was unable to adapt and perished.

Netflix engineered its operations beautifully to win the battle for DVD-by-mail market supremacy. It bought huge quantities of DVDs cheaply, set up a system for people to order them and engineered a process for delivering and collecting them. People have been willing to trade the convenience of picking up videos at the corner store in exchange for a wide selection of titles and the elimination of late fees. 

Then along came video streaming. As more people use smartphones and tablets, they are finding it more convenient to watch movies on these devices rather than sitting in front of their TV sets and plugging a DVD into an attached player.

Netflix renewed value, developed new capabilities (such as the ability to stream movies) and also created its own popular content.

With HBO and CBS eying online streaming customers, Netflix must keep its eye on the value cycle. 

And so should any startup with the hope of surviving over the long term.

Related: More Money, More Problems: The Down Side of a Mega Valuation