You Can Fool Some of the People Some of the Time...

During my childhood Monopoly was omnipresent, I was fascinated by the board game.  Rainy Northern days, of which there were plenty, would see me indoors gleefully piling plastic property onto the blue strips of Mayfair and Park Lane.  Usually mortgaged up to the hilt, the idea was nevertheless to speedily deliver a fatal financial coup de grace to whoever was unlucky enough to be playing my self-styled proto property magnate.

The other monopolies of my youth were even less fun to experience. The commanding heights of UK economy were at the time nationalised. This ensured that choice in everything from to telecoms to travel was scant, poor quality and expensive. The subsequent process of privatisation and the introduction of competition gradually ensured a much more effective - if still far from perfect - market economy came into play. 

So, thankfully, these days a monopoly of supply is a comparatively rare or transient thing of which ambitious legislators and the forces of digitally-enabled capitalism eventually take care.

Differentiate or die

That means to be a successful entrepreneur and generate decent profits then you do need to develop something to make your product or service stand out.  You need to be able to articulate a compelling reason why customers might continue to hand over their moolah to use your products or services.  If you don’t you are selling a mere commodity.  And probably not for long

Clearly differentiate or die applies because in commodity businesses the only real point of difference is price.  And pricing usually goes only one way – downward.  So if you want your entrepreneurial business to stay around, let alone attract further investment or even IPO, you need to have something that no one else has, that the market perceives to be different. And be able to sustain it, or quickly move on to plan B, C or D. 

Beards, brogues, bicycles

It’s easy to forget that in the economic good times these basic rules may not apply entirely as the investment market starts to resemble the antics of drunken punters at a casino.  A quick scan of recent investments in London’s Tech City makes me wonder about some of the criteria by which investors parted with their money.  Is the mere presence of beards, brogues, bicycles and haircuts last seen in the Great Depression now somehow a sure sign of superior returns to come?

The IPO market too certainly looks gung-ho both here and in the US.  Although proceeds from European IPOs in the traditionally quieter third quarter shrunk to €6.6bn (£5.2bn), they were still more than double those of Q3 2013. In fact, 2014 IPO activity has almost quadrupled compared to last year. In the nine months to September 2014, £31.8bn has been raised.

That’s pretty frothy.  In such rising markets the herd moves together and the fundamentals may get forgotten in the search for rapid returns.  But, all is not lost.  Some in the US and UK that have previously signalled their intent to raise funds publically seem to have rapidly got over the sudden rush of blood to the head.

Making a necessity out of Virtu

In the US earlier this year, high frequency trading firm Virtu Financial suddenly `delayed indefinitely` its IPO. Blaming regulatory approval for disrupting its intended float turned into a wholesale retreat in the face of journalistic expose of some of the less savoury but fundamental aspects of its business that would have seen potential investors run a mile.

In the UK conventional `bricks and clicks` fashion clothing retailers Fat Face and BlueInc pulled their UK IPOs blaming `market difficulties`  and have recently been joined by challenger bank Aldermore which, despite its modern digital platform, AnaCap, is still a bank established at a time when the mere word has become toxic to many firms requiring finance.

Back in the US Square and Box, on the other hand, have not used the word `indefinitely` but are dragging their heels having been re-scheduling their IPOs for most of this year. 
 
The ‘market volatility` or `weak demand for technology stocks`  excuses have, of course,  been rolled out by these two to a response of equally rolling eyeballs in the market.  But it strikes me as pretty obvious that the real reason is that the IPO process has highlighted to these comparatively early stage companies is that they have very little to differentiate them from better positioned competitors and they are frantically playing for time whilst they and their investors figure out what might save their blushes, if not their bacon. In contrast, most of the other firms had already worked out they had nothing and quit.

To reiterate, without a monopoly restricting choice customers need to be persuaded that there's something special for which it’s worth paying more. In the absence of obvious and fundamental difference expensive branding, marketing, sales and distribution have to deliver that in the mind of the customer.  Just look at the money mobile network operators spend on trying to convince you that you care about their brand, rather than the best value airtime package, so they can continue to trade on wafer thin margins.  

Queue-loving slavering sycophants

In direct contrast to the networks Apple’s marketing chops, that have reduced so many of its customers to queue-loving slavering sycophants, means it can make 40-odd percent margin on every phone it ships.  And a distinctive design aesthetic, rapid obsolescence and model cycle keeps the tills ringing.  Apple has other ways to ensure its super profits, of course.  Witness its voraciousness in its use of patenting innovation and patent infringement litigation to limit competition.  That’s how you become, and remain, the world’s most valuable public company.

The Holy Grail though, in digital age marketing is to profit from the network effect.  After all people join Facebook, LinkedIn, Twitter, Instagram et al because people join Facebook, LinkedIn, Twitter, Instagram et al and they sell that idea to themselves and each other. The same is true of Apple and apparently of Harley Davidson motorcycles. Although despite being one of a prime demographic for the message that hanging out with other owners of laughably crude yet eye-wateringly expensive motorcycles thrown together from obsolescent parts is an essential middle-aged male lifestyle choice it’s something I’ve never, ever understood.  

Anyway, I digress.  Back to will-they-won’t-they Square and Box. What is it that they're doing, can do or will do, that prevents them from being viewed as just yet another small supplier of a standard commodity?

If I squint enough at financial services, merchant services aggregator and mobile payments company Square, I could convince myself that if they spend the vast sums necessary to get their readers everywhere, then the possible numbers could start making the small transaction charges mount up to something significant.

Massive ecosystems, resources and customer reach

And, of course, to get to that situation you have to overcome very high barriers to entry. But if your business is essentially a point of sale app aimed at replacing traditional credit card terminals and cash registers you are up against the big merchant services and consumer specialists – Visa, MasterCard, Amex.  These have massive ecosystems, resources and customer reach and could start to squeeze you very quickly if they wanted before any significant disruption could be possible.

But with Box any advantage is a lot more difficult to see. It provides cloud services, specifically online storage. The problem is that it is already in a mature commodity game. A different set of big consumer specialists with similarly massive ecosystems, resources and customer reach – Amazon, Google, Microsoft - now dominate it and, naturally, prices are being driven down by the day.

In neither case also would that other route to big profits – that of being the lowest cost producer - apply. That’s a game that's already been fought out by the established behemoths of the industry.  And as for the network effect, that just ain’t gonna happen.

So, the fundamental entrepreneurial challenge remains what is it that your company, or even your idea, can do that's different, cheaper, more convenient or simply better than anyone else?  And that’s a question too for any potential IPO audience, the VCs that have sunk their money into such companies and the management that sold the dream in the first place.

As the old saying starts, `You can fool some of the people some of the time...