Thursday, 13 September 2012

Timing and Capital - Early Bird or Second Mouse

Timing and Capital
Timing and Capital
This is one of a series of posts on useful tools for entrepreneurs leaving the Armed Forces. Here is the full list and links.

If you never leave home without a wrist watch and wallet, you already know the importance of timing and capital. In a competitive commercial context these two tools are of vital importance.

Service leavers can bring their skills to bear usefully at every stage in the life of a company and an industry, and this post aims to illustrate some of the timing and capital considerations that may help a service leaver to choose a market that best suits their skills and expectations.

Timing

As the market for any product or service develops, demand typically follows a predictable pattern. After development and launch, a small number of "early adopters" are gradually joined by a growing group of customers. The market grows to maturity and then eventually declines.

Understanding the importance of timing and capital is essential if you are to harvest the best results from the market you are in - or thinking of getting into.

Early stage - to the victor the spoils

If you join a market at a very early stage - or create it - timing is critical. Get it right and you can enjoy high profit margins and high growth as early adopters sing your praises and spread the word. Get it wrong and you may find that demand doesn't appear - or takes longer and costs more than you expected.

While many early stage markets don't require large quantities of capital to enter, unless you are sure of your timing it is essential to have sufficient resources to survive if demand takes longer to pick up than you expected - you may also need to refine what you are selling so that more people want to buy it.

Of course any given quantity of capital will last much longer if you have a tight grip of costs and keep the "burn rate" as low as you can.

Growth markets - more capital required and less timing risk

If you choose to join the market later in its development - perhaps as a "fast follower" improving the initial offerings of others (Apple and Virgin are great examples of companies that do this), you are less exposed to the timing risk - the danger that you will have launched something that is ahead of its time - but you will probably also need more capital in order to capture customers and gain attention.

Mature and declining markets - optimisation and big balance sheets

Once a market has matured, the profit margins typically reduce and competitive success turns on being able to run the leanest operations. The search for economies of scale lead to consolidation and the creation of larger and larger organisations - along with the need for larger and larger quantities of capital. Strategic timing becomes less of an issue - but tactical timing is essential working capital management in particular becomes a key determinant of success.

You choose - bird or mouse

Military experience can fit people for each of these stages. The early stage of the development of a market is typically characterised by uncertainty - one of the staples of a military career - while fast following involves learning quickly from the experiences of others and seeking to build on their insights.

"The early bird catches the worm, but it's the second mouse that gets the cheese"

Since the military in the UK could fairly be described as a mature and declining market, servicemen and women have plenty of practice in optimising systems and processes to try to find efficiencies - particularly in large supply chains and communications systems.

Capital - be sure of your budget and backup

Each of these options depends to some extent on the capital available. While (except in some industries like mining or pharmaceuticals) there is often little capital required in the early stages of a market, joining an established market can require massive scale and resources.

Beyond the resources and expectations that an entrepreneur can bring to bear personally, they may need to seek additional capital from other investors or lenders. Understanding the expectations and constraints of those investors - whether they be friends and family or formal investors like business angels and venture capitalists - is essential to ensuring that the entrepreneur has the resources to realise their vision.

So gaining a clear understanding of the investor perspective should be high up the list of tasks for any entrepreneurial service leaver.


This is one of a series of posts on useful tools for entrepreneurs leaving the Armed Forces. Here is the full list and links.

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