Technology Start-ups: Creating Difference to Create Value
11th July 2017 | Alnoor Bhimani
Creating need and value through non-traditional practices
In the tech world, there is no set way of doing things. In fact, at the heart of technological change lies disruption. Start-ups experiment with different ways of using technology, usually to come up with new forms of customer benefits. Business models in tech firms may hinge on better quality of supply, more transparent service, lower prices, new ways of bundling services and, often, entirely new drivers of value that will create their own further market needs.
We shouldn’t expect that where technology has advanced apace and business models have rapidly evolved, financial management understanding should stay still. How have innovations in technology transformed the financial circuitry of tech businesses? Let’s take a look at just three significant changes.
First, we know that lots of traditional industrial firms relied on producing in large quantities, making money through economies of scale. They could undercut smaller businesses by focusing on supply to push down their material costs. They could then invest in faster and more flexible technologies. As their costs went down, their efficiencies rose, which is how they became profitable giants in their industrial sectors.
Tech firms, however, focus on demand. They use technological innovations to create and expand networks. The growth of networks becomes self-reinforcing because users get value out of creating and fostering connections. The larger user base in the network increases demand for the product, which in turn fuels even more network expansion and demand. Sometimes, networks connect with other networks, creating even more value. If business transactions grow because networks expand in many directions and defy linear pathways, then there’s no point using financial intelligence that only focuses on supply and that only sees linear paths of value creation.
Secondly, tech start-ups need to continuously experiment in order to innovate. They are not like traditional business ventures, where you work out the resources you need to serve a market segment for a product with a known value. There is no comfort of such certainty where the product-market fit has to evolve. A tech firm may want, to name a few experiments: to test out an altered product angle; toy with a new website feature; explore relationship building with influencers; try out a differentiated pricing scheme; play around with a mobile-responsive template; and work out novel organic tactics to increase online traffic. Some experiments will have tiny business repercussions, while others could unleash strategic-level changes. From a financial viewpoint, you’ll need specific ways to track activities that help determine what actions to take and when. What is essential is that your accounting intelligence must help you manoeuvre your start-up in a very specific way, through close tracking and monitoring of your experimental activities.
Thirdly, there may be the premise that when your customer makes cash, the tech start-up gets a cut. Models associated with the sharing economy rely very specifically on new sources of value creation being brought into the market from existing supplies. For tech platforms like Airbnb and Uber, the intent is simply to enable users who need a service or product to come together with suppliers who have unused capacity, benefitting all parties. Traditional suppliers such as taxis, trains and other pre-existing travel services had to invest into new resources to bring to life their business model. But with tech start-ups in this business space, existing supply sources are unleashed, bringing spare capacity onto the market. As a result of supply increasing, the traditional providers will have to share customer spend with the new suppliers. This brings down prices across the whole industry, as there’s so much more supply. Some profits go to the new suppliers of spare capacity, and some to the consumers who now have more choice with lower price points being available.
There are many other ways which differentiate tech start-ups from traditional firms, and traditional accountancy is going to be just too narrow to help. Growing a tech start-up today makes a lean innovation-focused financial management lens essential.