COMPETITIVE ADVANTAGE: The "smart" meter automatically resets to zero when a car leaves, boosting meter revenues; its software captures key parking data
THE CHALLENGE: Selling to the local government--the slowest, most conservative, least logical market on earth
The Founder
Vincent Yost, 44
FAMILY: Married, no children
PERSONAL FUNDS INVESTED: $350,000
EQUITY HELD: 62%
FORMER LIFE: Single A ballplayer in the Baltimore Orioles farm system; M.B.A., Xavier University; former head of a company selling computerized cash registers
THIS LIFE: "The worry is absolutely crushing. But I use it to drive me. Bill Gates said it--the paranoid makes the money. And I worry a lot."
Feedback: Is This a Company? Or Just a Product in Disguise?
Should Vincent Yost be trying to turn his breakthrough parking meter into a company? Or is his case a classic example of a great new product that should be managed as just that, instead of as the foundation for a start-up? We asked Harvard Business School professor Bill Sahlman, who is also chairman of Harvard Business School Publishing Corp., and a veteran new-venture investor himself.
Most new ventures are products, not companies. And which is Yost's? First I'd frame the question differently: If you want to maximize the reward for a good invention, how would you be better off? Would you be better off, for example, with a 10% royalty on the top line of a licensed product being pushed through an existing distribution channel by an entrenched competitor? Or would you rather own 60% of a start-up company that has to clear all the market hurdles from scratch?
That turns out to be a fascinating economic question. Imagine a successful company with a 20% profit margin (and that's quite successful). It has to plow profits back into working capital and capital assets, so you might turn a 20% operating margin into, say, a 5% cash-flow margin. Well, if I get a whole 10% of sales off the top, I promise that's a hell of a lot better than owning 60% of 5% off the bottom. If people worked out the economics, they would at least spend some time thinking about whether it might make sense to get their product into the hands of someone else who would sell it for them.
Unfortunately, most entrepreneurs are blinded by their obsession with control. It sometimes seems that 100% of founders are preoccupied with what share of the company they own. Fear of running out of capital is pitted against fear of equity dilution, and fear of dilution always wins. Yost, for instance, is worried about dropping below 51% ownership if he raises more capital. He'll discover that by not raising much capital he'll have given up real control of his destiny, anyway.
It's not clear yet whether Yost should abandon his company-building dream and think of his meter as a product. But he does need to make changes. He needs to rethink his sales pitch, and he needs either more capital to fight the fight or another company to piggyback on. In the history of entrepreneurship I don't think I've ever seen an example of somebody accurately anticipating the difficulties in the sales cycle or raising enough money to eliminate all of the barriers to commercialization. Yost isn't an exception. Look at what he's trying to do: He's asking customers to change the way they do business. He's asking them to suffer the political consequences of a more efficient but obnoxious collection system. And he's asking them to pay $400 for something they can get from somebody else for $100. (Comparing his meters and theirs is an apples-and-oranges thing, but in the political process it's going to be viewed as $400 against $100; certainly that's the way his competitors are going to pitch it.)
That's a tough sell. I think the road is hard for any product that 1) involves changing traditional behavior, 2) involves dealing with politicians and the political process, and 3) might prompt nasty articles in the press. This product is guilty on all counts. Just think, the more it succeeds, the nastier the newspapers will treat it. Nobody writes a positive article when the government increases parking-ticket revenues from $2 million to $4 million. That won't win anyone any votes.
So why not reposition the benefits the product offers? What is the customer's real problem? Yost has defined it principally as the need to get more revenues out of parking. But maybe the real problems involve holding down the city's labor budget (as these automated meters might help do) or stopping theft of meter money by the collectors (which these meters could do, since they enable cash collections to be reconciled with an electronic record of what the meters should contain). Put politicians in a position to say that those are the problems your meters are helping them solve.
And isn't it politically impossible to sell a $400 machine when the competition is at $100? So figure out how to sell it for $100, and work a back-end deal that calls for sharing the revenue increase the meter generates. Take, say, 50% of the gain over time. If the meter does what it's supposed to do, that's a good deal for both sides. And together with a restatement of the problem the meter helps solve, it's a way to make the city's buyer a hero instead of a goat. You know you're never going to be in a successful selling position if by accepting your deal, the guy puts a bull's-eye on the back of his coat.
If Yost can do all that, he'll be in a better position to know whether he just needs a lot more capital or should actually sell or license to an entrenched competitor.
Feedback: What the Experts Say
How might Vincent Yost shorten the municipal sales cycle?
