Zach Broderick
Bus 30a – Final
The Bauers’ entrepreneurial venture in the SOI case is a fine example of a well
balanced Timmons model with excellent fit. On the opportunity side of the scale, they are
currently entering a market in the midst of two sea-changes: the privatization of Eastern
Europe after decades of a closed economy, and the technological revolution of the Internet.
They are creating immense value by providing a much needed service that barely exists in a
market that is growing at near full capacity. They have numerous competitive advantages,
such as being the first to market and proprietary technology. Their financial statements predict
break-even in 2 years with about 40% growth in profits after that, and they have a solid 3-5
year harvesting strategy. Finally, they have low fixed costs and low asset intensity, which as
the case mentions translates into rapidly growing profits as income increases.
Equally impressive is their team, whose expertise covers all important bases. Both
Kurt and Rafal have considerable knowledge of the Polish and Eastern European business
climate; John, Jae and Mike are on the cutting edge of computer and Internet technologies,
and Robert ties the two together with his 16 years of experience in online financial systems.
They also have a top-tier advisor in the form of Jeffrey Timmons, who adds wisdom to the
already impressive business skills of Kurt. Especially important is that their minds seem to be
in the right place. Most of them are giving up cushy, well-paid jobs and instead opting for
months of no salary for their hard labor.
As the case seems to suggest, the problem with resources might not be a lack of them
but rather an abundance, leading to sloppy entrepreneurship and collapse such as seen in the
dot-com era. The Bauers appear to have raised sufficient equity on their own and do not seem
strapped for cash, and prospects for capital seem almost guaranteed—they should have no
problem feeding their cash burn rate, which is considerable at $34,000/month. So long as they
act before they are out of cash, they should be able to negotiate highly favorable terms from
VC firms looking to ride the high risk/reward wave of the Internet and Eastern European
booms.
The key to this case is not in the Timmons model, but rather in the harvest strategy
and the risk associated with it. Harvesting quickly (3-5 years) is certainly a good strategy, as
they are riding two bubbles that are likely to burst, and thus their company’s value is likely to
peak early on. The risk they face is not being purchased by one of the major players and
instead being crushed. In order to reduce this risk, they must make their acquisition costsaving or even necessary for the giants.
The primary cause of this risk is that their service is easily imitable, making their
purchase unnecessary, and in order to mitigate this they must distinguish themselves using
their competitive advantages to remain an attractive buyout target. Their business plan
acknowledges this and lists some strategies that are spot-on, but I will not reprint them here,
though I would advise them to take their own advice. Rather, I would like to suggest one
critical measure of my own that they left out that would significantly reduce their risk, and
that is to patent their idea. As it is today, the patenting of abstract software ideas such as “A
system and method for transmitting and viewing financial information over the Internet” was
very much legal, easy, and incredibly effective in ‘94, and would necessitate a buyout if any
other firm wanted to imitate their technology. In summary, they have an excellent
opportunity, and if I were them, I would patent my idea and aggressively follow the risk
reduction plan they outlined, forcing a buyout from a major player early when our valuation
has reached its peak.