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KEITH
Levenstein is passionate about his product. While interviewing him, I
could see he was struggling to contain his excitement about it. He
believes he has a winner. Now he has to convince others.
Levenstein
has owned a number of businesses. His last one, CEG Software
Consultants, he sold to the AST group in 1999. That company was an
internet service provider which specialised in e-mails.
In
2000 he started his latest venture, Econoserv SA, which designs and
sells branded software for the small business market. One of the first
products developed was SMS321, which sends SMS messages from computers
to cellphones and back.
Clients
include dentists who send reminders to patients about appointments,
alerts if an IT system goes down and car dealers who send a message to
customers when their car is ready. The system is also used to alert the
help desk if ATM systems go down.
Another
product is Economail, a bulk e-mail system used for newsletters and
subscriber content, such the Medical Association of SA’s newsletter to
members.
Levenstein
describes this product as being simple and easy to use. There is only a
one-off purchase charge and he does not charge per mail sent, for
training or for support services, a model he has used for his next
product, EconoAccounting.
This
is the package that Levenstein is convinced has huge potential. It is
an accounting system aimed at the small business. But its competitive
advantage lies in its data capture abilities. It is able to source
information directly from electronic bank statements and enter that
information in the relevant area in the books.
“It
has been in development for about two years and we finished it early
this year,” he says. However, the concept has been at the back of his
mind since the early 1980s when he started his first business.
“I
realised then that the first step for good accounting was to check your
bank account. I made sure I knew what was in my account at all times
because the majority of transactions appear on your bank statement. In
those days it often meant phoning your bank every morning or even going
to the ATM to get a statement.
“I realised that if I could manage my bank statements, I could have my finances up to date at all times,” Levenstein says.
With
the growth in internet banking Levenstein’s concept became possible —
all the banking information is now available on the computer. It is a
waste of time, he says, to manually input that information into an
accounting system again. That procedure also opens the way for errors
to creep in. If you enter R36,50 instead of R35,60, it will take you
ages to discover your error.
“Another
real problem is that the average small business owner is not a trained
accountant and often enters a transaction in the wrong place. It is not
that easy to use a regular accounting system.”
The
EconoAccounting system imports information directly from the bank
statement and allocates it to the appropriate place. It recognises all
regular transactions , which Levenstein says usually makes up about 80%
of all transactions. Therefore only about 20% of all transactions have
to be entered manually.
“It
is important for a small business owner to manage his own accounts,”
says Levenstein. “It’s no good giving a shoebox of papers at year-end
to an accountant and asking him to sort out the mess. If you do it
yourself, your finances are always up to date and you have control.”
Going
forward, Levenstein has a number of options in mind, none of which he
is certain is the right course of action. What he does know is that he
has to get the product to market effectively, and that he probably
needs a good sales and marketing team to do this. “We are not marketing
this as it deserves,” he says. “I am unsure of how to take the next
step to do this thing properly.”
Most
previous marketing has been done by word-of-mouth, small adverts in
suburban newspapers and websites and flyers in post boxes. None has
been hugely successful, but the flyers have been the most effective.
He
is running a special offer, until the end of this year, selling the
product at R1150 including VAT. His target is to sell 5000 by the end
of next year. So far he has sold less than 20.
“I
have the capital to hire one sales rep. I am thinking of getting a
tele-rep to start off with to generate leads for me to go close the
deal. Later on I want to hire a full-time rep. What I need though is a
sales and marketing manager and up to three reps to meet my target. But
I need guidance on finding the right people. I have hired reps before
but not with much success.”
Another
strategy he is considering is approaching retail chains to sell
EconoAccounting through them. To really launch a successful attack on
the market to meet the target, Levenstein needs funding. He is
considering approaching venture capitalists and has calculated he needs
about R800000 for marketing and to pay salaries. He does not have
enough collateral for a bank loan.
Based
on the target of selling 5000 units, he has calculated a profit of
R1,5m and has placed a value of R7m on his company. “Is it feasible to
place such a value on the business in this way?”
The issues he needs guidance on are thus:
�How does he determine a value on his business and what is the best funding route to pursue?
�What is the best marketing and distribution strategy?
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Panel Member: Christo Abrahams, Standard Bank
MANY
people have great new business ideas. Unfortunately, a good idea in
itself is not always enough to develop a successful business.
A business idea is nothing but somebody’s vision which needs to be developed into a viable business proposition.
Whether the business proposition is going to succeed depends on two major factors:
�Is the entrepreneur able to translate the idea into a viable business? and
�Is the market ready and are the market circumstances favourable for it?
Levenstein’s
history provides ample evidence of his ability to turn an idea into a
viable business. The second issue is of more concern.
The
EconoAccounting system is particularly relevant for people with a
larger number of bank transactions per month, which is the business
market. Although South African business owners tend to adopt new
technologies relatively quickly (consider the fast penetration and high
usage of internet banking and cellphones), they do need a lot of
convincing.
Business
owners do not have the time or inclination to adjust the way they do
things to use something that sounds “good on paper”. For instance,
Standard Bank developed interfaces between its internet banking system
and the major bookkeeping systems available in SA years ago. The
take-up was so low it had to cancel the service.
Therefore
it will not suffice to let the market know about the product;
Levenstein has to convince the market of the usability of his product.
He has to create sufficient “word-of-mouth” marketing, the most effective way of addressing the small business market.
Only
when he has managed to convince enough early adopters to use his
product should he consider distribution through retail chains.
At
this stage advertising, large-scale packaging and distribution of the
product is premature and will prove to be too big an investment.
Levenstein
should consider making the package freely available to a number of
accountants and bookkeepers who service small businesses.
Apart
from recommending the product to their customers, they will also be
able to provide feedback on its usability and the amount their
customers are willing to pay for the package.
Only
after he has determined the marketability and the price the market is
willing to pay for his product should he consider approaching a venture
capital provider for finance.
In
order to qualify for venture capital he will have to provide
information on the market opportunity, expected growth of the business
and the projected return on investment.
�Abrahams is senior manager, business marketing at Standard Bank.
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Panel Member: Thomas Hansen, Microsoft
IF
LEVENSTEIN is to move forwards applying a more traditional marketing
and distribution approach, it appears reasonable to assume that he has
no other option than to seek venture capital (VC) funding.
This
may add further value to his business beyond the funding in the sense
that most credible venture capitalists insist on active involvement in
the operations of their investments.
Hence
Levenstein could, through the VC option, gain some valuable support.
However, any VC funding obviously comes at a price — he would probably
have to part way with 25%-40% of his company.
I
do believe there is another route whereby Levenstein can retain control
of the equity. A joint marketing initiative with the larger banks could
make his product available through them to their client base of small
businesses which are using internet banking. In this way, his core
target market could be reached on day one.
Given
the South African banks’ drive for market leadership in the small
business segment, it is not unlikely that such a deal could be
brokered. However, such an arrangement may have to be of an exclusive
nature to entice the banks to invest in a joint marketing drive.
This
is obviously untested territory, but should such a strategy prove to
work on a local basis it could potentially lead to bigger and better
things as it could serve as a referral site for international expansion
based on the same concept.
Louis
D Brandeis once said: “Most of the things worth doing in the world have
been declared impossible before they were done,” and I do recognise
that this is a challenging strategy. strategic option to pursue.
Nevertheless if Levenstein is able to successfully implement it I have
no doubt that he will realise the maximum potential.
�Hansen is director, small and mid-market solutions and partner group, Microsoft SA.
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Panel member: Sicelo Sikakane, IDC
THE
key to an effective marketing and distribution strategy for the product
is one that would tap into critical elements within the value chain of
small business services at a cost that is variable with the number of
units sold.
As
first prize, Econoserve should appeal to banks and other finance
houses, specifically the small business finance departments of these
institutions, to provide a mutual solution for them and their
customers.
EconoAccounting
can be demonstrated free of charge to groups of clients by arrangement.
Banks and other small business finance houses have enormous problems
with their small business customers when trying to access their
periodic management accounts to track working capital, gearing and cash
flow patterns.
These
institutions are a critical element among small business services and
one of the key users of periodic management accounts. In proposing this
as a solution for businesses struggling with their record keeping, it
assists both the banks and their customers for the benefit of all. The
banks can also assist with model information for demonstration
purposes.
In
addition, or as an alternative (you always need a plan B), Econoserve
should target business conventions through the various organisations
that exist such Nafcoc, Sacob and the MBA schools.
These
two solutions tap into existing databases of small business services
and should be contrasted with the cost and impact of an individual
drive.
The
cost of implementing the marketing strategy should be as variable to
sales as possible. If there is anything to be learnt in cost
minimisation for any business, it is to make as much of your costs as a
variable to business activity as possible.
Having
minimised the cost of approach by developing a once-off demonstration
module and using existing databases, Levenstein should employ a direct
sales approach (call the office for delivery, order via the internet,
free installation) and cut out the middle men.
If sales people need to be employed, it should be on a commission basis.
A
useful partnership could also be developed with retail chains
(Incredible Connection, Dion, Game), including a leaflet in the product
pack with a full set of instructions plus a number to call in case of
problems.
Better
still, employ all of the suggested distribution strategies at once,
monitor which channel is the most effective (do not forget the flyers),
and slowly phase out the channel providing the least sales.
The
capital Levenstein has should be used to hire a sales and marketing
manager whose fixed remuneration will be fairly modest with the rest of
his income dependent on sales.
What
is disturbing is that there is no annuity income after each sale,
neither from the product licence nor maintenance, support and upgrades.
He has to rely on new sales or keep inventing new programs to sustain
his business.
His
cash problems will keep repeating themselves if he does not capitalise
on previous inventions by way of regular income. New inventions would
therefore be funded from internal funds generated.
The
valuation of the business with a price:earnings ratio of 4,6 (market
value divided by R1,5m profit after tax) seems fair and is an
acceptable “quick and dirty” calculation of the market value of
businesses.
�Sikakane is the IDC’s senior account manager, techno industries.
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Panel member: Farhad Khan, MTN
FIRSTLY,
MTN would like to commend Levenstein on his passionate attitude towards
business and the pride he has in his products and services. It is these
attributes and qualities that build and sustain successful ventures and
enterprises.
Levenstein’s
core competency is in the development of innovative and appealing
products and not really the marketing of these products.
Instead
of employing and growing a marketing and sales team, he should look at
completely outsourcing the marketing function. The firm he approaches
should develop a marketing strategy to embrace Econoserv’s
requirements.
A
sound marketing strategy, pertinent communications and a viable channel
is critical to the success of the business and, combined with good
sales representatives, will ensure growth in market share for the
product.
More
targeted marketing such as direct mailers (with, for example, a 5%
return rate) and a hard-hitting and sustained PR and media campaign
should also be explored with the firm Levenstein approaches.
Additionally, a targeted direct mailing campaign to small and medium enterprises may work in Econoserv’s favour
Regarding
the funding of Econoserve, we recommend that Levenstein should give
serious thought to charging a licensing fee of sorts. Once his customer
base has taken off, a set licensing fee will reap enormous rewards.
Related to this, Levenstein should also explore instituting a
maintenance plan or support fee which would augment his revenue stream.
Khan is general manager of MTN Business Solutions. |
