Interactive Strategizing

PHAZON’s Product Development and Entry Strategy

You are an “angel investor” with a broad portfolio in technology products. Unlike your “venture capitalist” colleagues, who manage the pooled money of others in professionally managed funds, you invest your own money in startups. You have made your millions by investing at very early project stages – before products have been developed and brought to market. You (like most other angels) lose money on over half your investments. Around 7 percent of your investments, however, are extraordinarily profitable and account for three-quarters of your financial returns. Although you are known to be an experienced and successful angel investor, you are willing to accept numerous failed investment decisions for the sake of the “few golden investments” which keep you riding high on the waves of success. You have read just a few business plans in your life and the content of these documents has never informed your decisions to invest. Rather, you prefer to rely on your expertise-based intuition, occasional advice from informal channels (if available), some rules of thumb and some formal analysis. Christian Houle – a retired CFL (Canadian Football League) player and entrepreneur – has approached you recently and has asked you for an investment. He has offered you 10 percent of his company, PHAZON, for $500,000. Houle is developing earbuds (Figure 1) that, he believes, will revolutionize the truly wireless (TW) market.


Figure 1. The PHAZON Truly Wireless Earbuds

The PHAZON earbuds will be, according to Houle, the world’s first one-size-fits-all wireless earbuds – guaranteed not to fall off. Wireless earbuds have been around recently. However, they offer poor comfort and stability. While producers claim that inserts (plastic or foam) can fix these problems, everyone who has tried earbuds with inserts knows that they do fall off. The PHAZON earbuds are the first that fit perfectly and do not fall off – with a simple twist motion, the fit is so solid that you can literally dive into the water and the earbuds will stay in place. Among other things, the PHAZON earbuds are just half the size of all other earbuds and their design is based on an inner ear pattern that everyone shares. While other earbuds fit correctly 50-70% of people, the PHAZON earbuds fit correctly over 95% of people. With PHAZON, any sports from casual jogging to skydiving will let you listen to music flawlessly. You can listen to music flawlessly even while swimming – the PHAZON earbuds are the first waterproof earbuds. In the wireless earbud industry, it is critical to have that great snug fit since there are no wires to prevent true wireless from falling out – after all, no one wants to lose their earbuds while playing sports. Even if the PHAZON earbuds do get lost, they will be easily traceable with their embedded “searching feature”.

Before approaching you for investment, Chris Houle has launched a crowdfunding campaign on a Canadian crowdfunding platform – in the 60 day campaign duration he raised over 2.2 Million dollars. Around 11 000 crowdfunding supporters have pre-ordered the PHAZON earbuds for a price of $199 a pair. Competitive (and similarly crowdfunded) wireless earbuds, like BRAGI, are pricier ($299 a pair) and offer poorer fit and comfort. They do offer other features, though, that the PHAZON prototype still does not have, like volume adjuster buttons and fitness tracking based on biosensors and internal memory. Big players like BOSE are offering wireless earbuds with superb sound quality, but they still have one wire, so they are not truly wireless. Apple has launched pretty-looking truly wireless earbuds, which are notoriously uncomfortable to wear.

You know the technology market well. You know that the nature of the technology market dictates a short “time to market” (the time between product development and product launch), but it also dictates achieving optimal product quality to satisfy a sophisticated client base. Chris Houle’s management team will have to decide on the tradeoff between quality and time to market. If they decide to go for a short development cycle time, they will need to compromise on quality. Does Chris Houle understand the urgency to get to market quickly in order to get a first-mover advantage?, you are thinking. Does he know that Chinese engineers can replicate and put crowdfunded products to market at unthinkable pace, even before the crowdfunding campaigns are finished? Or… wait, we are talking about a premium high-quality product here. Houle may be right in his belief that quality is everything as far as his earbuds are concerned. He believes that his earbuds are non-replicable. His design does seen to be unique. And he is passionate…

He intends to get the earbuds produced in Canada. You know some Canadian engineers who can help him develop the product on time. But will they really be able to help? Or should these earbuds be made in China? It would certainly cost less to produce in China, there would be better service and experience with similar products, and shorter time of production. However, neither Houle nor you speak Chinese, some people tend to have a lower opinion of products made in China, and the shipping expenses may eat away some of the production price savings. And… how about the suppliers? Who will deliver all of the special micro-components for the earbuds? Houle has inattentively revealed to you, during your conversation, that he will need many special micro-components in order to fully develop his prototype, and he is unsure about who can deliver those parts on time. You know from experience that the devil is hiding in the detail. Could a wrongly chosen supplier eventually kill the project? Will Houle and his team be able to balance the pros and cons of these factors?

Most startups you have invested in have involved some combination of immature technologies, inexperienced teams, undeveloped markets, and unfledged business models. PHAZON has been successfully crowdfunded, which means that the market is proven at the product entry stage. The initial risk would be split between you and many smaller risk takers (the thousands of crowdfunding supporters). However, another type of risk will emerge – the risk of duplication and infringement of patent rights, since the development process of crowdfunded products is public and transparent. Chris Houle has had to put every step in his product development process online (in regular updates for his backers), including pictures and some technical drawings. These technical drawings are available online and seem to you like an invitation to produce illegal duplicates or fast substitutes. Last time you talked to Houle, he explained to you that he does keep his most important secrets private. This may help, as well as international patent rights (if any) and the complexity of the product (which is not easy to duplicate). You know that the returns on investment in crowdfunding technical projects has varied in the past. The majority of founders have historically fulfilled their obligations to funders, but some have delivered products later than expected.

The PHAZON earbuds do seem to have potential, with their unique design. What Chris Houle has shown you is not the final product, though, but a prototype. The fully-fledged earbuds are not yet ready to be sold. Houle is focused on a single high-quality product. Another option would be to have a parallel pipeline, in order to release a similar product with less features and a lower profit margin, under another brand name. Doing so may enable Houle to gain experience on the lower-end segment by raising the bar to those who aim to enter the market.

Houle is charismatic and tells a passionate story backed with a 2.2 Million dollar crowdfunding support. You are wondering if he will successfully manage the expectations of his supporters. Crowdfunding supporters can be just as ruthless as generous. They can change their minds at the speed of light and decide to backlash all of a sudden. How patient will Houle’s supporters be in case of delays? Will Houle be, then, able to stay in the market? Would he be listening to your advice and be easy to work with? Is PHAZON the next project you will invest in?

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