Oleg Boyko (No. 76 in the Forbes Golden Hundred), the founder of the investment company Finstar and Sergey Belousov, President of Parallels, a company whose software is used by over 5,000 providers throughout the world are serial entrepreneurs. Boyko has participated in the creation of several major companies: the Olbi Concern, the metallurgical holding Evraz and the gambling empire Ritzio Entertainment Group. Among the dozens of projects which Belousov has been involved with, only one is not directly linked to the IT industry – Rolsen, a company specializing in the manufacture of televisions. In this interview with Forbes, the businessmen discussed how they decide whether it is worth investing money in an idea, how to decide when it is the right time to shut down a project, and also if analysts’ advice should be listened to.
Forbes: Do good ideas always bring in money?
Oleg Boyko (O. B.): Let’s clarify exactly what ideas we have in mind. There are ideas for making money, ideas for creatively improving existing business, and brand-new business ideas. In my opinion, to make more money, you need to do what everyone else has done before you, but do it better than everyone else. All the money-making ideas do not concern the question “what should I do?”, but instead “how should I do it?” – the implementation process. However, new ideas are riskier. Perhaps they are more promising, but they are very rarely large-scale.
Sergey Belousov (S. B.): It is also a question of how much money is needed to launch a new idea. We’re currently creating a fund which will invest in new companies specializing in software and the internet, and for me this is philanthropy rather than business. You have to be careful with new ideas. People make most money from working with old ideas, although there are exceptions to the rule.
F. Google and Facebook for example?
S. B. I would like to point out that the majority of people made money on Google and Facebook when they were already quite well-established. Furthermore, Google is not actually a new idea at all. It’s just a reiteration of Overture (the largest global provider of pay per click ads which was acquired by Yahoo! In 2003 – Forbes) and the AltaVista search engine. Facebook is a rehash of MySpace and sites similar to it. These are not new ideas, but new methods for implementing existing ideas. Innovation in business is most often solely the correct selection of a new business model. And what about Apple, the most valuable company in the IT industry? What have they come up with? Personal computers were already around when the first Macintosh was created, although they weren’t as user-friendly as the Macintosh. The iPad and the Tablet PC are another example of this as tablet computers have existed for at least 20 years.
O. B. They’re just great products which surpass the competition. With regards to the aforementioned companies, they created a unique climate and a unique system to get the most out of their employees. They develop the best products as a result of creating a comfortable work environment which stimulates personnel creativity.
F. Have you ever made money on original ideas?
O. B. I had one original idea which made me a good amount of money: sending discs containing software to be paid for on delivery from an individual to my own cooperative. The cooperative paid without cash while the individual received the payment in cash. The difference was 2% in this case, yet the market value of monetization was 25%. We sent out approximately fifty people across the country and they received cash at post offices. Then we handed the cash over at the cooperative’s cash desk. This was a completely legal, creative idea which took advantage of a period of transition.
S. B. An original technical idea for the sake of which we founded a company was container virtualization. Although I should add that throughout its existence the company didn’t generate a lot of money. We made the most from a large number of conventional ideas which we came up with easily.
I participated in the creation of several small businesses in the technology field which were often based on new ideas. But I don’t regard this as an achievement: it’s better to take part in the creation of one major company. All the more so, this does not always require many ideas, let alone new ones.
F. How do you stimulate idea generation?
S. B. There are some businesses that are built on resources which can easily be bought, for example, construction. And there are others where the main asset is people. My partner Ilya Zubarev has a phrase which he often repeats: the biggest difficulty in the software business is that everything depends on everyone. We need to motivate everybody constantly, and not just so that they work to our benefit, but also so that they use their heads.
Usually people don’t want to use their heads. The main business process is getting people to think all the time, getting them to generate and bring tactical ideas for new products to life.
O. B. In my opinion, Microsoft has organized this production process extremely well.
S. B. It’s a difficult process. Motivation is built on basic instincts. One of these is curiosity, which drives mankind forward. At Parallels we do a lot to develop new ideas. For example, we pay our employees for obtaining patents for their designs. In addition, we have a mechanism which enables us to understand and get to grips with unfamiliar business models and technologies. To gain an understanding of a field you need to read around 300 pages of text, however this takes at least 10 hours. Therefore I have special employees that help me to read all the interesting information regarding business and technology. An intelligent person can get a grasp of a subject and then summarize these 300 pages in 30 or even 10 pages.
O. B. If we are talking about a company that operates in several areas, then I consider that the main task is coming up with strategic ideas. It’s the search for a niche, where there is still a small amount of competition, the so-called “blue ocean”. I can’t claim that I come up with everything. It’s closer to a compilation and a review of other peoples’ ideas, a machine which processes a large amount of information, innovative opinions and experiences. I read a lot of technical and analytical literature, I talk with various interesting people and do a lot of listening. The combination of all this information leads to conclusions and summaries.
F. What are the most unusual opportunities you have considered?
O. B. We considered rubbish recycling plants and contemplated the production of lighters – there are only three companies in the world which are engaged in this sphere. There are always a lot of medium size niches, especially in a developing economy or in a transitional economy (we still have this sort of economy in Russia). Opportunities arise every day because our society is growing rapidly and unevenly. For example, at a certain point it was not possible to open franchised restaurants beyond the Urals because products of the necessary quality were unavailable. But as soon as the right conditions develop, a niche appears, and whoever gets to it first is on time – the early bird catches the worm.
F. What criteria do you use to establish whether an idea is worth investing in?
O. B. One thing that you should always take in mind is whether you have the resources to implement an idea. You must understand that your company is superior to your rivals. If you are not up to the task, then nothing will save you, neither money, connections nor any other resources, because competition depends on people themselves. Even if a niche is free you still have to prepare yourself very well.
S. B. We established five things that should be focused on when evaluating new business projects. First of all, the scale of the problem which will be resolved with the help of this idea: this is the size of the potential market. Usually there is a slim possibility of a new idea succeeding and therefore the market for such an idea should be sufficiently large. Second, the team is important – its experience, motivation, capabilities, including leadership abilities. A team does not have to be formed immediately: if you know who to hire and how to find them in advance then everything is ok. Third, you need a plan – you need to know what to do in order to achieve your objectives. Fourth, you have to understand the competition well. You need to be aware of the existing solutions which will compete with the new idea. Finally, you need to understand why you are better than your competitors, how you differ from them. It is not enough to claim that you will sell at lower prices or make higher quality products.
F. Could you give us some examples of differentiations?
O. B. All my main ideas are built on this. The idea to get involved in the gambling business was completely untypical of our corporate culture. From the outset in the 1990s we were a banking organization: an investment bank, a commercial bank… As you can see, I still wear a tie despite the fact that everybody else stopped wearing them long ago. It was the bookish, American type of banking culture. People from that sort of environment go into shock when they hear the words “gambling business”. At that time I understood that I was faced with no competition in that industry. No one could compare with us in our huge country in terms of the combination of resources we possessed: a good team, structured thinking, money, and a corporate culture. People with no experience were normally involved in this business. Besides this we had a lot of information about the market: we often provided loans to the gambling business and operated as an import-export company importing equipment at the request of clients. We began looking into this field since 1992 and only in 2002 we started to operate in this area properly. As a result we founded a company with a turnover of $2 bln and an EBITDA of $700 mln. According to that figure we were one of the largest companies in Russia. If the Act on the Gambling Business hadn’t been passed, the company would have been even larger.
S. B. Here’s an example from my field of work. Software which enables you to manage a large number of servers, data, users and applications is historically important for large companies. Therefore, the developers of such software tend to focus on the problems that trouble the IT directors of large companies: making servers safe and accessible at all times and minimizing expenses. But the world is changing. Service providers emerged who provide such services to companies (mainly small businesses) via the internet. They want to generate the maximum amount of profit and rapidly develop their business. Our competitors focus on providing the highest quality service and cutting expenses, whilst we concentrate on the fast development of the company and generating the largest possible profits for our partner providers. It’s a completely different business model. There’s your differentiation.
F. Do emotions play a role when you are evaluating an idea?
O. B. Throughout my life I have looked at emotions from a scientific point of view. My general theory of the universe is as follows: everything that a person does is for the sake of receiving a cocktail of emotions, and every action he takes, starting from a gulp of water or beer and ending with his business strategy, is aimed at one goal – to experience the emotions which he wants to feel at that given moment. One person wants power and influence whilst another wants to fulfill her creative potential, and a third wants to spend more time with his family. Therefore a business strategy is a strategy for getting those emotions which a specific person wants and is interested in, which the body subconsciously suggests. Thus in the end a dull calculation, a creative idea and strategic planning all concern emotions, simply different ones.
S. B. The projects which I consider successful did not always meet the five criteria which I spoke about, and decisions were made on the basis of emotions, on instinct – I like that idea, let’s do it! For example, our most popular product Parallels Desktop for Mac sells a million copies every year. When we were developing it we assumed that we would sell 100 times less, but we just really wanted to make a virtualization program for the Mac.
F. It’s very difficult to predict results when new ideas are concerned. Is there any sense in planning?
O. B. During planning you come to understand what’s realistic and what isn’t.
S. B. As Eisenhower said, plans are useless but planning is indispensable. Business is a team game. In order to do something effectively, you need to work out and agree on what role every person is going to play. Also the planning process helps you to gain an overall understanding. More often than not, teams which don’t plan end up losing to the teams which carried out planning regardless of whether they stuck to the plan or not.
F. How do you know when it’s time to abandon an idea?
O. B. There is a single criterion: when the feeling starts to grow that it’s time to give up on the idea. There’s no such thing as business without mistakes, be they tactical or strategic. There is always a degree of doubt.
F. Are they emotions?
O. B. No, it’s a risk evaluation. A person who makes a decision starts to feel that the aggregate of risks exceeds the critical ratio to potential profit and potential prospects. Every entrepreneur evaluates this ratio every minute of every day.
These could be arguments connected with portfolio management, for example, resources have to be immediately transferred to another project, or suddenly some new opportunities arise or the market took a dive. Every manager has a personal life strategy and it involves specific decisions which are personalized and subjective.
A good example of this is our groceries business, which we liquidated during this recession. We developed it to a specific level and invested a lot of money, but then the financial crisis started. First of all we admitted that our project was not the most effective in this segment. Secondly I saw an alternative: at that moment the stock market hit bottom and I understood that money will at least quadruple over short period of time. All our managers, and of course, analytics and western consultants were making a lot of noise and trying to convince us to wait.
F. Who is right more often – the business man or the expert?
O. B. Analysts and strategists can help you optimize the system component of a business. This is essential for every business, even if it’s an extremely creative one. It’s a common belief that analysts and businessmen are two different things. In my opinion, the most capable analysts are businessmen – they carry out less formal analysis and take a larger number of factors into account, including the opinions of professional analysts.
S. B. We listened to the advice of our analysts and attempted to sell our software to major companies. However, major companies usually buy from our competitors. We spent four years and a lot of money on that market, yet we could have invested it in something which would be far more likely to succeed. It just wasn’t worth continuing in that area of business. In the end we stopped trying to compete with major companies and focused on a market where we could become leaders.
There’s a direct correlation between market position/share and profitability.
Long-term profit is only generated by the companies that have the largest market shares – it makes sense to be among the top three. Question one: can you, at least theoretically, reach the top three and how many resources do you need to do this? If you can’t then it’s possible that the area of business concerned will cease to interest you. Also you should take another factor into account – can you become number one or hold second place for a specific niche?
F. You both have experience in acquiring businesses from other entrepreneurs. Has it ever perturbed you that founders sell their companies and leave because they don’t see any future in them?
O. B. When we bought Russian Lotto, the whole lottery market was in decline and all companies were demonstrating negative results. It was clear why all the company owners were abandoning ship: they needed money to live on. However, unlike them, we understood what must be done to reverse the decline and turns losses into profits. Until that point there was not one major entrepreneur in the industry, no corporate systems, no investments bankers and not one single person with an MBA. It was the same at the start of the gambling business.
S. B. A lot depends on the motivation of the person who is selling their business. Firstly, at some point you decide to sell because the project doesn’t interest you anymore. Scientists prefer devising technologies, while engineers find functioning products more interesting, the ambition of entrepreneurs is to develop companies and of financers – to generate a company’s maximum possible cash flow. Secondly, a seller just might not have the same resources and opportunities as a buyer. For example, the Novosibirsk company Plesk which we purchased seven years ago. The owner had a good idea and they had developed it to a certain stage, but they didn’t have enough money, a business team or an auxiliary technical team in order to continue developing the idea.
There is also a great deal of examples of when we failed to invest money in good businesses. Once a programmer came to me with an idea concerning navigation and proposed a share for a small amount of money, but at the time I knew little about that sort of business and turned the offer down. Now he is the owner of a large company called Navitel.
F. Should you only work with what you understand?
O. B. Expert knowledge is also a resource. A business should be understood by at least one of its key employees. I have a contact that I can phone even if someone proposes to build spaceships, but I don’t have the number at hand and therefore I’ll never look into such an idea. At the dawn of capitalism everyone did everything because there was no competition. Now the world is different and you have to be more careful when you start working with new niches: your competitive advantages should be clear-cut and you have to be aware of them. There’s no other way forward. Market sectors are becoming more focused.
S. B. That’s why we only work with software. Even computer hardware is not our game.
O. B. The time of concentration is upon us. Earlier it was fashionable to regard diversification as salvation. We have all gone through that stage in Russia. The Olbi concern operated in 32 areas of business. When they drew up a chart of our activities at the FSB (Federal Security Service), they used whatman A1-size sheets of paper – there were over 3,000 circles. Their hair stood on end (it happened to me as well) because the system was too mixed up. American millionaires are often people have been doing exactly the same thing for 25 years in a row – they still live in the same house with the same wife.
F. So you’re saying that it isn’t worth launching several products at the same time in the hope that one of them will take off?
O. B. Absolutely.
S. B. That’s the worst thing you could do with a small business. I often meet people that had a bunch of projects and not one of them developed. They have this sort of logic: “but what if I’m not concentrating on the right thing? It will be better if I launch five projects, at least one will take off, and then I’ll focus on that project alone.” They don’t understand that this is a bad way to allocate resources! By concentrating on five things at once you only put in a fifth of the amount of work on each of them, but you’re competing against teams that went all out and put in one hundred percent, i.e. five times more than you. If you can’t focus on one thing, then you’re doomed to fail. Imagine a sportsman that decided to compete in 20 types of sport. If such a thing is even possible, then it’s a rare, short-lived spectacle.
O. B. Of course, there are examples like Sistema JSFC and Alfa Group. But they are specific structures with a large number of partners and strictly speaking, they function due to their outstanding leaders. That type of structure is hard to simulate, difficult to copy and difficult to parody. Even Lee Iacocca is no substitute for Friedman.
F. Is intuition more important that formal criteria for an entrepreneur?
S. B. You often have to make decisions which go against ordinary logic. If you get advice from the experts on an original idea, the majority of the time they’ll shoot the idea down. The founder of Starbucks Howard Schultz received 223 rejections from venture investors. No one believed in his idea.
O. B. To go against the advice of the experts, do it your way and turn out to be the real expert… that’s art.