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August - 2007 - issue > In My Opinion
Who says niche players can't be billion-dollar companies?
Sashi Reddi
Friday, August 3, 2007
Many leading venture capital firms from the U.S. are willing to invest in, and have begun to bet on, niche Indian players. Consider this, till five years ago an investment of $7-8 million in a niche services company, operating on an outsourcing model from India, was considered big. Today, the average size of investment a leading venture capital company makes is anywhere between $20-30 million.

This growing trend among VCs of investing in ‘niche players’, gives me a sense of satisfaction about what I ventured out to do six years back; which was to set up a company focused on ‘testing and quality management’.

With the increase in the number of organizations that have automated their business processes, there has been a growing need for these companies to test the efficiency of their software and IT systems. More often than not, they prefer to engage the services of an independent testing and quality management company, to get an unbiased appraisal. As an entrepreneur, I realized the potential of the testing market and set up AppLabs in 2001, to capture the exciting and tremendous business opportunity that ‘testing’ provided. And since then, AppLabs has been growing significantly.

Contrary to what comes to mind when thinking of a ‘specialized niche company’, AppLabs is not built around a small opportunity. In fact, it is possible to build a $1 billion company in this niche segment of ‘testing and quality management’.

Let me illustrate my point. Once a strong value proposition is built to focus on a particular niche segment, one needs to identify an opportunity that is scalable. Here, I would like to clarify that, while in the Indian context scalability often refers to how quickly a company can increase its headcount, in the U.S., it is measured by the market opportunity the company has the potential to capture. Hence, it is required to determine the quantum of business already being generated by the big players in the niche market, as well as implementing an effective ‘go to market strategy’ to effectively compete in the market for business.

On attaining considerable growth in its industry segment, it is also advisable for the niche company to diversify into peripheral or related services. For example, a player in the ‘testing’ market could look at providing ‘security or certification services’ as well. Also, various niche players with related business interests could work through ‘partner referral’ programs which would enable them to offer the entire range of specialized services required by the customers to meet their business needs. The attempt here is not to expand by becoming an ‘end-to-end player’, but to grow the business, while not losing focus on one’s core service offerings. Additionally, a niche player needs to invest in, and build, new competencies in the focused areas. Success is measured by the ‘true value’ provided by the niche company’s services and products to the customer’s business, which will help retain as well as increase the client base.

To reinforce the ‘value proposition and branding’, niche players periodically need to get their messages out in the market they operate in. This could also involve ‘a re-branding’ exercise, wherein the company considers changing its logo, tagline, external and internal messaging to its customers and employees respectively. This is also a positive statement in communicating the company’s ‘key differentiators’ from its competitors and to maintain its ‘leadership position’ in the industry.

A niche player could also communicate its value proposition to its customers through new and innovative pricing and packaging. For example, a testing firm could charge for its services appropriately, after analyzing the amount the customer currently spends on technical support (post-product deployment). If the spending is minimal, it could result in increased returns for the testing firm. The pricing could also vary according to the number of bugs one finds in the product.

On the packaging side, one could draw up a list of ‘top 20’ functions and charge it as a package, rather than charging for all the services. For example, in the arena of security testing, this ‘top 20’ list could constitute a set of services deployed to detect security flaws.

A niche player should clearly articulate the business benefits that would accrue from engaging the company’s full services to the customer, including the ‘financial savings’ in the entire product lifecycle, rather than limiting it to specific services concerned. Experience has taught me that this is one of the strongest factors that help win and retain customers.

Niche players are extremely effective at working closely with their customers to build and maintain long term relationships by innovating and challenging the existing norms in the industry, thus adding value to the project, program, and organizational level. The best organizations in the world want to work with the best, and if you (as a niche player) can be the best at what you do—and this can really happen only if you focus in one area—then you will have great success.

In conclusion, I would like to add that, the toughest challenge an entrepreneur faces while building a $1 billion niche company, is to convince people to believe in the ‘value proposition of offering only specialized services’. While a niche firm often succeeds in attracting the best talent with the requisite specialized skills, it does encounter challenges to retain them in the face of competition from the big ‘end-to-end players’ in the industry. Hence, it is imperative for a niche company to consolidate its workforce with appropriate talent, value proposition, and the conviction of being a ‘big player’ in the industry, while offering them promising career paths.

The author is the Founder, Chairman & CEO of AppLabs. He can be reached at sashi.reddi@applabs.com
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