Risk in startups: why lawyers rarely become entrepreneurs

I was at an event recently in conversation with an entrepreneur, an early-stage investor, and a lawyer, who works for a largish law firm that supports small businesses.

The investor asked the lawyer, “do you ever imagine starting your own company or joining a startup?”, and his answer was “no, I’m not sure I’d be able to deal with the risk.”

The conversation made me think about how different people assess risk. It’s an idea that is central to the tech startup and investment sector but it means different things to different people and at different stages of their careers.

The level of risk is often equated with the probability of making a financial return. On this understanding, entrepreneurs who leave their current day job to start a business full-time before they have revenues coming in are at high risk; executives who work for large corporates or government and take a good base salary are at very low risk. This is the kind of calculus that the lawyer has in mind when he thinks about swapping his regular salary for equity in order to work in a startup, and the difference quickly becomes starker when there is a family and a mortgage involved.

But a lot of entrepreneurs don’t look at risk in the same way. Assessing risk to an entrepreneur is not just financial – I think it is also about control of your career. Let’s call this ‘career risk.’

Thinking beyond financial risk

In a corporate environment you are well looked after and well compensated, so you have a lower financial risk, but you have less control. You can be asked to go to work in an office on another continent, or moved to a different role in a new department. And then there’s the risk that everything collapses. Your industry is rendered redundant by new technology or your company is forced to shut down through no fault of yours.

Every UK public company has a section on risk in their annual report, which discusses all the risks that have been anticipated and none of the risks that haven’t. The unforeseen ‘black swan‘ events are the most catastrophic and therefore the most important risks but Lehman Brothers did not have a paragraph on how they are counteracting the risk of a global financial crisis. This is the kind of ‘career risk’ that can be significant in the corporate world, where people tend to stay in similar industries for many years, and reduced in the startup world, which is more fluid.

Being an early member of a startup gives you enormous opportunities to learn quickly in many different roles. You learn how to create something valuable with limited resources and you learn how to fend for yourself. And even if the startup fails you will move on to your next one with a lot of experience, which has value in the jobs market (both to startups and to corporates: experienced entrepreneurs and startup operators are quite attractive to a lot of large organisations as well). You have control over what you learn, how you develop, what personal network you want to build, and with whom you work. As entrepreneurship professor Steve Blank said in an interview recently, “failure in Silicon Valley is called experience.”

On the financial side, adhering to the lean startup movement should help you reduce the largest financial risk to you as an entrepreneur – that you make no money for a while then have to shut the company down, perhaps owing some money to investors or the taxman – by encouraging you to invest your time and money in the right way.

Why trust your success in people you don’t know?

One of things I like about small business is that you get to know the people that are responsible for the success of your business. You can see their strengths and their faults first-hand and you can make an informed decision about your ‘career risk.’

The entrepreneur’s viewpoint is that you’re always backing someone so why not back yourself and people you know instead of putting your job in the hands of high-up executives whom you will only ever meet for a few minutes at a time.

I recently read this quote from entrepreneur Uri Pomerantz, which sums it up well:

“I still remember my professor advising us that, at the end of your career, you’re unlikely to regret taking a calculated risk to achieve a goal, regardless of the outcome.”

The interesting thing here is that once you’re in the startup world the criteria for assessing risk seem to be different.

The Investment Game: how to choose your investors wisely

Tony O’Shaughnessy, founder of ABS, gave us some key points to consider when looking for investors for your company:

“I think the very first thing you need to understand is why you are looking for investment in the first place. It sounds really obvious but you would be amazed by the number of people who think ‘if only we had investment we could do x, y and z.’ Thinking about money problems alone is a very naïve viewpoint. You should really make sure you know exactly why you want the money, what you’re going to do with it, and that what you are going to do with it fits with your strategic direction. This is absolutely key.

You also have to think about what the role you want these investors to play:

  • Do you want them to be equity holders?
  • Do you want them to be proactive?
  • Do you want them to have valuable employment in the business?

The minute that you have investors it will affect the culture of your business and your employees directly. You need to know that it is a great idea because it allows you to build a new product, etc., but also what it means in terms of the way you operate.”

 

"Building a product that people want" – An Interview with Dragos Ilinca, CMO and Cofounder of UberVU

Dragos Ilinca is the CMO and cofounder of UberVU, a social media intelligence company with bases in London, Bucharest, and the USA. Dragos began our interview by describing the genesis of UberVU as it evolved out of a web-marketing consultancy into a social media posting platform, into a social media monitoring tool, into its current form as a social media dashboard with social media intelligence.

In your opinion, what is the most difficult part of getting a startup off the ground? Is it getting funding, working together as a team, is it actually developing the product, or something else? Or is it everything in combination?

I think it’s everything in combination. It all comes down to building a product that people want because I think everything falls into place from that. Of course in order to build that product, you need a team. We were lucky because we had known each other for a lot of years, we had started other businesses together, but I look around and a lot of people are looking for co-founders and I think that’s really, really hard, finding someone to start a business with. And once you do that, its about just building something that people want—even if it’s a minimal sort of version—because if you do that, raising money shouldn’t be difficult. If you manage to build that product, that kind of means you’ve got a team, and if you’ve got that team and product, raising money should come pretty easily. So in our case, I think it was definitely figuring out what product to build, but I see a lot of entrepreneurs who are starting with building a team, especially in places like London where developers have so many options to choose from. They could work for, you know, the finance industry, or an already-established startup, and if you’re just starting out it’s difficult to get talented people to join you.

Perhaps it’s too early to ask this question, but in terms of your experience working with social media, how do you adapt? How do you know when to stay your course with your vision for developing a product, and how do you know when to pivot? The social media world is constantly changing, so how do you adjust for that?

I don’t think there’s an easy answer to it, but it kind of comes down to traction. If nobody likes your product or buys it, you need to do something about it. If you have a few people who really, really love it, then you need to understand who those people are and why they love it, and if there’s an easy way to reach more of them, that’s your whole market. And if you’re happy with that that’s fine, but if you need a way larger market, you can potentially work with them and figure out what a dumbed-down version of that product is. I think the most difficult thing is actually making the decision. I think deep down you kind of know when things aren’t really going well, and you can stick around for three months, maybe another six months and see: make a plan, and just say we’ve got this deadline and if things don’t pick up we need to do something about it. But I think people deep down kind of know, but they’re just afraid to make a decision. You need to be able to say, “What we’ve done so far, yeah, it’s a lot of effort, but in the end, people aren’t really paying attention to us and aren’t buying the product, so tough luck. We need to start all over again.”

UberVU strikes me as a pretty advanced mechanism, integrating social media and media monitoring. Do you think the days of simplicity in application development are over? In other words, do you think the skill-level required to produce groundbreaking apps will only become higher as times goes on?

Probably. That’s probably true. Because we’re a business tool, so from that point of view, we need a lot of technology to do what we do. But look at something like Instagram, for example: there’s not a lot of technology in there. If you think of technology just in terms of code, you know, other people can build that kind of stuff in a weekend. If you think of technology as also the mechanism by which they’ve been able to build viral coefficients in it so that it spreads and that kind of stuff, then that’s very difficult to replicate by other people. So I think if you’re building consumer apps—if you know what you’re doing—you can still get away with not having a highly technical solution. But even so, if you look at Colour, they’ve got pretty hardcore technology in there, and it’s just a photo app, more or less. So even these things are becoming more and more complex, and I think the reason is that you can do so much more now with the technology and the stuff that would have been impossible to do in real time is now possible, so you can build a lot better experiences for the user; and the second thing is there are so many people looking at the tech space, that if you build something that can be replicated within a week, and you’ve got absolutely nothing else that can make you succeed, then it’s just not worth it, because other people will copy you ASAP. Just look at Groupon as an example. A lot of people think it’s the technology and they built that in a weekend and there are hundreds of clones; but actually the difficult part is the sales behind it, selling to small businesses and being able to scale and that kind of stuff. So if you think about that as sales, not really technology, but technique and strategy, then it’s very difficult to replicate it. In terms of actual code, some people can probably build that in a day. But it’s not that that makes it work.

Since you’re the CMO, I wanted to ask a marketing related question. Since uberVU and so many applications are so heavily grounded in the online world, how important is actual person-to-person interaction in marketing?

I think it’s still important to have the in-person interaction. Not all the time; we started selling online with credit card, so it wasn’t necessary to meet anyone at that point. You could, you know, make the product and the company look more human by having photos of the members of the team on the website, having a video where you present certain stuff, having a blog that’s very human, but now that we’re moving more into the enterprise space and we’re starting to get customers like NBC or the World Bank, for these sort of things it looks like it’s pretty important to meet face to face, and if you cannot do that, at least have a few phone calls. I think the higher price you charge for what you do, the more you need that sort of relationship. And it’s not just because of the person-to-person interaction; usually if you’re charging a lot of money, the solution that you’re selling, you need to really understand the customer’s use case and be able to show them how the product is really going to make an impact. And these solutions are usually pretty complex, so it’s not like a photo sharing app: you take a picture, you share it with your friends, pretty easy to understand. It can be pretty hard to articulate just from a website and understand exactly how that could be used in your organization, and understand how easy it is to use even though it’s got this breadth of features. It’s hard to make the jump from, ok I see this demo video, how could I use it for my specific use case? It’s very difficult to understand that. And people just don’t have the time and don’t want to take the effort, so instead of researching that tool for 30 minutes and not understanding, it’s sometimes more useful to say, ok let’s just have a 30 minute phone call, you’ll tell me about it and I can explain really easily how we can help or how we won’t be able to help and you’ll probably need some other tools.

 

“The only guidepoint is reality” – Interview with Andy Hutt of triOpsis

Andy Hutt is founder and CEO of triOpsis, a real-time visual intelligence company designed to provide technology that allows enterprises to use mobile devices to track the status of products and services on the ground.

I can’t promise any words of wisdom at all, but I can promise words.

1) Why did you decide to become an entrepreneur rather than go down a more traditional career path?

Lots of answers to that. As with most things in the world, life is a bit more complex than, I woke up one day and said, “Fantastic! I’m going to do this.” Life evolves to a point and you make some decisions. For me, one of the most important ones, and it is only one of many, is when I looked at a traditional career path, I just saw boredom. My background is in finance; I’m a qualified accountant. Way back when I worked for PwC, I worked in Private Equity Transaction Services at Deloitte, I worked in corporate finance, blah, blah, blah. And the problem was whenever you looked at the career path of any of those, it was frankly just boring. And for me, I didn’t want to spend 30-40 years of my life doing that. At all. So it’s about how to make a change. And any change is very difficult to make.

For me, the obvious one with the skillset I had was to go and set up a business. It was possibly a bit of a random choice in terms of where we went, but you have to use what you have around you. I had no background in software prior to this, I had no background in retail, no background in utilities, never set up a business, all those kinds of things. But you have to make a decision that says, I need to change something. I need a more interesting path in my life, I need to do something which I find more satisfying, more enjoyable, and I have more control of.

2) What new skills and specialisms did you have to develop as you got triOpsis going? How did you develop new skillsets?

One of the skills a potential entrepreneur has to have is risk taking. Risk taking possibly equates to stupidity or arrogance, because if you knew all the risks, you probably wouldn’t do it because you’d assess you’d fail; or you understand the risks, and you’re so arrogant that you think you can succeed anyway.

A lot of people are very risk-averse when it comes to trying different things. I’ve never set up a business before. Ok, fine, how do you do that? You just go and talk to some people, get a bit of guidance, and do it. And a lot of it comes down to just doing it. I’ve never run a technical team before, in terms of coding, never run a PR campaign before, I’ve never been a salesman, I’m going back to when I started the business, and it’s about risk taking, just dive in and do it. And if you work out you haven’t got the skills, learn. So, can I be a salesman? Yes. If you can’t afford a salesperson at first, that’s what you have to do. You can’t say, “I don’t have those skills!” You have to dive in, do it. The key thing is, if you’re prepared to take that initial risk—which is basically whether you’re prepared to show yourself up, whether you’re prepared to effectively fail—you need to learn quickly. Dive in, learn quickly, chuck it at the real world and off you go.

In terms of acquiring new skills, it’s partly about risk taking, it’s partly about confidence, and it’s the ability to learn quickly. A large chunk of my view of the world, when it comes to learning and entrepreneurship, is about surviving enough failures to succeed.

Most of the time, until you’ve made your business, you’re assembling a collection of small failures. If I go back to the first sales pitches I did four years ago, I cringe. I’m like, “My God, did I ever actually pitch something as stupid and vague as that?” But you have a go and you just learn, and that was a failure. You’ve got to collect these failures. And in terms of how you fund the business, ideally with entrepreneurship, you need to get enough funding to survive enough failures to have learned enough to succeed.

People view failure as though there’s only one way to fail, which is, you know, like the Eurozone at the moment: BIG! And actually, entrepreneurship is lots of little failures. “I tried that, it didn’t work. Put that to one side. I’m going to try that, ooh that didn’t work, ooh that does, let’s do more of that.” Ideally it’s not catastrophic. I got a good piece of advice early on, which is, “Never bet the ranch early on any particular given path.” Some people say, “You’ve got to do it the whole hog, just go for it!” And if you did that, put all your money in one strategy, one path, one thing, and it fails where do you go? I’d rather spread the failures, and then try and learn where I passed. “That bit did succeed, I’ll put some more money over there.” With failures you learn. Success doesn’t actually teach you anything, it’s just like, Oh, I got lucky. More of the same.

3) How do you balance breadth across industries and depth within an industry?

It’s a really good question because for me, success only comes if you focus. But it’s actually the point I was making a second ago about failures, because you don’t actually know which market, which product is going to be a success. So what you have to do, and what we did, is we started off in brands and we tried retail, and we’ve ended up in utilities; we ended up in water, and we’re now in gas and electricity. It’s a case of the same learning curve, but the ultimate goal has to be a focus. As a small company, you don’t have the resources to do lots of stuff. Provided you understand that to start with then you may succeed. If people don’t understand that to begin with, if they think they can have a go at everything, they will fail. You can’t. Unless they’ve got a really big bank balance, in which case, good luck to them! So, what you have to say is, ultimately I do have to focus to succeed, but I don’t know where to focus, so it comes back to how do I learn? How do I fail, etc.? And what you try and do is get into a niche where you think, yeah I’ve got something real. And that particular point to me in terms of business is what I was talking about earlier: you have to get that in the real world. You can’t sit in an office and think, right, it’s going to be this. That’s the way for me. You have to take the risk and then actually go and talk to that particular client. And they’ll probably go, “Oh that’s rubbish.” So you go back, you have a think, you listen and then you go back and you try that again. And ultimately it comes down to, sadly, what will this generate in revenue for somebody or will it save them money? You need to understand that as an end point.

The only guide point is reality, and that’s the bit when I was talking about risk taking earlier. A lot of people aren’t prepared to take a risk. And a risk is standing up in front of people and actually potentially looking a bit stupid. And for a lot of people, they’re not prepared to do that. The ultimate arbiter of everything is reality. You can’t sit in an office and make a profit. You have to actually physically go into the real world, get your product into the real world, and get real world feedback. Think of anyone who sits in an office and says, “Yeah, this is the best thing since sliced bread!” For our products, we could say, “Yeah insurance market, hey! We can do all of this stuff!” But actually if you spoke to someone in insurance they may turn around and go, “Err, you can’t do it for these reasons.”

4) What is the lifestyle of an entrepreneur like?

The lifestyle of an entrepreneur? It varies. In the world of big corporates, hard work is when you have lots of work on. For a small business, when you’re an entrepreneur, that’s easy. I’ve got work. The hardest part is when there’s nothing. You know, there aren’t any projects. You haven’t got a team of people, you have to sit and you have to go, I need to do something, I just need to create something from scratch. That’s hard work.

 

Lessons from History: The Book

In recent years we’ve seen a massive adoption of e-books and a new industry evolving around e-readers and e-book publication. In the span of history, the adoption has been shockingly quick, especially when compared to the adoption of other systems of writing and reading throughout history.The adoption reflects our society’s increased demand for textual consumption and our new ways of perceiving and processing text.

In Roman times, the strong trade connections between what is now Europe and the Mediterranean meant the widespread availability of papyrus through the Roman world. Inexpensive and simple to produce, papyrus allowed for widespread literacy and literary production. In other words, writing could be used for more than ceremonial or culturally significant texts. When stone is the only medium for writing, you probably are not going to write much.

In Roman times, the typical medium for writing was the scroll. The codex — what we now call the “book” — was first developed around the beginning of the Common Era, but it took about 300 years to become widely used and did not replace the scroll completely as the dominant format for five or six hundred years.

After the fall of the Roman Empire, trade broke down, and Europe entered a new era. Papyrus was no longer available, and people needed to find a different medium for writing. The solution was to use calf and sheepskin (parchment and vellum). Skins had to be extensively treated and prepared before they were ready for writing. It was a laborious and expensive process to produce a single page. Books themselves, therefore, had to be carefully planned and executed by professional scribes who had trained on wax tablets. From a modern perspective, writing was a scalability nightmare, so it is truly remarkable how much written material was produced during the middle ages in Europe.

As might be expected, literacy declined and was not widespread during much of the middle ages. But as the High Middle Ages dawned, literacy began to expand once again, and books began to be used for more than religious purposes. The scale of book production became immense, but it still relied on the laborious process of preparing animal skins to use as pages. As the demand for more written material increased, Europe saw several innovations quickly taking hold, notably printing and paper.

The issues faced in adopting these technologies were very much the same in the 15th century as they are today. Book production was an entrenched art and industry, and disruptive technologies that could supply something cheaper, faster, and better suited to the needs of customers were looked on both as exciting new developments, and as abhorrent degradations of an ancient tradition.

Just as the increased demand for textual production and consumption drove the adoption of printing and paper, an insatiable demand for textual consumption has lead to widespread adoption of new innovations we are witnessing at this very moment.

In the early days of the book, silent reading did not even exist. It was considered a miracle when some monks discovered St. Jerome reading silently in his cell. In those days, each word was to be savored, even committed to memory; now text flows through us like wind among the leaves. Our perception of text has changed, and with it, the media of consumption have evolved. Even though we now often consider “technology” to require electronics, the codex was cutting edge technology in the days of its invention and adoption.

The codex has been in use for about 2000 years. It is one of our greatest traditions and has become an important part of our culture. The speed with which e-books have been adopted is truly phenomenal considering the history of the book. It is the next phase of textual evolution, as we process more and more textual material. From this, I fear for the survival of the codex, which holds a dear place in my heart; rather than its disappearance, I prefer to see its return to its former place as a revered object housing the texts deemed most worthy of retention.

What route should students take to become a successful CEO?

Peter Collins, currently the CEO of Permasense, has obtained a PhD Computational Fluid Dynamics and an MBA prior to his various managerial and director roles. He built on his knowledge and skills as an engineer prior to management.

This is perhaps the conventional way to proceed in one’s career, but there are many other opportunities for newcomers these days. The British schooling system creates a dilemma for students at numerous stages. Having to graduate with only few A-levels suggests that you are required to narrow your focus down at a very early stage. However, individuals’ personalities only shape after “teen” years, where confidence and ability to manage others become evident. So there is no clear-cut answer to which is the best route to take.

In order to get an understanding of which route successful CEOs prefer, we asked Peter whether he feels his career advancement was the key ingredient in his success or whether if he could go back in time, would he have done it in any other way…

I have no regrets…

Engineering based businesses are best run by engineers. You cannot build a great engineering business without knowledge of and passion for engineering, as you cannot build a great hotel business without a knowledge of and passion for hotels.

It’s a pity that more engineers don’t remain in engineering, in particular to build engineering businesses…

Growing a business during a rough patch in the market

You do not need to look far to notice that the Eurozone recession is dooming on us. During the last global recession, entrepreneurs were some of the worst hit across all businesses.

So we got in touch with one of few entrepreneurs who managed to continue hiring and growing his business during the recession, Tony O’Shaughnessy, to describe how he managed to build Fourth Hospitality to a point where it was strong enough to break the storm and plough through by hiring 5 to 10 people a week, and to give us and other entrepreneurs advice on how to survive rough patches…

“The key point here is business planning. I’ve written and seen so many business plans that have unachievable financial targets. This is because entrepreneurs are stereotypically very opportunistic, and there is nothing wrong with that as long as you consider the worst-case scenario. You need to consider how you can ride the storm in the middle of the Atlantic, i.e. how can I operate my business with limited resources and demand.

Additionally, you must always think of the basics: what is it that your product does and how is it unique. A lot of people promote products/services that are ‘good to have’, but not many people sell ‘essentials’. If your product is an essential in the market with no better substitutes, the effects of external pressures will be minimal. Once you have identified why the market demands this product, you must drive this through with consistency.

We offered complete back office solutions, which met market requirements that would aid them to overcome the effects of recession. Very importantly, our offering was affordable. Major industry players felt the pressure of the recession and wanted to become more organised to succeed. Consequently, they recognised us as a way in helping them through the recession and coming out on top. In particular, the idea of visibility and sales analysis became very important to them in understanding how they can outperform. Our ability to provide this solution became a great asset for them to control performance of outlets.”

The Risks of Awesomeness Marketing

There are many strategies for marketing, but one that has been growing in popularity, particularly in the United States, might be affectionately called “Awesomeness Marketing.”

As a type of viral marketing, the concept is pretty simple: associate a product or service with something awesome. Often, the connection between the product and the awesomeness will be tenuous at best. The association between a car and a Greek god, for example, is irrelevant; but putting the product next to something witty, outlandish, and intelligently over-the-top associates the product with favorable qualities and a sense of enjoyment.

Recently, the startup Dollar Shave Club has attracted a lot of attention because of its YouTube viral advertisement video:

The video appeals to a range of audiences, pushes on a real pain point most men have (overpriced razor cartridges), and includes a number of more subtle riffs, including having the guy getting his head shaved reading a copy of Eric Ries’s The Lean Startup. Nice touch.

For a video of this nature to be effective, it cannot dance with any middle ground of reality: it must be clearly and decisively over-the-top. Otherwise, the company runs the risk of being taken seriously in its boasting. Or, worse, just flopping. Video advertisements of this nature shamelessly extol the awesome powers of the products they sell: “Anything is possible,” says the Old Spice man after passing seamlessly through an impressive series of fantastic set changes. Furthermore, by claiming to be so “awesome” that nothing can come near, the company builds into its marketing a solid defense against inevitable attack. They can say, “Hey, don’t you have a sense of humour? We were obviously joking…”

“…But we really are awesome.”

In order to create the desired effect, however, one must be very careful to actually produce something amazing. Trying to be awesome can be fatal and will be worse than more traditional forms of advertising. In many ways, working with the real selling points of the product can be dangerous; every message needs to pass through the twisted gates of hyperbole.

Awesomeness Marketing is high risk/high yield. Do it right, produce a legendary campaign, and your brand will stand as legendary in the minds of consumers (provided the product is actually decent). But if your advertisement falls short of awesome, or worse, if in trying to be awesome, it comes across as juvenile or offensive in some way, then you have big problems.

One can never be certain that a video will go viral, even when the requisite qualities of brevity and over-the-top humor have been included. For an example, see the Zeus Scion commercial below, which does not have the same viewership as other similar ad campaigns. The video itself does it right, but it has not enjoyed the same success as others. Not going viral is always a risk when aiming to produce a video of this kind. But equally, there is the risk that the video actually will go viral. What then? Can you scale quickly? Is everything ready to fill orders on a large and perhaps international scale? Are all mechanisms in place? Is the product actually any good?

Awesomeness Marketing is also risky because of its implications in terms of social media. When a commercial goes viral on the Internet, there is no time to have a legal team vet all social media correspondence. Tweets, Facebook posts, responses of various kinds all come in and must go back out very quickly in real time. The team in charge of handling that social media presence must be sharp and switched on, able to respond quickly and appropriately without approval from corporate boards or legal teams.

The customer’s initial reaction to “Awesomeness Marketing” typically has nothing to do with the product itself. The product is in many ways irrelevant. The goal is to get the viewer stirred up and to think, “That was awesome!” The product can almost be an afterthought, which is one of the reasons the advertising is effective: the customer does not feel pushed. Gradually, and perhaps long after seeing the advertisement, the customer’s awareness—and the association with awesomeness—will shift to the actual product itself.

The efficacy of this kind of marketing comes down to the way in which the association with the advertisement shifts to the product:

Distributive Property of Awesomeness

Customer —> Awesome Commercial

Awesome Commerical —> Brand

Awesome Brand —> Product

Awesome Product

Customer —> Product = Awesome

 

Awesomeness—in terms of advertising—appears to be highly transferable.

Awesomeness Marketing will find a stronger appeal among the younger generation, but that is not to discount its effectiveness with other demographics. Who doesn’t like things that are awesome? It can be an incredibly powerful tool, especially because it requires relatively little resource to use, but it is likewise an incredibly dangerous tool and one that should be used carefully and only when one is certain the advertisement will be effective and the company is prepared to handle the responses.

The most important success factor in working with entrepreneurs: matching development stages

Whenever we have particular successes or particular failures with the startups in our portfolio I tend to try figuring out what was behind them. I think it’s important to think about patterns of behaviour that we should aim to repeat or avoid next time around if similar circumstances come to pass. Failure is an intrinsic part of working with startups but failures can be reduced or limited by paying attention to these points.

A quick reminder of what RIG does for those coming across us for the first time: we have a team of advisors who specialise in helping startups scale up to become sustainable businesses. Our model is similar to a VC’s model in that we have an element of fees and an element of ‘upside’ linked to the success of the startups with which we work. As a result, like a VC, we have limited space in our portfolio, and failure can mean working with the wrong companies over a long period without great success just as much as working with companies that crash out quickly and spectacularly. We also invest financially in startups which we really believe in.

Last week one of the companies in our portfolio had a great success – they won a significant contract with a major player in their target market, after a year of our combined hard work figuring out every aspect of market strategy, complex customer buying processes, the value proposition, the pricing, and the product development strategy. I tried to reflect on what has made this project successful to date and it struck me how important it was that we agreed about which development stage the startup was in.

At RIG we talk about three key development stages that all startups go through in their journey to becoming a sustainable business: finding a business model, building capability, and realising value. They broadly reflect other categorisations of phases that we’ve seen from other industry commentators such as Steve Blank’s Customer Discovery, Customer Validation, Customer Creation, and Company Building, and Ash Maurya’s Problem/Solution fit, Product/Market fit, and Achieving Scale. I think that the biggest determinant of a successful relationship and a successful collaboration with an entrepreneur as an investor or advisor is that you agree on the startup’s development stage.

Looking back at some of the startups I’ve worked with that have not done so well, the relationships I’ve had with the entrepreneurs have almost always been characterised by a difference in opinion about the development stage. I recall that one entrepreneur was convinced that his startup had a market-winning product that clearly solved a serious problem in his target market, but during the course of our collaboration we spoke to players in the market who didn’t understand how the product applied to them or how they would use it. Another entrepreneur felt unsure about fully committing his resources to a market strategy that had started to work, switched business model, and went back to discovery mode.

These differences are crucial because your development stage dictates everything about how you as the entrepreneur should invest your startup’s limited resources – in other words, it dictates your entire strategy.

Trying to optimise, outsource, and streamline your processes when you haven’t yet found a business model (i.e., you haven’t validated customer demand and therefore haven’t reached problem/solution fit) simply wastes a lot of money. In this stage you need your best resources at the front line learning from the customer and feeding back to your market strategy, proposition, and so on. Conversely, once you have real evidence of customer demand, spending time away from focussed execution will only slow your growth rate – sometimes to such an extent that you miss the market opportunity and never get past the startline.

I think that our recent success comes down as much as anything else to the fact that we all agreed that the startup was still trying to find its place in the world: working out where its product had the most value, who would pay a good price for it, and how to find those customers at acceptable cost. The entrepreneur didn’t try to go too quickly and didn’t get too disheartened by following a few paths with dead-ends. And now that they have a solid proof point of the right kind of customer demand they can shift into execution mode with renewed confidence.

I would be fascinated to hear the thoughts of investors who are asked to invest sometimes for discovery and sometimes for scaling. I would guess that if an entrepreneur asks for money with the promise of scale and then spends it on discovery, or vice-versa, then the relationship will almost inevitably deteriorate.

Please leave your thoughts in the comments section below.

Key challenges in sales and marketing for entrepreneurs and growth-stage firms

Permasense corrosion monitoring systems provide engineers, inspectors, planners, and plant managers insight into condition and capability of critical oil and gas assets. Potentially it is a technology with wide appeal. Given this, what are the key challenges in the sales and marketing process? What are the key steps and challenges entrepreneurs face in taking a product like Permasense successfully to market and what would you advise they do to overcome them? We asked the CEO of Permasense, Peter Collins…

Identify the product champion

Identifying the individuals in a company that are ‘own’ the problem your product or service is addressing is the place to start in finding the individual to champion it in your target customer.

For example, in Permasense’s case, this person my be an asset integrity, engineering, corrosion or inspection manager.

Identify all that have to sign off on adoption

If you are selling a system solution, impacting on a number of functions or business processes, you must also win the buy-in of these gatekeepers. For example in Permasense’s case this includes IT, safety, plant operations and frequently others.

Identify the economic buyer

It’s as old as sales itself – no sale without a budget, and it’s so easy to believe you’re close to a sale, when the person who has to sign the cheque hasn’t even been brought into the sales process, let alone convinced.

Whether you or your champion, or both of you together, convince the economic buyer will vary – but you will need to be clear with your champion how that final step to sale is going to happen…

Realistic time plan

Entrepreneurs and their financiers should not underestimate the length of the sales cycle, and thus how long to positive cash flow. For business-to-business sales like Permasense’s, this cycle can easily be 6-12 months. And that following achievement of reference sales. So make sure to plan your cash management accordingly.

Know your product

Know your product, believe in it, communciate that passion – but don’t oversell it! Having the appropriate background – in Permasense’s case, an engineering background – is, I believe, so important.