Insights from a complex negotiation

Most readers of this blog will be interested in getting to the point that a current client finds themselves in, so I thought I’d record the process we are working through to resolve it.

Picture this: you’ve found an enthusiastic sponsor, got them to buy into your proposition ….. you then find they have opened an opportunity bigger than you could have dreamed of (or given them credit for!).  The opportunity is business changing …. it smashes that sales target ….. the world is about to take a serious change for the better!

You’ve dealt with the sponsor and business user all the way through the sales process, everything makes sense …. then you hit (corporate) reality – an unhappy procurement function.  Why are they unhappy?  Your sponsor decided (almost certainly correctly) that if they were involved early on they’d kill the whole thing stone dead – and the business needs your software so they didn’t want it killed off early.

The call is set up, the agenda point is ominous – “commercial discussion”.  That’s where we find ourselves today.  Time for some scenario planning.

Position-based negotiation – a brief segue 

Just like in position-based warfare, you either win or die in your trench.   Positioned-based negotiation is the same – and thus to be avoided unless you have nowhere to run!

Back to the point

What will come up?  In reality there are actually very few things that procurement can say / do.  They either need to tick a due diligence box to say they checked it all out and understand it – or they are going to try and beat you down on price.

As I see it, there are only really three start points you should prepare for:

  1. The price is too much
  2. They don’t like the pricing structure
  3. Justify the whole piece

The price is too much

So let’s start with the first point – the price is too much.  The price is too much?  How is that possible, we spent all that time with the business users who hold the budget working through it and making it the right fit.  How can it suddenly be too much?

In my experience it can be too much because: a) procurement has a corporate target for reducing initially quoted prices e.g. everything down by 10%; b) the budget that the sponsor and business users identified got spent and they weren’t aware of it; or c) procurement isn’t particularly evolved in this corporate and is spectacularly unimaginative when it comes to negotiation!

So how to respond?  Remembering to avoid a position based approach (“it’s the best we can do”), ask a question: “why is it too much?  We have spent time with X and Y, who confirmed the budget was available, so you need to explain this to us”.  It’s a killer – now the procurement person has to explain their rationale for their statement – if they aren’t coming clean, try a couple of other questions: “do you have a corporate target? Has the budget been spent elsewhere?”  This puts you in the driving seat as you are now asking the questions.

We don’t like the pricing structure

This for me is a classic.  I have a tendency to specialise in subscription-based businesses – I like the model, as it lowers the cost for users to adopt and provides the business with on-going revenue to pay its employees and further develop the software.

However, subscription-based software isn’t old hat to everyone – in fact, some people still think that all software is sold on a license / maintenance basis.  This is not good, because you might have to explain the whole rationale of subscription based software to them, and then break the news that they won’t even own it – and some procurement departments hate not having something they can take away (even though in the long term they are totally powerless to develop it in house!)

There are several ways to address this:

  1. That’s our business model – take it or leave it (bad position-based start!)
  2. The pricing structure is like this because it reflects how we deliver the software – a lot of our costs are in on-going development for your benefit, as well as server space to deliver it across all those different geographies
  3. Give them a quick calculation of the license / maintenance cost – hey, if they want to buy it like that then why not!  So your £50k per annum software is now £127k (£115k+£12k) year one and then £12k for the following two years.  Obviously that’s good for my cash flow and bad for yours, Mr Procurement, plus we won’t be able to deliver you with any of the development benefits over the three years because we are going to have to create a separate instance of the software for you on another service, and once that’s in place we won’t be able to tinker with it in case something goes wrong and affects your business
  4. Ask them why they don’t like it – then knock off all the responses with the standard SaaS arguments – it won’t make them look good, so hopefully they will stop making stupid points fairly quickly!

Justify it…..all of it

This has to be the worst one …. not because you can’t do it, but because it takes so long to do.  You have confidence in your pricing, otherwise you would not have put it in front of them, and you’ve probably already been through this with the sponsors and business users – so it’s just tedious.

Do get some practice in beforehand though – time spent in preparation is time well spent.  In all likelihood the question that keeps coming up as you go through will be “why is that like that?  And why is that like that?”   As I said before, you have confidence in your pricing …… you are just going to have to spend a long time explaining it.  And there’s always the risk that either “that’s too much” or “I don’t like that” is going to come up – if so, I reference you back up to the previous two sections.

Final Thought

Generally you don’t get to a negotiation unless the customer wants to work with you.  Keep that in mind….and you’ll have a successful outcome – and lastly, the only business worth winning is profitable business!

“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.

 

The 'differentiated' sales force

As technology advances and the manner in which technology is consumed changes, traditional software sales jobs are fast becoming an anachronism. The selling of largely standardised solutions using a direct sales force has been replaced by an internet-based, self-service, sales-less model in which marketing comes to the fore. Recommendation and virality create and drive demand. The change is marked.

If you are running a direct sales team today then you are in the business of selling higher value solutions with a degree of complexity. The sales force is no longer merely the execution channel; they are a constituent part of the solution’s differentiation. Sales skills alone are not enough; they must offer the prospective customer expertise. This value-add is integral to the sale. Sales consultants must become ‘consultants’ in the true sense of the word. They must have domain expertise and problem-solving skills that are valued by the customer. They must be ahead of their customer’s thinking. They must be able to challenge and educate the client. Value is created though collaboration. While the technology at the core of the solution must remain scalable, the skill in creating a dialogue around the client’s needs and configuring an attractive solution is not. Building this type of differentiated sales force requires know-how and investment.

This type of shift is significantly changing sales management from management of a sales force that can articulate differentiation to one that is in itself part of that differentiation. This is a significant evolution that impacts selection, training and development, and sales practice. Where it is not practical or desirable for all the knowledge required to execute a sale to be contained in one individual, team selling (an anathema to the traditional software sales manager) may emerge from being the exception to being the norm. Incentive and remuneration structures will change to facilitate this. Where developing specialised domain knowledge is a core competence, a ‘hire and fire approach’ (always an excuse for poor management) makes no sense. This world of sales demands the brightest and the best. Those that have both IQ and EQ in abundance.

London Web Summit – an excellent networking event, but “Where’s the Beef?”

Hats off to Mike Butcher: he runs a great event. London Web Summit, held yesterday at The Brewery, this time brought together with Paddy Cosgrave of Dublin Web Summit, drew a wide range of entrepreneurs, investors and ‘glue’ people in a day packed full with panels, interviews, discussions and startup presentations. There was a ‘coding dojo’ for kids. There was even a band, just like on The Tonight Show. The networking was excellent – there was a matching platform for surfing the delegates and booking meetings in advance. In terms of rallying the startup ecosystem, to quote the song, “nobody does it better”…

Content-wise, there was lots on cool new ideas, and, as ever, much focus on getting VC funding and whether there is enough of it, and a session on exits. I couldn’t help feeling though that the bit in the middle – i.e. building and scaling the business – was completely glossed over. Finding out from practitioners the answers to questions like “How are you changing your organisation as it grows?”, “How have you created a scalable model and what did you need to learn before you were ready to scale?” and “How are you structuring your sales and marketing efforts to ensure you deliver your growth milestones?” can only be instructive and thought-provoking to anyone going on the same journey.

There was a fair amount of attention given to hiring the right people, but the implicit assumption is that if you get the right people, then all of this will be taken care of. If exactly the right people exist, then maybe it will be, but in practice, very few people have all the right skills, and even then, there is so much that can be learned.

With Sonali de Rycker of Accel Partners saying that it is normal for up to 8 out of 10 of their investments to fail, the odds of success post-funding are still only 1 in 5, which means that getting funding is only the start of the journey (even with a world-class VC). In this case, why would you not want to devote a huge amount of time to learning about how to navigate the course and mitigate the risk?

Quite possibly it’s not the point of an event like this to look at how to generate and manage growth. Perhaps it’s felt that it wouldn’t make for an interesting discussion – maybe it’s too detailed and too specific. But if not here, then where?

Competitive differentiation – are you the WiFi or the cinnamon?

Around our offices in Red Lion Square there must be 50 cafes within 5 minutes’ walk. There are the big chains – Starbucks (two of them), Caffe Nero, Costa Coffee; there are bakery cafes; there are outdoor stall cafes; there are sit-down-for-lunch cafes; there are takeaway cafes. Lots of choice.

Sitting in one of the two Starbucks the other day, to which I’d been coming regularly for 18 months, I realised that Starbucks had successfully differentiated itself in my mind as one of the better options for me.

For a long time Starbucks was the only major coffee shop chain in London to offer free wireless internet to all its customers. It was also the only one that stocked cinnamon shakers so that you could add your own cinnamon to your coffee.

So for 18 months I’ve been going regularly to Starbucks despite the fact that it’s not the most friendly cafe in the area; it’s not the best coffee; it’s not the closest to the office; and it doesn’t do the best food. But it has free wireless internet (I don’t care much for cinnamon).

In fact I can’t imagine there are many people who would consistently choose Starbucks for its cinnamon shaker whereas I know plenty who go there for its internet.

I often meet entrepreneurs that are competing in very crowded markets – particularly in the B2C world of apps or consumer internet – and they talk through their “significant”, “compelling”, and “unique” competitive differentiators and USPs.

Unfortunately a lot of the time those differentiators can sound like cinnamon and not like free internet.

Interview with Ascendant: the current trends in UK tech investment

Stuart McKnight is the Managing Director of Ascendant, a technology and media focussed Corporate Finance house that specialises in growth stage companies. Ascendant also has experience in fundraising for buying and selling businesses and technology licensing deals. RIG’s Managing Director, Shields Russell sits on Ascendant’s Advisory Board.

Ascendant has tracked all growth-stage investments in technology companies in the UK and Ireland since 1996. Their definition of technology is broad – covering software, telecoms, Cleantech, semiconductors, and internet/wireless services – but excluding life sciences and most medical devices, as well as Management Buy-Outs and Private Equity deals.

What are the growth-stage investment trends that you look to cover?

“We keep track of five key questions in the growth-stage technology sector in the UK and Ireland: how much money is being invested; who’s writing the cheques; what they’re investing in; the stage of the companies; and whom they’re co-investing with – that’s very important as well.

“2011 was a very interesting year – we saw good growth in the total amount of investment (£786m up from £620m in 2010) and the capital was more concentrated – there were 193 deals greater than £0.5m in 2011 compared to 213 in 2010.

“228 different investors participated in those deals last year. That number 228 is important because if you speak to the many of the London-based VCs and ask them how many different people are investing they typically say 20-25 – or a maximum of about 40 – but nobody imagines that it’s closer to 250.

“There is a geographical locus in terms of where VCs are based but not in terms of what they invest in. Most of the most active VCs in the UK and Ireland are based in London but many look at companies throughout the UK and at deals in Europe too.

“There are also a large number of trade investors looking to invest. In 2011, there were 34 deals in which trade investors participated. So financial VCs are not the only solution.”

How do companies perceive VCs in the UK compared to overseas?

“If I had a pound for every person who came to me saying that they were looking for a US investor, I’d be a very rich man.

“Companies can spend a lot of time looking for a US investors as there is a perception that they are better at Tech investing than the Brits. For a company that’s grown well in the UK the obvious next stop is the US and so picking up a US VC whilst you are there seems like a good idea. Add the belief that there is a big pot of gold waiting for them over there and you get an army of UK companies getting on planes to head for the US.

“Initially many find that there is a lot of interest. It’s easy to get meetings in the US – anyone can line up two weeks of investor meetings of 45 minutes to an hour each. However many US investors see these as a ‘fishing trip’ to see what’s going on in the European market. But it’s much more difficult to get serious, hour-and-a-half meetings where investors are really thinking about you as an investing opportunity.

“Companies and their shareholders have to be really sure that the US is right for them They need to be realistic about the chances of getting US money – only 11 UK tech companies received money from the States last year.

“Europe’s actually been a much more fertile ground, and it’s much more enthusiastic on mobile/internet companies. The VCs in Munich, Paris, and Brussels have been active in the UK, and the Nordic funds have recovered a bit but they’re still not back to the position they were in about a decade ago.”

Which sectors are getting the most interest at the moment?

“There’s been a strong sector bias – the three primary areas of investment were Internet/Wireless services, Cleantech, and Software. We find that in many cases investors tend to hunt in the same packs: they follow the same trends and look for the same ideas. There’s a cohesion about what investors look for at a certain time.

“Cleantech is interesting because it’s still strong but we’re beginning to see it wane. I could go to a Cleantech conference every day of the week but in truth there was a dramatic drop in Cleantech deals last year, even taking a broad definition of Cleantech that includes solar, fuel cells, electric motors, and so on.

“In Q1 last year there were hardly any Cleantech deals – perhaps 2 or 3; Q2 was very busy then Q3 and Q4 were very low. There were only 31 Cleantech deals in total compared to 45 in 2010, which compares to typically 60-70 deals per year in Internet/Wireless services and 45-50 in Software.

“Investors in Cleantech are making bigger gambles on later-stage companies than they were when Cleantech started to become popular and we started tracking it in around 2004/5.

“A lot of these businesses are still effectively early-stage because they are struggling to get meaningful orders from customers or even just getting a customer even though they’ve been going for many years. For most LLP backed VCs, when an investment holding period extends beyond 5 years, the IRR on the investment starts to get difficult. Many funds are starting to realise that in some cases Cleantech can be like semiconductors in needing lots of capital and long holding periods. Hence the rapid reduction in the number of active investors in the sector.

“Cleantech companies are starting to look for other options like funding through the balance sheet investors or ‘green funds,’ and we’ve seen a larger participation from non-standard VC funds like trade funds or family funds that can take a longer-term position.”

The majority of deals last year had more than one investor. Why do firms co-invest?

“Co-investment can be a bit of a magic trick for investors and for companies. Not all investors get the same deal flow – some get a lot of high-quality deals; some get a lot of average deals; and some struggle to find the right opportunities.

“Well-established firms like Index, Balderton, and Accel see a high-quality deal flow, whereas for the others a bit further down the league table it can be a rational business development strategy to build up relationships with other investors and look to co-invest with them.

“It’s in the investors’ interest to network. The relationships between VCs are partly personal and partly corporate. The relationships are primarily personal but there is such a thing as corporate memory – people will remember joint successes and they’ll remember joint failures.

“In the UK around 60% of deals have more than one investor. This is one indicator that the market is in ‘good health.’ Just before the ‘internet bubble’ burst in 2000-1 less than 40% deals were done jointly – reflecting the misplaced sense of confidence VCs had at that time – they were so sure that they had the best deals that they did not want to share and wanted everything for themselves. Fortunately many of those folks are no longer with us.”

What advice would you give to growth-stage companies looking for funding at the moment?

“Before a company speaks to investors, they need to have a significant opportunity, a clear differentiated plan to exploit it, a good team, and realistic expectations in value and the amounts they want to raise.

“For Ascendant to take on a deal, we would need to comfortable on all these points and be certain that we could identify 30-40 potential investors who would actively consider the opportunity. We are happy to give some guidance to companies looking at funding options – it is a tricky market out there. ”

For more information on Ascendant contact Stuart McKnight at smcknight@ascendant.co.uk

Information is Free, Knowledge is Expensive, Wisdom is Priceless

A couple of weeks ago I had a chance to hear some of the speakers from the event “Silicon Valley Comes to the UK” in Cambridge. Several of the speakers talked of the amazing possibilities opening up with the availability of large data sets that effectively index information, language, and the world itself. It got me thinking about the nature of information, knowledge, and wisdom, and my thoughts turned, of course, to the old giant Vafþrúðnir (Vaf-thruth-neer).

In the Old Norse poem Vafþrúðnismál (Vaf-thruth-nis-maul)The Sayings of Vafþrúðnir—the god Óðin (O-thin) comes to the giant Vafþrúðnir in disguise. Both are powerful figures in body and mind, but Óðin challenges Vafþrúðnir not to a contest of strength, but to one of wisdom.

The giant agrees, but it is his hall and his rules. They set the terms of the competition: he who loses the battle of wisdom shall forfeit his head. The cultural implications of this wager are great. Strength without wisdom is useless; the strong fool is as good as dead.

The giant does not know, of course, that he battles against Óðin, and is therefore doomed to fail. But Óðin finds a dauntless opponent in the giant as he crafts riddle after riddle, and must win in a rather sneaky way. He asks a question to which only he knows the answer: What did Óðin whisper into the ear of Baldr when he was laid on the funeral pyre? Upon hearing the question, the giant realises that his opponent must be Óðin, for only Óðin would know the answer to this question. Aware of his error, he concedes defeat.

In the Q&A period after the final session of the Silicon Valley Comes to the UK conference, one person asked about what skill-set will be required in the coming years of computer-based living as opposed to the skill-sets cultivated in years past.

The first answer came from Reid Hoffman, co-founder of LinkedIn, who said that memory and memorizing would no longer be necessary, and instead people would only need to know how to navigate data and find the information they need in the moment. Delivered to an audience largely comprised of current Cambridge students, this answer did not seem to sit well with the crowd.

After a brief, half-hearted challenge from Megan Smith at Google, Andrew McLaughlin of Civic Commons championed the opposition to Hoffman, saying that no matter how readily available information and data in the coming years may become, nothing can match the human being’s ability to integrate and synthesize information into something newer and better. Memorizing, he said, would still be important not for mechanical recollection of facts, but for the pathways it opens up in the human mind that facilitate true growth, unmatched by any program or computer.

The response received loud applause from the audience. Without the processes that real learning initialises within an individual, what purpose do the advancements in data storage and processing actually present mankind? Information has always been free. Everything we know as a species we have learned through observation, exploration, and experimentation. The information has always been there; we just needed eyes to see it, like Newton beneath the apple tree. The effort required to unearth and organise that information, however, speaks to the costliness of knowledge. Knowledge is not just about possessing information, but also about possessing methods and means of storing, processing, and using that information. It requires action. Owning an encyclopedia is useless if one never reads it, much like the uncut pages of the books in Gatsby’s library. Information is just potential, useless unless developed into knowledge, and then used with knowledge. 

And then we get to wisdom. Wisdom is yet another step further, a kind of combination of knowledge and experience that transcends the articulable. Knowledge can be traded, bought, sold, and passed on; wisdom must be developed within each and every person individually. Knowledge is also limited to a specific subject area, whereas wisdom applies across the range of human experience. And that is precisely why no matter how advanced data processing and applications become in the years ahead, they ultimately have nothing to do with the internal advancement of each human being that makes life worth living.

Wisdom will always be our rarest and most expensive commodity. In our quest to explore the applications of data, we must be sure we do not neglect the importance of wisdom and lose our heads like the giant Vafþrúðnir.

"Get Thee Down to a Hackathon, Young Man"

Hackathons are generally seen as being the preserve of enthusiastic developers. It’s all about the code, surely..??

I recently had the good fortune to be accepted for the Seedcamp Seedhack event – there were going to be 120 attendees, with a mix between coders and ‘business types’. My personal aim in going was to see inside the black box and understand what ‘bits’ it actually takes to build a web app/service.

As the event approached, I had a sense of great excitement at taking part but also a lot of self-doubt: what can I possibly contribute?

Shortly after arriving at LBS on a Friday evening, we were taken at breakneck pace through a raft of API presentations by companies such as Facebook and GIS Cloud. Then there was a special session highlighting the role that entrepreneur-driven innovation can play in the delivery of healthcare: Richard Stubbs, Programme Director for NHS Innovation Challenge Prizes, hailed the role of local initiatives as the antidote to the ‘one big system mentality’ behind the failed NHS core IT project. This was then nicely illustrated by the presentation that Mohammed Al-Ubaydli gave on the approach that his company, Patients Know Best, takes to healthcare data innovation.

In the days running up to the event, we had all been encouraged to post ideas on the event’s forum so that they could be commented on and voted on. The people with the highest scoring ideas then pitched them to the room – ideas included a credit scoring system based on social media data, a Facebook API-driven social dating application and an online social calendar. Teams were formed on the spot and went off to start work. Our mission was to have a minimum viable product (i.e. a working demonstration) by 4pm on Sunday.

Although I had posted my own idea which was a concept based on emerging Smart TV platforms, I chose instead to join an existing group so I could see a web app being built from the ground up. I joined up with three bright young developers from a development company in Bielsko-Biala, Poland who wanted to write a web-delivered system to integrate all the different operating and financial data sources that a small professional services company uses in order to generate easy and insightful profitability analysis metrics.

Fortunately I was able to be very useful – there was an emphasis on having an outline business rationale (which was based on the Lean Canvas framework) – so ‘business types’ like me were able to provide critical input on the customer proposition, the routes to market and the revenue models.

What was great was how much the developers valued the business input as they wanted to make something not just ‘cool’ but also with commercial potential.

By Sunday, most of the teams had a product demonstration ready. My team had a nicely designed online dashboard with a set of metrics and interactive Javascript graphs linked to dummy data on a custom-built Ruby on Rails engine. Very satisfying!

As we headed off to the nearby pub, everyone was happy but exhausted – at least one person had coded for 48 hours straight! I came out of the event with a much better sense of what it takes to build a decent web service, and having met a really good bunch of talented and motivated people (and having eaten more pizza in two days than I thought was humanly possible).

If you haven’t attended a hackathon, I would strongly recommend it!

Many thanks to Carlos Eduardo Espinal of Seedcamp and his team for putting together a fantastic event.

Can you be a lean startup and a visionary entrepreneur?

I like the ideas around 'lean' methodologies for startups that have been developed from their manufacturing background in Eric Ries' new book, The Lean Startup. It's now on our recommended reading list and I cited some of its principles in my recent podcast on market leadership.

To use Ries' 'lean methodology' is to ensure that your startup grows its customers, its product, its team, its financials, and its business model in sync: slowly, iteratively, and securely.

As an example, an entrepreneur should never make huge investment in a product without getting the right feedback from potential customers; without getting the right team in place to deliver it; without being properly financed; and without having developed a business model to support it. Ries implies that expanding markedly along any single axis will lead to wasted investment and potentially catastrophic failure.

The Startup Genome project produced an excellent report entitled A Deep Dive Into The Anatomy Of Premature Scaling, using the example of the Sequoia Capital-backed startup, Color, which managed to raise $46m in Venture Capital funding before its launch. The graphic shows how Color was out of harmony in its growth because it had a huge PR campaign, a highly-experienced and extensive management team, lots of capital, but no product and no customers.

But I'm not sure that 'lean' growth is always the right approach for startups.

Admittedly, there are some startups that are trying to respond to a current, well-known need in the market. For instance, the UK's Carbon Reduction Commitment legislation required UK businesses of a certain size to declare their carbon footprint on an annual basis, so a group of technology startups sprung up providing services and software to help them do it. In that case, it makes a lot of sense to grow a startup securely on the basis of regular customer feedback.

But there is another category of startups that are making a bet on an emerging, currently unperceived need. Twitter was one of those startups. So was Zynga. Color might be another. These are companies that ignored early market sentiment because they believed in a vision of how the market would act if their product became sufficiently developed.

Plenty of investors looked at early versions Twitter and Zynga and professed to 'not getting it': "Why would I want to limit my blog posts to 140 characters?"; "Why would I login to Facebook to play poker?"; but both companies now have enormous valuations. Howard Schultz of Starbucks used to say, "If I went to a group of consumers and asked them if I should sell a $4 cup of coffee, what would they have told me?"

But it's the companies that make these bets successfully that generate the greatest returns because they have more time to get ahead of the competition – not the ones that compete to respond best to existing market needs. Conversely it's the companies that make the wrong bets about the future that fail the quickest.

I like the ideas behind 'lean' but I don't think it should be seen as the only viable set of principles for a startup's growth. If you're trying to create a 'visionary' startup that's truly transformational then you should allow yourself to press ahead despite negative feedback in the early days, as long as you do so in the knowledge that this approach has a higher risk of failure as well as a higher potential return.

If your assumptions about the market prove to be incorrect then you'll fail spectacularly. If you're proved correct then you'll be on the front page of Forbes magazine.

How to give your startup more power when selling to corporates

A friend of mine used to run a technology project at Tesco, working alongside a growth-stage technology company. Whenever he phoned that technology company, he represented Tesco with the full weight of its brand and its revenue potential: his calls would be answered at all hours of the day. On the other hand, even the CEO of the technology company was seen as only one element of a much wider project, from which my friend would shortly move on to the next one.

There seems to be a clear imbalance of power here. I think that this can sometimes arise from the very understandable eagerness as a growth-stage company to prove yourself and your product or service to the best and the biggest in your sector.

But growth-stage companies should remember that they have power too. And this should be reflected in your approach to potential customers.

Compare these two approaches:

  1. We have a really great product; we have experience in your sector and a proven ROI; we can save you £1m within the first year. Based on your characteristics x, y, and z we think you might be a good fit for us. We'd love to open a dialogue with you to see whether we might be able to help you
  2. We have taken funding from VC investors in order to demonstrate in the next 12 months that one of the major players in this sector can save £1m within the first year through using our product. We're going through a process of identifying which the best company would be to partner with to generate this proof. We feel based on your characteristics x, y, and z that you might be interested in exploring this with us.

The second approach creates a sense of scarcity: the startup is choosing the customer not the other way around. There is an opportunity here to save £1m, the entrepreneur is saying, but it's not open to everybody. The offer won't be around for long because our investors need to see a return. It's then up to the potential customer to convince the entrepreneur that they are the right people to capitalise on this opportunity.

Give yourself more power when selling to corporates by remembering that your resources are limited and so you have to be just as careful to select with whom you work as your customers are.