Making Innovation Flourish

The most important question an entrepreneur has to answer

Sherry Coutu (in her article in the 'what I wish I'd known'  series) explains that “solving someone’s problem” is at the heart of a business.

On the face of it, it appears an obvious consideration, however, a large proportion of the companies we see can not satisfactory articulate the problem they are solving. I put it down to a reluctance of some early stage entrepreneurs to really get to know their potential customers early on in a business’s life. This hesitancy to speak to a real customer can lead to outrageous assumptions on the depth of the so called ‘problem’ that they are solving.

Answering the question ‘what problem are you solving’ is fundamental to getting to the heart of the value of your business…if that is not enough reason to reconsider this concept then consider that every sensible investor I know asks a version of this question at some point in their first meeting with a company that is looking for investment. In short it is essential that you and everyone in your business can give a clear, articulate answer.

Failure is acceptable

For the guy who founded SurfControl (which recently sold for just over $400million) it may seem surprising that Steve Purdham should say ‘Failure is acceptable’ in his ‘what I wished I knew’ article.

As it happens I would go a step further and say not only is failure acceptable but it should be seen as inevitable.

For early stage companies to be genuinely innovative, break in to new markets, beat off the competition and make great returns for investors they have to take risks and ‘swing for home runs’. The reality is that if you are running an early stage company you are taking numerous (managed) risks every day and are not always going to be successful. You can fail to raise all the money you hoped to, fail to get the technology to work just the way you wanted, fail to get a break with a significant customer and so on.

Failure at some scale will constantly plague early stage businesses. Investors often try and put pressure on companies to avoid failure but with it often goes the entrepreneurial, risk taking spirit that is essential to an early stage company’s success. I don’t celebrate failure but it should be seen it as inevitable in a risk taking business.

'I wish I had raised more money....'

Professor Jeremy Stone writes a great article in the 'what I wish I'd known series' and I want to comment particularly on this sentence: “I wish I had raised more money than I needed and worried less about dilution”.

Let me hijack his point and build on it: If you’ve got the choice –don’t do it on the cheap.

Why? Well, firstly – time. It takes a shocking amount of the senior management's time to close a funding deal (be prepared for at least 6 months of road shows and negotiations). Instead of building your company you are forced to be out pitching for more investment.

Secondly – The right level of funding can get you to a really good milestone. Too many companies just don’t give themselves enough runway to get to a really worthwhile milestone…so the next round investors don’t give you (or your first round investors) the valuation you were expecting.

Thirdly – IT NEVER GOES TO PLAN. Revenues are usually slightly further out than you expected. Scientific milestones take longer to meet than you anticipated. Key management people unexpectedly leave or fail to deliver…in short, something happens and you put your self at great risk of ending up with cap in hand trying to get more money when you are in a really bad negotiating position.

Even if it takes more dilution it is still worth making sure you are funded to a significant milestone AND you have some money put aside for contingency.

Does anyone have any rules of thumb for how much contingency costs you should budget in for an investment / funding round?

Are we all cut out to be entrepreneurs?

In my last post I mentioned that NESTA and the BVCA have asked a handful of successful entrepreneurs to reveal 'what they wished they'd known' when starting up their business. We'll be publishing their responses each week. First up is Peter Denyer from Vision Group.

I liked Peter's point of view that successful entrepreneurs must have the ability to adapt and solve problems. But I would go a step further and draw out a lesson that says if you are not the sort of person who likes change, and if you would rather avoid being faced by problems every single day - then entrepreneurship is probably not for you. This isn't a bad thing; it just means that we're not all cut out to be entrepreneurs.

I think a lot of first-time entrepreneurs struggle to grasp that fundamental to their job is managing change...constantly. So, if you don't want to think about reorganising your company 'about once every 12 months' and coping with 'continual stress' then perhaps it's time to pass the baton to someone who thrives in that environment...?

Read Peter's full response.

Things I wish I'd known...

The BVCA, together with NESTA, have approached 16 highly successful technology entrepreneurs, many of them involved in spinouts from universities, to provide a short letter addressed to an unknown aspirant tech entrepreneur under the title of ‘things I wished I'd known!’.

We’ll be publishing 1 article a week on our website over the coming months - starting from tomorrow - and I really recommend you take a look. We’ve ended up with some extraordinarily honest insights on what it is really like when you are at the coalface trying to build a technology business.

Just to give you a flavour…

• Steve Purdham  - founded SurfControl –a global internet security company that recently sold for $400million
• Peter Denyer – he is the founder of a spin out that makes millions of those little cameras in mobile phones
• David Tatchell – founded Flomerics that now employees more that 200 people in 12 countries

I plan on commenting on some of the insights along the way and it would be great to hear any other takes on the articles.

No wonder there's no UK-born Facebook or Flickr

I attended a presentation by my colleagues from NESTA Investments on Monday, and I have to say I never realised the gravity of the sad state of investment in tech startups in the UK. According to Paul & David, the overall amount of money invested by venture capital in the UK is £10billion. Of this, only £1billion is invested in early-stage companies. Of this pot of early-stage investment, only £160 million goes to tech startups. That's just 1.6% of the total. Sheesh. It's no wonder UK tech startups are struggling. I wonder what the comparative figures are for US venture capital?