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Sunday, September 10, 2006

The Value of Patents

Technology patents have huge potential value - but how do you turn them into cash? As Keith Rodgers reports, San Francisco's first large-scale patent auction may provide a model for the future.

Despised by the conservative right and revered elsewhere as one of the centres of liberal thinking in the US, San Francisco has long had a reputation for breaking new ground. Home to the Beat Generation in the '50s, a stop-off for hippies in the '60s and the centre of the gay liberation movement from the '70s, the city has never been afraid of fighting the status quo. From the lawlessness of the Gold Rush years to Silicon Valley's heyday during the technology boom years, it's a place where the entrepreneurial spirit thrives, and where the experience of two devastating earthquakes in the last century gives everything an extra edge.

All in all, then, not the kind of place where you'd expect people to get too excited about technology patents.

That, however, is exactly what seems to be stirring among those who care about these things in the run up to what's billed as the world's 'first-ever live, large scale auction of technology patents'. Hosted by Ocean Tomo, a merchant bank based in Chicago that specialises in intellectual property, the auction is an attempt to bring greater liquidity to a class of assets that until now have been frustratingly hard to monetise. Sure, on the Richter scale of life-transforming events in San Francisco, it barely registers a murmur - but for tech entrepreneurs who want to extract some value out of their inventions, it's a model that's definitely worth keeping an eye on.

In their own right, technology patent auctions are nothing new. Along with physical assets, patents occasionally come under the hammer after company bankruptcies - most famously in December 2004, when a mystery bidder sent shivers down the spines of leading industry players by spending millions of dollars securing a clutch of significant e-commerce patents owned by Commerce One. (Rather than being an aggressive patent asserter, the purchaser later turned out to be Novell, which has put the patents to benign use in the open source community).

What's different about the Ocean Tomo event, however, is that it's an attempt to create an institutionalised marketplace where inventors of any description can put their patents up for sale. The event, due to be hosted at the San Francisco Ritz Carlton in April and broadcast over the Internet, is expected to bring together large corporations, early-stage companies, academics, and investors, all looking either to buy or sell. Qualified bidders will be able to carry out some degree of due diligence before the event and to contact sellers anonymously via the bank, while sellers can protect the value that they perceive in their inventions by setting a minimum sale price.

While it will be important to see how closely reality matches the hype, the event has been generating some positive feedback. Although unwilling to comment on the specific event, Dan McCurdy, chief executive of IP licensing and advisory firm Thinkfire, likes the concept, arguing that investors and inventors need new, convenient mechanisms to extract value from their IP. Too many companies, he says, are falling victim to patent 'trolls', the independent assertors who buy patents and then aggressively enforce them. The best way to see them off is by cutting off their source of supply - and patent auctions might be one way of doing that.

That said, McCurdy warns would-be sellers to bear a few salient points in mind. While it's great to be able to flag the fact that you've invented or possess something unique, the real purpose of a patent is to exclude others from using your invention without your permission. Whether you put it to offensive use by pursuing others, or secure the patent for defensive purposes to guarantee your own freedom to operate, its ultimate value is economic - so buyers will want to know:

� Is the patent valid? Are there any issues now, or during the prosecution of the patent, that could invalidate it?

� What's the current or future impact of the patent - or in other words, who's infringing the patent today, and who's likely to do so in the future?

� Assuming it's valid and infringed, who's already licensed it and on what terms? If the bulk of the potential population has already paid for a licence - or if licenses have been given away cheaply in the past - it's a less attractive option for those looking to assert it

If you can answer those three concerns, it'll be worth keeping an eye on how the institutionalised auction model pans out. The Ocean Tomo event may not be to everyone's taste - this is San Francisco, after all - but what's pioneered in Silicon Valley has a habit of being replicated elsewhere.

Thursday, August 24, 2006

Working with Foreigners

Many in the tech industry worry that tough US immigration policy is damaging the country's long-term prospects and benefiting emerging economies such as India and China. That could transform the face of technology entrepreneurship, writes Keith Rodgers.

If you've traveled to the United States recently and been photographed and fingerprinted at the immigration desk, you'll have sympathy for the concerns being raised in Silicon Valley about the future of the home-grown technology sector. Software vendors and venture capitalists alike are voicing fears that a combination of anti-terror measures and misplaced efforts to protect US jobs are keeping some of the sharpest technology minds out of the country - to the benefit of emerging tech economies in India and China.

The problem is partly political, partly bureaucratic, but the issue has become more prominent over the last year as fears over terrorism have started to be weighed against longer-term economic factors. Universities have complained that tough visa requirements and lengthy processing delays have deterred many foreign graduates from applying to US schools, potentially depriving the economy of the talent it needs to drive forward innovation in the long term. At the same time, the number of H1B visas - the type typically used by US companies recruiting skilled foreign professionals - has been restricted following a temporary increase during the dot com boom. Add to that delays in processing work-related green cards, which give foreigners permanent status in the US, and there's a powerful disincentive for people to settle.

At a recent investment conference in San Francisco, Rob Chandra, general partner at Bessemer Venture Partners in Silicon Valley, invited the audience to take a trip to a local office of the US Citizenship and Immigration Services and see for themselves what foreign applicants go through. Like many bureaucracies, the USCIS can be slow moving, and it's often time-consuming for foreigners to jump through the administration hoops required to get their spouse and children into the country. Not only does this deter people from coming in - it also encourages some foreign students studying at US business schools to leave the country rather than put their newly-acquired skills to use within the US economy. As Chandra points out, if you've attended one of the world's best business schools and carried out ground-breaking research that could create American jobs, you probably believe that you deserve a little better. 'Today, the US government has a policy of keeping the brightest people out of the country,' he says. 'Immigration needs to be separated between those who create jobs and those who do not.'

The clamour for a more flexible immigration policy has not gone unnoticed. Only last week, the Senate Judiciary Committee agreed to increase the number of work-related green cards by 90,000 and H1B visas by 30,000. But the debate is much broader than a numbers game, and becomes embroiled in more politically-charged controversies over the treatment of legal and illegal immigrants. Opinion in the US is sharply divided, for example, as to whether undocumented labourers should be offered amnesties and work permits. Within California - where an estimated 2 million to 3 million illegal immigrants prop up the economy in sectors such as leisure and agriculture - the large Hispanic community plays a big role in ongoing debates over whether undocumented aliens from Mexico and elsewhere should be allowed to carry drivers' licences (a road safety measure that would allow them to get vehicle insurance). These debates, which can swing elections, are unlikely to be resolved in the short-term.

In the meantime, Chandra and others believe that the US VC community needs to reach out to the many talented individuals who in the past might have moved to Silicon Valley, but are now helping grow economies elsewhere. 'In our opinion, entrepreneurship is shifting in a dramatic way - we're looking for those entrepreneurs that the [USCIS] is keeping from Silicon Valley,' he says. Instead of looking to emerging economies as a source of cheap labour through off-shoring, he argues that tech companies should seek out the best talent from these markets and see how they can best be harnessed to help Western companies grow. 'The worst way to leverage this is to turn bright people in India and China into hired help,' says Chandra. 'We think about getting the brightest people.'

Thursday, August 3, 2006

On Selling and Sales

If you've already made the move from R&D to commercialisation, you're probably generating a host of information about your customers and prospects. But how effectively are you managing it?

Just as every business manager's wardrobe needs a minimum number of outfits for different occasions - from client dinners to casual weekend meetings - so certain business software applications are all but compulsory on a start-up's IT systems. Applications for fundamental tasks such as financials and payroll top the list, but one that doesn't always get a look in is the one that could ultimately make the most spectacular impact - sales management software.

Sales automation applications were around long before the much-hyped arrival of 'Customer Relationship Management' suites in the late 1990s, which were supposed to usher in an era of customer-friendly service and marketing. In fact, sales automation has existed for decades, although early incarnations tended to focus more on the administrative side of storing contacts and tracking interactions with customers. Until relatively recently, the business case also tended to be a little defensive - it was as much about keeping your business running if your top salesperson walked out with their contacts book as it was about selling more effectively.

Today, while those fundamentals are all still valid, the focus tends to fall on improving efficiency and information management. Sales management applications arm employees with information about a customer's preferences, purchasing history and previous interactions, all of which help during negotiations and closing. They also provide managers with a better insight into all levels of sales activity, from high-level meetings run by the CEO to pitches made by the most junior employee. That includes information about where prospects are in the sales cycle, how sales are doing against forecast, and what proportion of leads are being converted and by whom.

As well as helping companies monitor individual performance, over time this data can be pulled together to provide trend analysis to help with future sales and marketing activity - what kind of campaigns generate the most valuable leads, which vertical markets are proving most responsive and so forth. As such, for any business that's moved beyond R&D and early pilots and is starting to sell in volume, it's as much about business intelligence and performance management as it is about automating processes. Even if you only have a handful of people actively selling, this kind of trend analysis can bring powerful new insights, telling you not just what's been sold (which you probably already know) but how - what product or marketing campaign triggered the initial enquiry; what objections were raised and how they were overcome; whether pricing was a stumbling block and so forth.

The software industry has gone through something of a revolution over the last few years in providing this kind of capability at an affordable price. While specialists have long targeted smaller businesses, the leading midmarket and high-end software vendors have also shifted some of their attention to start-ups and small businesses, bringing new capability with them. They include the likes of Siebel, one of the top CRM vendors which was recently acquired by Oracle, as well as SAP, Microsoft and Sage. Users also enjoy different purchasing options, with the likes of and many other leading vendors offering a hosted service for users to 'rent' applications on a monthly basis. As a result, setting up doesn't have to be expensive - prices for hosted applications start as low as �45 per user per month.

Like any software project, of course, there are a number of challenges associated with implementing and running these applications. If the experiences of larger organisations are anything to go by, one of the most significant issues will be tying together customer-facing applications with software in the 'back-office', such as financials or warehousing. Many companies look to give salespeople read-only access to information about stock levels and delivery schedules, either from their PC or via a remote device, and this requires some integration work. Others have gone as far as to link their sales application to credit control, so that the system triggers an alert whenever a salesperson pulls up a record for an overdue customer. Not only does this prevent a salesperson wasting time with a customer who's on credit hold, it also adds valuable extra resource to the cash collection process.

In each case, it's useful for organizations to have thought through in advance how they want to link these applications together. Some will be content using pre-built integrations offered by packaged software vendors or building their own: others will prefer to have as much of their sales, marketing, service, engineering and other customer-related information in the same database, so that they can easily access it from one place.

By Keith Rodgers, Webster Buchanan Research

Monday, July 24, 2006

Selling Your Business

What's the perfect takeover target for the world's largest tech companies? And why could your choice of VC funding put them off? Keith Rodgers reports from San Francisco

If your long-term game plan is to sell your tech company to a vendor like IBM or Oracle, you've got to think big - but not too big.

For seasoned corporate acquirers, the profile of the ideal tech target seems to be 'small but imperfectly formed'. What the likes of IBM are really looking for is solid technology and the first vestiges of customer acceptance: what they don't want is a company that's spent time and resource building a large manufacturing and sales infrastructure which is only going to get dismantled when the deal's done.

This was one of the conclusions from a panel of corporate acquirers at the 16th annual Venture Capital Investing conference in San Francisco in early June. In a discussion peppered with pointed attacks on venture capitalists from one speaker - 'you can't believe [the worst of them] actually function as humans' was the choicest remark of the afternoon - five senior representatives from acquisition-hungry vendors mapped out the factors that can make or break a deal.

One of the more sedate voices belonged to David Johnson, worldwide head of corporate development at IBM. The company recently analysed the performance of 25 acquisitions it's made over the last two years, determining that in the last twelve months half of them far exceeded the targets laid out in the original business case for acquisition, with a further 25 per cent hitting target and the final 25 per cent falling short. Johnson pointed out that IBM's success rate has been highest at companies where the product was proven and there were two or three customers on board to demonstrate proof of market acceptance (or more if sales are made through partners). But 'if they've developed manufacturing, sales, and G&A [general and administrative expense], quite frankly that's somewhat redundant to IBM. It's the development team we want, the product, the technology.'

That view was echoed by Doug Kehring, senior vice president of corporate development at Oracle. While the company's acquisition record is dominated by its controversial, 18-month long hostile pursuit of rival PeopleSoft, it can also point to this year's takeover of Oblix, a relatively small IT developer specialising in identity management and web services management, as proof of its taste for smaller businesses. Kehring identified tech companies with revenues of $2m to $20m as the 'sweet spot' for Oracle. Over $20m, there's a danger that the company will be over-investing in sales because it doesn't have the scale of distribution that a vendor like Oracle has or may be chasing a mature market where similar companies are up for sale.

Similarly, Adam Spice, vice president of business planning at Broadcom, a $2.5bn turnover communications semiconductor company, pointed out that of the 30 acquisitions he's been involved with, only one had significant revenues (of over $100m). The rest had turnover of less than $10m, or in some cases none at all. One thing they did have in common, however, was working product.

Other key criteria identified by the panellists for acquisition targets included:

� Culture. IBM identifies this as a significant part of its due diligence process
� Choice of platform. The right fit will minimise integration issues, while the wrong fit will usually rule a deal out
� Ownership of intellectual property. This is a particular concern in the open source environment
� Importance of speed to market. This will influence their decision whether to buy product or build their own

So what about the vitriol poured on the VC community by one of the panellists? In some respects, it's simply a question of different objectives: IT vendors have strategic motives for investments and are prepared to pay a price, while VCs focus primarily on the financial outcome.

But for Broadcom's Spice, there's more to it. 'I've rarely seen VCs add value,' he said. 'When we acquire, typically they get in the way.' He believes many VCs fail to talk to customers, get caught up in CEOs' sales stories and fail to manage the earn-out expectations of tech companies' senior management. Similarly, he's experienced conflicts where one VC sits on the board of two prospective targets that Broadcom's looking at in the same sector. Perhaps not surprisingly, of all the investments made by the company over the last five years - including two companies in Cambridge - not one was brought to Broadcom by a VC; rather, its own customers or engineers flag up potential deals. 'We've worked with some very reasonable [VCs],' Spice concluded, 'but at the other end [of the scale], you can't believe they actually function as humans.'

There's little technology companies can do to temper any friction between their VC partners and potential purchasers, but it's worth bearing in mind some of the possible fallout. IBM's Johnson, while not commenting on Spice's views, pointed out that technology acquisitions are all about simplicity and speed - so the moment you have multiple VCs in a deal, each with their own sets of lawyers poring over contracts, you're likely to have a problem. Get more than three VCs in a deal, he says, and it will add three to twelve weeks' delay to the completion process.

Keith Rodgers is content director of Webster Buchanan Research (

Friday, July 21, 2006

Keys for managing business risk

Why would a large, well-established company gamble everything by purchasing business-critical technology from a start-up?

When Christopher Crowhurst signed a contract with a specialist software developer in the fast-emerging field of web services, it was the end of an exhaustive selection process and the beginning of a slightly unusual supplier-customer relationship.

Crowhurst's company, computer-based assessment provider Thomson Prometric, had spent 14 months assessing its technology options before deciding to put its faith in the start-up software vendor, Actional. As vice president and principal architect, Crowhurst knew Thomson's fortunes - and the success of a strategic $5 million IT project at his company - would become inextricably tied to the vendor's viability. Success wouldn't just be down to functionality, implementation skills, technical prowess and the other factors involved in making any IT system operational - it would also be down to the supplier's ability to sell the same system elsewhere and so stay in business. And although Actional, a specialist in Service Oriented Architecture technology, has since notched up multiple live customers, at the time he began the selection process no referenceable customers were in production.

Crowhurst's informed gamble on Actional was an extreme but telling example of the factors that come into play when companies purchase strategically-important technology from small, relatively young vendors. In any market where much of the pioneering work is being carried out by venture capital-backed specialists, organisations that require bleeding-edge technology have to take two tightly-connected risks. Firstly, they need to be sure that the technology is stable and does what it's supposed to do - and secondly, they need to know the vendor will be around for long enough to keep on developing it. Larger vendors inevitably seize on this issue, so helping purchasers take steps to mitigate risk could be the difference between a start-up clinching and losing a sale. That's one reason why two staple components of any specialist vendor's marketing presentations are updates on the latest round of funding and a run-through of new customers.

What Crowhurst and others have done is push back the boundaries of the research process typically undertaken by customers prior to making a purchase. Beyond addressing features and functionality, most tech start-ups would expect their sales prospects to do some kind of financial due diligence prior to making a strategic investment. But it may not stop there. They may also want to meet the supplier's finance director and its venture capital backers, and check the composition of the board to ensure it's got the right balance of VC, strategic, financial and operational input. One customer that made a similar purchase to Thomson also drilled down into its vendors' middle management and engineering capability. This should all connect back to a strong visionary - getting a company with committed founders and a CEO who's passionate about the organisation, not just treating it as their next job. In addition, the start-up's technology and marketing partners will also be a factor.

Crowhurst suggests that the level of commitment shown by key individuals within the vendor company can be measured in several ways. He believes in spending face time with key players from the CEO down - in fact, he spent three days at Actional's headquarters, part of what he believes is a vital process to get beyond the salesperson. 'I developed a relationship with the CTO of Actional and have managed to influence development of the product - with some other organizations, we couldn't get beyond the sales folks,' he says. 'You need to get to the engineers, feel you can trust them.'

But he also argues that suppliers give much away by their own actions (or lack of), pointing to standards bodies as a good example. It's not enough for an organisation to be in a standards body - it's about being engaged in the body. Crowhurst subscribes to a number of standards bodies' newsgroups, which gives him insight into which organisations are active within the body, rather than merely taking up membership because they feel they ought to.

The flipside of managing the risk associated with a start-up is that there are many positive reasons for buying from a smaller business. For one thing, it's the smaller specialists that tend to set the pace in emerging technology sectors, leaving larger vendors playing catch-up. In addition, they can offer a different kind of purchasing experience. James Brewis, managing director of expenses management vendor Signifo Expenses, points to a deal his small London-based company won against a large US rival. 'On our side there was the usability, the greater speed and lower cost of implementation,' he says. 'On their side was all the bells and whistles functionality and the fact they were an established player with significant revenues.' The customer believed that the former offset the risk. 'As a business owner and an entrepreneur, you've got to be prepared to get in there and ask the customer to take a chance on you - to tell them you'll do everything in your power to meet their needs and ensure the highest level of satisfaction,' says Brewis. With local, London-based sales and support, he also believes he can provide a level of service and focus that some global players may struggle to match.

Inevitably, the process of winning over customers is time-consuming. Even after selecting Actional, another six months passed before the deal was signed as Thomson's internal team set out to convince the corporation that it was the right decision and developed the financial justification. During that time, several other Actional customers went into production, which helped boost confidence. Crowhurst's team also documented a back-up plan during its internal capital approval process in case of problems: because Actional uses a standards-based platform, the team was able to demonstrate that it would be fairly straightforward to take the Thomson configuration and implement it on another platform.

Ultimately, however, winning over this kind of customer may have benefits that go beyond mere revenue. 'I have an interest in [Actional's] success,' says Crowhurst. 'I promote the project quite ferociously - I need other people to buy into the technology. I'll gladly be an advocate - they're a great organization and I've worked with them extensively.' Deeds speak as loudly as words, and the fact that customers have tied their fortunes to a particular vendor for strategic projects is an important vote of confidence.

This article is developed from a feature that originally appeared in 'Loosely Coupled's Monthly Digest', a subscription-based newsletter offering in-depth reporting and analysis for early adopters of SOA and business process automation.

Wednesday, March 1, 2006

Customer is King

Struggling to manage your sales data is the kind of 'problem' most start-ups would die for - at least it means you have customers. But even in the earliest part of the sales cycle, capturing and analysing customer data could prove critical further down the line.

If your sales team's idea of information management is to log their prospects' contact details in a spreadsheet and file client business cards in alphabetical order, it might be time to introduce them to some of the newer techniques that have become possible over the last few years. Even if your biggest problem today is getting early proof of concept sales, keeping a grip on all the relevant information quickly gets problematic once your business moves out of the development stage, particularly if you're in the consumer market or have a dispersed prospect base. It's not just about better administration - for some companies it's about cutting the cost of doing business and increasing the chances of clinching deals.

Even in the software-savvy hi-tech sector, sales automation software has enjoyed something of a mixed reputation in the past, particularly among more experienced sales professionals who rose up the ranks using little more than a Rolodex system and pen and paper. Some people still tend to think of it as a computerised contacts list and wonder what the fuss is all about - this, after all, is why personal organisers were invented. In smaller start-ups, where even the most mundane sales-related information tends to be shared with everyone on the team, the idea of purchasing a system to record sales data seems like overkill.

At their most basic level, however, sales automation systems provide security for a key asset - customer information. How much of your sales information will walk out the door if your sales director misses target once too often and decides to try their luck elsewhere? Do you know what your customers and prospects are telling your team about their future purchasing plans and product needs, and do you have a grip on all of the sales objections they're coming up with? How easily can you get a snapshot of ongoing sales activity and assess the strength of the prospect list if one of your investors calls for an update? And can you measure how effectively your sales team is working - how many calls are getting through; how many face-to-face meetings they're setting up; or how long they're taking to close each deal and what its value is?

This kind of information is routinely captured in sales automation systems, which bring a combination of process control and business intelligence to the whole sales set-up. At an operational level, sales systems bring a degree of administrative efficiency as the volume of prospects increases, providing templates for commonly-used documents and alerts for follow-up calls. They also give salespeople easy access to details of past conversations with prospects and customers detailing their business pain points, IT budgets, previous objections, competitive data and so forth. Managers of larger sales teams can also use the functionality to control leads centrally, which speeds up processing time in high-volume environments and allows organisations to allocate leads more effectively. Some sales systems also provide insight into marketing effectiveness: after running different campaigns, leads can be allocated to their source to see which approaches delivered the best return.

But it's in the field of business intelligence that sales automation promises the most significant long-term benefits, particularly for small business managers who tend to spend more time finding and collecting information about their business than actually analysing and acting upon it. The greater the analytical capability that's built into a system, the more powerful it will be. Because sales effectiveness is so critical to a business as it moves out of the development phase, there's often an assumption that management will already know the most important details, but it isn't always easy to take a step back for trend analysis. Analysing sales activity quarter on quarter, for example, gives you an additional perspective on current performance. Likewise, forecasting becomes more reliable if you have a rich historical context; if past records show that lead times in certain business sectors are long, that may influence your estimates as to when sales will close.

Many of the largest sales automation software vendors now provide this kind of capability for smaller businesses. They include Sage, which sells several applications including ACT! for small business and Saleslogix for mid-sized companies;, which hosts sales software remotely for users to access over the Internet; and Siebel Systems (currently being acquired by Oracle), which was the leader in customer management software at the enterprise level and has more recently targeted the SMB space. As a measure of pricing, offers packages starting at �45 per month per user, or �690 for five users.

There are of course some caveats. Firstly, like all user-based pricing, the monthly bill or package licence fee will go up as the volume of users climbs, something that's particularly worth bearing in mind in sales automation where access may be required from multiple departments. Secondly, it's important to establish how flexible the system is in terms of searching and slicing and dicing information: it's all but impossible when you first implement a system to know what kinds of reports you'll want one year down the line. Ease of integration will also be a factor in the future: for example, some organisations link sales to credit control to ensure sales staff are up-to-speed on accounts that are on credit stop.

Most importantly, as with any analytical exercise the quality of the analysis will depend in large part on the quality of the raw data - and that data is generated through day-to-day use of the system. If you really want to have strong historical insight into your sales effectiveness, the earlier you start collecting data the better.

By Keith Rodgers

Friday, February 24, 2006

Keeping Tabs on Your Cost

With the equity gap widening, start-ups are looking to find new ways to stretch their scarce resources.

Cash burn is a problem for any start-up - and contrary to common belief, the components that really drain your bank account can't always be anticipated. 'Let's just say we blew in the region of a million dollars on recruitment, redundancy costs, and staff ups and downs,' admits the CEO of one start-up, explaining how desperate attempts to land its first sales had forced it to hire and fire a succession of expensive employees.

With the so-called 'equity gap' continuing to cause problems for smaller technology companies that don't qualify for venture capital funding, implementing tight financial controls could be the main factor that ensures your seed capital keeps you in business. Long gone are the days of plush offices, fancy cars and state-of-the-art equipment. Now more than ever the old accountants' warning - if we halved our revenues and doubled our cost base would we survive? - is starting to ring true.

The existence of an equity gap in London's capital markets is nothing new. In April 2003 the Government announced a consultation effort dubbed 'Bridging the Finance Gap', a joint initiative between the Treasury and the Small Business Service. The document says: 'SMEs seeking equity pass through different stages in the funding life-cycle, typically starting with personal capital, often supplemented with bank debt and equity from friends, family and other private investors including 'business angels'. Only a small minority raise equity in amounts over �250,000 from these sources. Above this threshold, SMEs must generally look to the formal venture capital sector to meet their equity funding requirements.'

But this is where the problem emerges: 'Many commercial venture capitalists are reluctant to invest in small amounts (a �1 million threshold is often cited) for a variety of reasons, principally high fixed transaction costs, shortage of available exit options, and a perceived greater risk in investing in early-stage companies. Although the UK has one of the most developed private equity markets in the world, it has increasingly focused on later-stage deals.' The document notes that while the overall number of private equity investments has increased by 17 per cent since 1997, the number in the �500,000 - �1 million range has declined by 10 per cent.

From the VC's perspective, there's a simple explanation for this phenomenon. Glenn Stone, corporate finance partner at Grant Thornton, says: 'Raising capital is very hard today - and I'm saying that as someone who can get in front of VC funds. Venture capitalists have become almost as risk averse as the banks. Some are not at all interested in start-ups. They won't even talk to you unless you have a pipeline of sales. They call it risk capital, but really [what VCs are offering is] development capital - and yet they still want VC returns.'

The Government's answer to the problem is to attempt to mirror the US, where state-aided Small Business Investment Companies account for nearly 60 per cent of investments. After more than 150 responses to Bridging the Finance Gap, the resultant output calls for, among other things, the creation of Enterprise Capital Funds (ECFs), the bidding rounds for which recently closed. These will add to the existing Regional Venture Capital Funds (RVCFs), the largest of which is London's �50m Capital Fund. But with the RVCFs designed to invest sums of less than �250,000, and the success of the ECFs still to be evidenced, the best option for many entrepreneurs is to make seed funding stretch as far as possible.

It's not, as one investor recently put it, necessary to 'prepare for poverty', but start-ups need to be ready to tighten their belts until regular sales start coming in and the business gains some stability. 'Starting a business is more than a full-time job,' says Geoff Sankey, managing director of the Capital Fund. 'It's a life activity and it absorbs most of your waking hours.'

Boxout: Controlling costs: the start-up's perspective

1) Ensure major suppliers have a vested interest
One business that has been through the experience of stretching out a �250,000 DTI-backed Loan Guarantee Scheme loan is hospitality and charity technology provider Eproductive. Chris Cowls, CEO and co-founder, recommends ensuring suppliers are pulling in the same direction as the business. 'Our technology partner is now an equity stakeholder, which means all of the key players have an interest in the success of our venture.'

Cowls says keeping its main supplier onboard has been one of the key factors in its delivery of Internet-based management control systems. The ongoing commitment of suppliers can be critical to the success of any small business, so giving them a vested interest in the success of the business is a good safeguard of future wellbeing.

2) Keep a lid on people costs
People costs are often the largest single item on a start-up's P&L, but they're not always managed as well as they could be. For one thing, smaller businesses often don't have time to carry out formal performance reviews - yet these can often give both employer and employee the chance to step back and assess their work. It's not just about analysing someone's performance in their job - it's also about establishing whether the employee's skills and knowledge are being put to the best use. Many tasks and activities are carried out as a matter of routine, even if the original objectives have long since changed. It's also worth assessing what value each employee creates and asking yourself whose job would go if you had to make redundancies - that may give an interesting perspective on how well you're deploying your human capital.

In addition, consider pay scales carefully. One business angel argues that no executive in a seed capital funded start-up should be earning more than �30,000. While reward should always be in line with the value an individual adds to the business, keeping a cap on salaries is an effective way to ensure costs don't spiral.

3) Control cash flow
Everyone knows that cash flow management is essential for ongoing stability, especially for businesses with high start-up costs such as software development. But how effective is your long-term planning? Rolling forecasts that look ahead six to twelve months provide a guideline for businesses to manage peaks and troughs in cash flow. Specific problems such as slow paying clients can also be managed through a combination of techniques, from payment incentives or penalties to concerted efforts to build a more mutually beneficial relationship. Those steps are often preferable to external solutions such as factoring, which comes with considerable costs attached.

4) Minimize fixed costs
'You need to keep an eye on your fixed costs' says Cowls, 'if only to keep them in check.' It's a truism that fixed costs can't be easily altered, but it's worth doing a regular review for the best deal on office rental, equipment hire, and monthly telecoms and IT.

5) Carefully evaluate asset purchases
Always ask whether the purchase of an asset is key to the development of the business or whether the leasing/rental option may be cheaper. But by the same token, don't cut corners in the wrong places. Cowls says: 'Don't scrimp and save on the wrong things. We've paid top dollar in outsourcing our servers because it's our clients' data and critical to our success. You need to pay good money for what's important'.

Written by David Longworth

Tuesday, January 24, 2006

A breath of fresh air

Marty Pichinson knows as much as anyone about why start-ups fail - after all, he's closed down 148 tech companies. Now, he wants to pass that knowledge on.

Short of turning up with a hood over his head and wielding a scythe, it's hard to see how Marty Pichinson could have created much more fear when he appeared on the doorstep of Silicon Valley's troubled start-ups in the wake of the dot com bust. This, after all, is a man who's helped close down no less than 148 technology companies, representing $5bn of investment. If anyone knows why businesses fail, it's him.

But while his company, Sherwood Partners (, still gets regular calls from investors to put troubled firms out of their misery, today Pichinson is building a reputation for himself as a friend and mentor for start-ups. True, his track record errs on the side of failure rather than success, with only 18% of companies saved from wind-down. But as he points out, often when he's called in it's because the investment has already been terminated. What he's now focusing on is getting into companies earlier so that he can head off problems before they become terminal.

In many respects, Pichinson is the entrepreneurs' entrepreneur. With a colourful background that encompassed a spell managing bands - they included the Miracles, albeit without lead singer Smokey Robinson - he moved onto restructuring companies in the garment industry before turning his eye to the technology scene. And while the tech collapse spelled the end of the road for so many entrepreneurs, for Pichinson it kicked off a period of frantic opportunity.

His experiences give him good insight into the kinds of problems that beset start-ups. From a cost perspective, for example, he says the problem is less about uncontrolled spending than about knowing what to buy. It's not uncommon for companies to blow five-figure sums on a telephone system when they could do it for a couple of thousand pounds. Likewise, they might get a great deal on office space by negotiating a multi-year lease, but don't insert the option to give six months notice - so when their business goes through a lean patch, they find the cost of switching to smaller property prohibitive.

What these start-ups lack, Pichinson argues, is advice - and he has plenty of it. 'Look at the Olympics,' he says. 'Twenty per cent of the countries - like Great Britain, Germany and the US - get 80 per cent of the medals. What makes the athletes special? It's the trainers and coaches. We're management's best friend - we're your trainer, your confidante.'

Pichinson describes his approach as 'extending the runway' for tech companies. Say you have 13 months of funding left - you don't know it, but it's going to take 15 months for your company to make it. Come month 12, there's every possibility your investors will pull the plug - but if you could make your original money stretch another four months, that would be the difference between success and failure. The scenario doesn't even need to be that stark: extending the runway can simply mean that start-ups make it through without the need for an additional round of funding.

Much of the advice Pichinson gives combines established business practice with an understanding of common start-up failings (see box). His approach to time management, however, is guaranteed to raise eyebrows. This, after all, is a man who did a time management study on himself and discovered that he could save 46 minutes a day by keeping his Treo handheld by his side - now, if he's queuing for the movies, he uses the time to fire off emails. But his philosophy is rooted in practicalities. From a personal perspective, where previously he'd spend two or three hours when he got home every evening on the computer, now it's 30 to 40 minutes. From a business perspective, his focus on 'Return on Time' reflects a simple fact of life. 'Time is not a variable,' he says. 'You either manage it, or you lose your company or your relationship.'

That might explain why Pichinson struggles to understand how many European entrepreneurs can take a three or four week holiday but don't take their mobile phones with them. It's nothing to do with a culture that confines many Americans to just two weeks' holiday a year - after all, Pichinson himself takes seven weeks. The difference, he says, is that no-one knows when he's on vacation. 'When I'm skiing, the first thing I do when I get off the ski lift is check my email and voicemail. What's the big deal?'

Five pieces of advice from Marty Pichinson:
� Work out your business model and plan, and make sure you're accountable to it. Follow the model and if you're not going to make a particular goal, readjust it on a daily basis if necessary
� Don't overpay on anything, including people. Make sure every pound is well spent
� Communicate at all times with your management team, personnel, investors, attorneys and mentors. You don't know it all
� Make sure you don't oversell to customers - if you don't deliver, they're not going to be your customers
� Don't be pigheaded - you're not going to be the best in the world, you're not going to be bigger than Bill Gates. 'Always be polite to everyone. It's a very viral industry, and there's no room for jerks.'

By Keith Rodgers, Webster Buchanan Research