Are you on your way to building the next Google or Genentech? A new listing of the fastest-growing private companies in the US gives a little insight into what makes an entrepreneur successful
What does it take to build a business that works? Well, if you bolster your immune system with a mix of 17 herbs and nutrients, process credit card payments quickly and flog some add-ons for the iPod, you stand a pretty good chance of making it.
That, at least, is one conclusion you can draw from the 2006 'Inc. 500' List, a ranking of the fastest-growing private companies in the US just released by the magazine of the same name (www.inc.com). Topping this year's list is Litle & Co., which provides credit card processing services and has grown at a staggering 5629 per cent over the last three years to reach a turnover of $35m. Second was Airborne Health, maker of a snazzy health tablet, and third was Digital Lifestyle Outfitters, which provides accessories for portable devices (including, incidentally, a rather fetching pink case for your iPod nano with a 'workout-ready' armband). DLO was only founded five years ago and now turns over $84 million with 72 employees, which just goes to show what you can achieve if you really work out how to tap into mass market chic.
For the rest of us, labouring in the less flamboyant corners of the tech community, the Inc. 500 list provides some kind of insight into the things that help make businesses succeed. The companies that populate the Top 25 demonstrate that you don't necessarily need to have a great idea - in fact, one or two are terminally dull - but you do need to be tapping into a real need.
So while issues like security will always be a hot topic, it's how useful your security offering is that matters. PatchLink, which pulls together security patches for different types of software and then updates all your computers, seems to have found a sales pitch that combines fear of attack with a way to ease day-to-day IT aggravation, good enough to land it 14th place. Similarly, fear of attack from regulators appears to have propelled OpenPages into 22nd place, based on sales of its corporate governance software. One place behind it - and playing in a somewhat more interesting space - is digital marketing company Booyah Networks, which does search engine marketing for websites and provides an online marketplace for video advertising.
Other companies appear to have got where they are by taking a tried and tested idea and applying it to a new market. San Francisco-based StubHub, number eight in the list, is an online exchange where you can buy tickets for sporting events, theatres and concerts - a sort of eBay for the entertainment business. Sixteenth-placed Bandwidth.com provides Voice over IP, Internet services and managed network services - nothing new in itself, but it makes its money by specialising in selling to small and medium sized businesses.
And then there are the guys who tried something different in sales or marketing. In sixth place is United Bank Card, another player in the credit card processing game. According to Inc., the company broke the mould in the industry by giving away its terminals to customers rather than forcing them to buy or lease. At number 24 meanwhile, is IT consultancy LanceSoft: Inc. quotes its founder crediting its success to the high rewards its salespeople earn for bringing in customers, suppliers and employees, effectively turning each of them into entrepreneurs.
The list goes on, but it's a fair bet that the messages from companies in slots 26 onwards won't be radically different. All of them have dipped into the melting pot of products, services, market awareness and execution, and somehow managed to pull out the right ingredients to make it work.
What would be just as interesting, of course, would be the list of the bottom 500 performers in the US - the ones whose sales plummeted by record percentages to send them crashing into oblivion. How many people simply gambled on the wrong technologies? How many failed to keep control of their costs? How many had a great idea, threw everything into it, got some early successes and just ran out of time and money? How many hired the wrong people? And how many were just plain unlucky? The top 500 performers have clearly done a spectacular job - but that doesn't necessarily mean there's a huge gulf between them and some of the others who never quite made it.
*Details of the Top 25 performers in the Inc 500 are available at www.inc.com. The full list is available to subscribers
By Keith Rodgers, Webster Buchanan Research
Friday, November 30, 2007
Saturday, November 24, 2007
The Importance of Business Location
Are Los Angeles, San Diego and other cities starting to steal Silicon Valley's thunder in the tech world? And does your choice of location - whether it's San Francisco or London - really matter?
Is Silicon Valley in danger of losing its position as California's technology centre? Sacrilegious as the thought may be, it could just happen. Southern California - better known for Hollywood glamour, the naval centre of San Diego, the fruit fields of the Central Valley and an unhealthy obsession with surfing - now employs almost as many techies as its Northern counterpart.
That's the conclusion of a report* last month from AeA, the national trade association formerly known as the American Electronics Association. Studying official data from 2004, it concluded that there were 214,900 high-tech jobs in San Jose and the rest of Silicon Valley in 2004, with the San Francisco-Oakland axis a few miles further north adding another 156,700. Once you take into account less fashionable cities like Sacramento, the state capital and official residence of Arnold Schwarzenegger, northern California is home to a grand total of 439,000 technology workers.
Surprisingly, the southern half of the state is just 21,000 jobs short of that figure. Hidden in the smog of the great parking lot we know as Los Angeles, some 165,700 tech workers flood the freeways each morning. Further south near the Mexico border, San Diego ranks as the fourth largest tech hub with almost 100,000 jobs, while Orange County follows closely behind.
Why does this matter? Because location, whether it's downtown San Francisco or the London suburbs, will always be a big influence on corporate success. Michael Porter, professor at Harvard Business School, has famously argued that clusters of industries and supporting institutions help improve the productivity of the companies within them and provide significant competitive advantages, from closer relationships to better information. And John Preston, associate director of the Entrepreneurship Center at Massachusetts Institute of Technology, points out that if you want to build a semiconductor business, you're better off doing it in Silicon Valley than Cleveland, for the simple reason that it'll be easier to find the employees and supporting infrastructure that you need. There are also soft benefits that rub off, as anyone from a British university town will testify. Just because your biotech office is a ten minute walk from a top-tier college doesn't automatically endow you a PhD, but mentioning Oxford or Cambridge University on the international circuit will immediately earn you kudos.
To an extent, this is a counter-intuitive concept for an industry that has made the real-time global economy possible through its own information management and communications technologies. If aircraft manufacturers can design planes using virtual teams located around the world, you'd think that US and UK tech developers would be able to telework from around the country. Yes, many start-ups require access to labs, high-performance systems and other research facilities - but you can do a lot of software programming on your laptop on a beach in Bournemouth with a simple remote connection to your central servers.
San Francisco, however, is a great example of why location really matters. If you set up a business here, you have an extraordinary choice of support partners on your doorstep, from high-tech public relations specialists to experts in patent law. If you're looking for funding, there are numerous angel networks to call on, and the home of the technology venture capital community is just forty-five minutes down the road. Similar arguments apply to London, of course. There are enormous benefits to operating in a financial capital because of the quality of companies it attracts, the physical infrastructure that grows up around it, and the support network that has evolved to help take London start-ups forward.
So what can London learn from California's experiences? Sadly, the challenges facing its different tech centres will be wearily familiar. Transport is still a problem in many parts of the state, from the clogged freeways of LA to the rush-hour congestion that blights the Bay Area's bridges and highways. The cost of housing in many cities is prohibitively expensive. And as Julie Biagini, chair of AeA's Bay Area Council, points out, there are further social challenges ranging from schooling to US immigration policy. 'San Francisco, Silicon Valley, and California have to be seen as friendly places to do business and to live. To this end, our schools need to be institutions of excellence, where all kids learn the necessary skills to compete in the 21st century, particularly in math and science. And to remain competitive, we must press our national leaders to allow the best and brightest from around the world to work for our companies, study in our world-class universities, and start new companies here.'
*California Cybercities 2006, published by the AeA. Visit www.aeanet.org/research
By Keith Rodgers, Webster Buchanan Research
Is Silicon Valley in danger of losing its position as California's technology centre? Sacrilegious as the thought may be, it could just happen. Southern California - better known for Hollywood glamour, the naval centre of San Diego, the fruit fields of the Central Valley and an unhealthy obsession with surfing - now employs almost as many techies as its Northern counterpart.
That's the conclusion of a report* last month from AeA, the national trade association formerly known as the American Electronics Association. Studying official data from 2004, it concluded that there were 214,900 high-tech jobs in San Jose and the rest of Silicon Valley in 2004, with the San Francisco-Oakland axis a few miles further north adding another 156,700. Once you take into account less fashionable cities like Sacramento, the state capital and official residence of Arnold Schwarzenegger, northern California is home to a grand total of 439,000 technology workers.
Surprisingly, the southern half of the state is just 21,000 jobs short of that figure. Hidden in the smog of the great parking lot we know as Los Angeles, some 165,700 tech workers flood the freeways each morning. Further south near the Mexico border, San Diego ranks as the fourth largest tech hub with almost 100,000 jobs, while Orange County follows closely behind.
Why does this matter? Because location, whether it's downtown San Francisco or the London suburbs, will always be a big influence on corporate success. Michael Porter, professor at Harvard Business School, has famously argued that clusters of industries and supporting institutions help improve the productivity of the companies within them and provide significant competitive advantages, from closer relationships to better information. And John Preston, associate director of the Entrepreneurship Center at Massachusetts Institute of Technology, points out that if you want to build a semiconductor business, you're better off doing it in Silicon Valley than Cleveland, for the simple reason that it'll be easier to find the employees and supporting infrastructure that you need. There are also soft benefits that rub off, as anyone from a British university town will testify. Just because your biotech office is a ten minute walk from a top-tier college doesn't automatically endow you a PhD, but mentioning Oxford or Cambridge University on the international circuit will immediately earn you kudos.
To an extent, this is a counter-intuitive concept for an industry that has made the real-time global economy possible through its own information management and communications technologies. If aircraft manufacturers can design planes using virtual teams located around the world, you'd think that US and UK tech developers would be able to telework from around the country. Yes, many start-ups require access to labs, high-performance systems and other research facilities - but you can do a lot of software programming on your laptop on a beach in Bournemouth with a simple remote connection to your central servers.
San Francisco, however, is a great example of why location really matters. If you set up a business here, you have an extraordinary choice of support partners on your doorstep, from high-tech public relations specialists to experts in patent law. If you're looking for funding, there are numerous angel networks to call on, and the home of the technology venture capital community is just forty-five minutes down the road. Similar arguments apply to London, of course. There are enormous benefits to operating in a financial capital because of the quality of companies it attracts, the physical infrastructure that grows up around it, and the support network that has evolved to help take London start-ups forward.
So what can London learn from California's experiences? Sadly, the challenges facing its different tech centres will be wearily familiar. Transport is still a problem in many parts of the state, from the clogged freeways of LA to the rush-hour congestion that blights the Bay Area's bridges and highways. The cost of housing in many cities is prohibitively expensive. And as Julie Biagini, chair of AeA's Bay Area Council, points out, there are further social challenges ranging from schooling to US immigration policy. 'San Francisco, Silicon Valley, and California have to be seen as friendly places to do business and to live. To this end, our schools need to be institutions of excellence, where all kids learn the necessary skills to compete in the 21st century, particularly in math and science. And to remain competitive, we must press our national leaders to allow the best and brightest from around the world to work for our companies, study in our world-class universities, and start new companies here.'
*California Cybercities 2006, published by the AeA. Visit www.aeanet.org/research
By Keith Rodgers, Webster Buchanan Research
Wednesday, November 14, 2007
Growth Issues for Google
Susan Wojcicki has first hand experience of what it takes to be a successful start-up - after all, Google was set up in her garage. Ten years on, she's begun to reveal some of its early secrets
Everyone knows you can't be a true Silicon Valley icon unless you started up in a garage. The 12 x 18 foot building at 367 Addison Avenue in Palo Alto, where Bill Hewlett and Dave Packard first started working together, is probably the most famous of them all - so much so that HP recently restored it to its 1939 condition. Almost sixty years later, it was Susan Wojcicki's garage that served as the critical real estate for Google, providing the first office premises for co-founders Larry Page and Sergey Brin.
Wojcicki, who didn't even work for Google at the time, has as good a handle as anyone on what it's like to take a start-up from angel funding through Initial Public Offering - and in Google's case, on to become Silicon Valley's flagship Internet success story. Joining the company as employee number 16 and now vice president of product management, she's been part of a local legend characterized by the founders' insistence on doing things their way. As keynote speaker at a Women's Technology Cluster event in San Francisco earlier this month, she talked through some of the lessons she's picked up on the way.
Google actually spluttered into life at Stanford University in January 1996, when Page and Brin started collaborating on a new search technology known as 'BackRub', reflecting its focus on the 'back links' that connect to a website. The early years were characterised by a lot of R&D and a fair amount of improvisation - the 'data centre', for example, was actually Page's dorm room. Their first big break came when they cornered Andy Bechtolsheim, co-founder of Sun, on an acquaintance's front porch, and after the briefest of product demos landed themselves a $100,000 cheque (remember - this was the dot-com era). With contacts and family taking the start-up funding to $1 million, the two founders formally incorporated the company and hired their first recruit, Craig Silverstein, who's now director of technology. They also took out space in Wojcicki's garage and rented a couple of rooms. In these early days, the Google brand didn't carry a great deal of weight with its landlady - Brin, Page and their clients were forbidden from using Wojcicki's front door.
The challenges Google faced in its early years will be familiar to every start-up. To begin with, their business plan needed a credible revenue stream - but no-one knew for sure where the money would be coming from. They predicted three equal revenue streams - one third from licenses, one third site searches, and one third advertising. For what it's worth, they were wrong: today, advertising accounts for 99 per cent of the company's revenues.
Then there was the marketing, part of Wojcicki's initial remit. When it launched, Google was operating in a competitive market, with companies like Excite and Alta Vista making much of the running. Wojcicki recalls that Alta Vista in particular was spending millions on marketing, but Google took the decision not to splash out, reckoning that doing so would force it to go through more funding rounds than it needed to. Instead, the bulk of the funds were spent on the product, and most marketing was done through public relations and word-of-mouth initiatives.
Like many start-ups, much of the Google story was simply about making things happen. Computing power, for example, was always a problem. In the early days, much of the infrastructure consisted of low budget, cheap systems - at one point, they tried bungee cords and velcro to earthquake-proof the machines. Not surprisingly, they nearly ran into capacity problems when they struck their first deal with AOL/Netscape, which selected Google as its web search service and pushed traffic to three million searches per day.
Despite these hiccups, they also got a lot of things right. Most important, says Wojcicki, they had a clear vision of where the company was going and they focused hard on the product, believing that if they built a great product the users would come. That's not always a successful business philosophy, of course - the early Apple user interface beat Microsoft hands-down, while Betamax lost out when VHS won the video standards war - but it's been one of Google's strengths. Even today, Google engineers spend 20 per cent of their working time on their own chosen projects, helping to sustain a culture of innovation.
That unwavering focus demonstrated itself in Google's relations with its VCs, where Page and Brin controlled the product vision and pushed through one or two controversial ideas, such as developing their own advertisement platform. 'If you as a VC or angel know more about the product and market than the entrepreneur, you've got a problem,' says Wojcicki. What the investors did bring to the party - aside from cash - was a high-level focus on the key issues, acting as validators for Page and Brin. The VCs also brought practical assistance, helping with complex deals like the AOL/Netscape agreement, difficult legal and corporate governance issues, and key hires. Recruitment was also taken seriously from the beginning, says Wojcicki, and Google's still keen on flat organisational structures. That was occasionally taken to extremes in the early days - at one stage, the VP of engineering had 150 direct reports.
Summing up, Wojcicki passed on eight lessons to start-ups looking to emulate the Google story:
1. Build a great product that users love
2. Think big
3. Solve an important problem. Google, she says, wasn't always sure if search would make money - but the founders knew it was a problem
4. Rally the company around a vision and be focused
5. Hire the best people you can
6. Question accepted practices, and invent the right ones for you. Google's product launch philosophy, for example, is based on doing things fast rather than building comprehensive business plans - if it thinks a product is right, it launches it and then sees how it works out
7. Base decisions on data. Wojcicki stresses that the company has always put value on business and statistical analysis
8. Make decisions for the long-term. 'We were willing to wait,' she says
By Keith Rodgers, Webster Buchanan Research
Everyone knows you can't be a true Silicon Valley icon unless you started up in a garage. The 12 x 18 foot building at 367 Addison Avenue in Palo Alto, where Bill Hewlett and Dave Packard first started working together, is probably the most famous of them all - so much so that HP recently restored it to its 1939 condition. Almost sixty years later, it was Susan Wojcicki's garage that served as the critical real estate for Google, providing the first office premises for co-founders Larry Page and Sergey Brin.
Wojcicki, who didn't even work for Google at the time, has as good a handle as anyone on what it's like to take a start-up from angel funding through Initial Public Offering - and in Google's case, on to become Silicon Valley's flagship Internet success story. Joining the company as employee number 16 and now vice president of product management, she's been part of a local legend characterized by the founders' insistence on doing things their way. As keynote speaker at a Women's Technology Cluster event in San Francisco earlier this month, she talked through some of the lessons she's picked up on the way.
Google actually spluttered into life at Stanford University in January 1996, when Page and Brin started collaborating on a new search technology known as 'BackRub', reflecting its focus on the 'back links' that connect to a website. The early years were characterised by a lot of R&D and a fair amount of improvisation - the 'data centre', for example, was actually Page's dorm room. Their first big break came when they cornered Andy Bechtolsheim, co-founder of Sun, on an acquaintance's front porch, and after the briefest of product demos landed themselves a $100,000 cheque (remember - this was the dot-com era). With contacts and family taking the start-up funding to $1 million, the two founders formally incorporated the company and hired their first recruit, Craig Silverstein, who's now director of technology. They also took out space in Wojcicki's garage and rented a couple of rooms. In these early days, the Google brand didn't carry a great deal of weight with its landlady - Brin, Page and their clients were forbidden from using Wojcicki's front door.
The challenges Google faced in its early years will be familiar to every start-up. To begin with, their business plan needed a credible revenue stream - but no-one knew for sure where the money would be coming from. They predicted three equal revenue streams - one third from licenses, one third site searches, and one third advertising. For what it's worth, they were wrong: today, advertising accounts for 99 per cent of the company's revenues.
Then there was the marketing, part of Wojcicki's initial remit. When it launched, Google was operating in a competitive market, with companies like Excite and Alta Vista making much of the running. Wojcicki recalls that Alta Vista in particular was spending millions on marketing, but Google took the decision not to splash out, reckoning that doing so would force it to go through more funding rounds than it needed to. Instead, the bulk of the funds were spent on the product, and most marketing was done through public relations and word-of-mouth initiatives.
Like many start-ups, much of the Google story was simply about making things happen. Computing power, for example, was always a problem. In the early days, much of the infrastructure consisted of low budget, cheap systems - at one point, they tried bungee cords and velcro to earthquake-proof the machines. Not surprisingly, they nearly ran into capacity problems when they struck their first deal with AOL/Netscape, which selected Google as its web search service and pushed traffic to three million searches per day.
Despite these hiccups, they also got a lot of things right. Most important, says Wojcicki, they had a clear vision of where the company was going and they focused hard on the product, believing that if they built a great product the users would come. That's not always a successful business philosophy, of course - the early Apple user interface beat Microsoft hands-down, while Betamax lost out when VHS won the video standards war - but it's been one of Google's strengths. Even today, Google engineers spend 20 per cent of their working time on their own chosen projects, helping to sustain a culture of innovation.
That unwavering focus demonstrated itself in Google's relations with its VCs, where Page and Brin controlled the product vision and pushed through one or two controversial ideas, such as developing their own advertisement platform. 'If you as a VC or angel know more about the product and market than the entrepreneur, you've got a problem,' says Wojcicki. What the investors did bring to the party - aside from cash - was a high-level focus on the key issues, acting as validators for Page and Brin. The VCs also brought practical assistance, helping with complex deals like the AOL/Netscape agreement, difficult legal and corporate governance issues, and key hires. Recruitment was also taken seriously from the beginning, says Wojcicki, and Google's still keen on flat organisational structures. That was occasionally taken to extremes in the early days - at one stage, the VP of engineering had 150 direct reports.
Summing up, Wojcicki passed on eight lessons to start-ups looking to emulate the Google story:
1. Build a great product that users love
2. Think big
3. Solve an important problem. Google, she says, wasn't always sure if search would make money - but the founders knew it was a problem
4. Rally the company around a vision and be focused
5. Hire the best people you can
6. Question accepted practices, and invent the right ones for you. Google's product launch philosophy, for example, is based on doing things fast rather than building comprehensive business plans - if it thinks a product is right, it launches it and then sees how it works out
7. Base decisions on data. Wojcicki stresses that the company has always put value on business and statistical analysis
8. Make decisions for the long-term. 'We were willing to wait,' she says
By Keith Rodgers, Webster Buchanan Research
Saturday, October 20, 2007
Recruiting for skills and experience
While US politicians argue about immigration and offshoring, London entrepreneurs have a big opportunity to take advantage of skills shortages in the American tech sector
As he grapples with war in Iraq, nuclear showdown with Iran and North Korea, and the inexorable growth of China, President George W Bush could be forgiven for seeking a little light relief at home. But he isn't getting it. With his popularity ratings low, petrol prices rising and his Republican comrades looking for inspiration ahead of mid-term elections, Bush has become embroiled in a debate that no-one can ever win - immigration.
For a country shaped by pioneering pilgrims who arrived uninvited on a boat, it's ironic that Americans are so strung up about immigration. Every country has similar contradictions, of course - the British make a point of hating the French, yet if we could unravel our lineage many of us would end up sooner or later at William the Conqueror and his Norman mates. But in the US, where an estimated 11 million illegal immigrants have made their home, it's a red hot and highly controversial topic. The House of Representatives recently passed draconian legislation up to the Senate that criminalises illegal entry to the country and demands that much of the US border with Mexico be fenced off. The Senate has since been debating a complex set of alternative proposals, including a compromise bill that increases border security while expanding a guest worker scheme and offering more immigrants a chance to acquire legal status and ultimately, citizenship.
Bush, whose conservative instincts would usually align him with the 'Kick 'em Out' brigade, finds himself in a quandary. For one thing, the Hispanic vote is an increasingly powerful force in US politics. For another, big business is pushing for flexible policy, since so many sectors rely on immigrant labour, including construction and agriculture. All this explains why, during a speech in California on Monday, Bush was pushing for a compromise.
The problem with the current immigration debate, however, is that too much of it is focused on the US-Mexico border and unskilled labour. As we've reported before, there are significant issues relating to a shortage of skilled labour in the tech industry and elsewhere, which tend to get overshadowed by the broader political arguments. While US politicians wring their hands in anguish at the growth in offshoring, the reality is that the policies they create are restricting tech businesses from hiring the talent they need, because of a shortage of visas and delays in issuing green cards see 'Work in Progress'. That leaves many companies with no choice but to hire labour abroad.
All of this matters for the London tech scene. Offshoring has historically been associated with low-skilled jobs, but Western companies are increasingly comfortable hiring programmers and IT specialists from India. While the rates they pay for these skills are low compared to Europe and the US, cost is not the only reason they do it. Many US companies would be prepared to pay more for the right people - the fundamental problem is that the people they want aren't available. It's a shortage of human capital - the kind of capital that resides, of course, in the UK.
No-one's suggesting that London should turn itself into the Bangalore of the West, but there are clearly enormous opportunities here for companies to fill the gaps in the US market. UK entrepreneurs have long partnered with major US suppliers, resellers have always developed add-ons to other suppliers' products, and organisations such as Yahoo foster a network of independent developers to create innovative products for their portfolio. That process can logically be extended even further. There's little to stop UK companies from providing a whole range of specialist services to plug US skills gaps, in anything from product design to marketing expertise. If aircraft manufacturers can design and build prototype craft using virtual teams around the world, then tech companies are perfectly capable of collaborating across 5500 miles of water as well, particularly for intangible products such as software.
This kind of collaboration has long been punted in the business community but rarely achieved. Business necessity, however, is a great driver. With compromise being sought on the whole immigration issue, the chances of a radical restructuring of US policy are slim. That leaves the door open for UK entrepreneurs to try something different.
By Keith Rodgers, Webster Buchanan Research
As he grapples with war in Iraq, nuclear showdown with Iran and North Korea, and the inexorable growth of China, President George W Bush could be forgiven for seeking a little light relief at home. But he isn't getting it. With his popularity ratings low, petrol prices rising and his Republican comrades looking for inspiration ahead of mid-term elections, Bush has become embroiled in a debate that no-one can ever win - immigration.
For a country shaped by pioneering pilgrims who arrived uninvited on a boat, it's ironic that Americans are so strung up about immigration. Every country has similar contradictions, of course - the British make a point of hating the French, yet if we could unravel our lineage many of us would end up sooner or later at William the Conqueror and his Norman mates. But in the US, where an estimated 11 million illegal immigrants have made their home, it's a red hot and highly controversial topic. The House of Representatives recently passed draconian legislation up to the Senate that criminalises illegal entry to the country and demands that much of the US border with Mexico be fenced off. The Senate has since been debating a complex set of alternative proposals, including a compromise bill that increases border security while expanding a guest worker scheme and offering more immigrants a chance to acquire legal status and ultimately, citizenship.
Bush, whose conservative instincts would usually align him with the 'Kick 'em Out' brigade, finds himself in a quandary. For one thing, the Hispanic vote is an increasingly powerful force in US politics. For another, big business is pushing for flexible policy, since so many sectors rely on immigrant labour, including construction and agriculture. All this explains why, during a speech in California on Monday, Bush was pushing for a compromise.
The problem with the current immigration debate, however, is that too much of it is focused on the US-Mexico border and unskilled labour. As we've reported before, there are significant issues relating to a shortage of skilled labour in the tech industry and elsewhere, which tend to get overshadowed by the broader political arguments. While US politicians wring their hands in anguish at the growth in offshoring, the reality is that the policies they create are restricting tech businesses from hiring the talent they need, because of a shortage of visas and delays in issuing green cards see 'Work in Progress'. That leaves many companies with no choice but to hire labour abroad.
All of this matters for the London tech scene. Offshoring has historically been associated with low-skilled jobs, but Western companies are increasingly comfortable hiring programmers and IT specialists from India. While the rates they pay for these skills are low compared to Europe and the US, cost is not the only reason they do it. Many US companies would be prepared to pay more for the right people - the fundamental problem is that the people they want aren't available. It's a shortage of human capital - the kind of capital that resides, of course, in the UK.
No-one's suggesting that London should turn itself into the Bangalore of the West, but there are clearly enormous opportunities here for companies to fill the gaps in the US market. UK entrepreneurs have long partnered with major US suppliers, resellers have always developed add-ons to other suppliers' products, and organisations such as Yahoo foster a network of independent developers to create innovative products for their portfolio. That process can logically be extended even further. There's little to stop UK companies from providing a whole range of specialist services to plug US skills gaps, in anything from product design to marketing expertise. If aircraft manufacturers can design and build prototype craft using virtual teams around the world, then tech companies are perfectly capable of collaborating across 5500 miles of water as well, particularly for intangible products such as software.
This kind of collaboration has long been punted in the business community but rarely achieved. Business necessity, however, is a great driver. With compromise being sought on the whole immigration issue, the chances of a radical restructuring of US policy are slim. That leaves the door open for UK entrepreneurs to try something different.
By Keith Rodgers, Webster Buchanan Research
Monday, September 24, 2007
Grant Funding
Winning Grant funding through competitions and applying for government-backed grants are both good options for start-ups - but they take different kinds of skills and present very different challenges
Getting funding under the DTI's R&D grants programme is like going to counselling, according to one entrepreneur. You don't think you need it, it feels pretty terrible when you're sitting on the couch - but on balance you're probably better off for having done it.
The R&D grants programme is just one of many government-backed schemes that provide funding for start-ups beyond traditional venture capital and bank lending. Competitions differ from grants in the way they're administered and in how the money is awarded, and they're often perceived to be more difficult to apply for. So which approach will work best for you?
A perfect fit?
First of all, don't be put off by the rules and regulations of either scheme. Invariably, there are conditions attached to the awards, which often require match funding and specific project deliverables. But many entrepreneurs who've successfully gone through the process argue that it's relatively straightforward so long as you provide all the information the administrators are looking for first time round. The most important consideration, they say, is to find a scheme that fits what you're trying to achieve - not to try to force your business idea to fit a scheme's requirements.
'People do try to shoehorn an inappropriate idea into a grant application,' says Gary Hellen, manager of the Grant for R&D programme at the London Development Agency. 'Some applications try to bundle several projects into one and that's often a reason we have to turn them down. If it's inappropriate we'll find out.'
Novacta Biosystems in Hatfield won over �500,000 funding in the Spring 2005 Collaborative R&D competition with its partner, Edinburgh-based Ingenza. The project was a three-year initiative to find new industrial processes using enzymes, and according to Dr Mike Dawson, research director at Novacta, meeting the scheme's criteria was key. 'It fitted pretty well, not just in terms of the science but on the commercial side and the objectives of the funding scheme,' he says. 'There are a whole load of criteria that the funding mechanism is looking for and it's important to meet them all.'
Winners and losers in competitions
When it comes to choosing between grants and competitions, bear in mind that the latter can be harder to apply for, primarily because they have very specific aims and cut-off dates that often provide little room for manoeuvre. The Autumn Technology Strategy Board Collaborative R&D competition, for example, opened at the Innovate Conference in November with a �50m pot for six priority areas. But if you're thinking of applying now, you're probably already too late - applications need to be in by January 15th. Likewise a �10m Competition of Ideas at the Ministry of Defence, which kicked off in October, closes on January 31st.
'The timelines are very tight from the announcement of the scheme to the deadline for submission of applications,' says Dawson. 'Given the collaborative goals, it's a relatively short timeframe to bring a consortium together.' To tackle that problem, Novacta keeps a rolling programme of ideas that it's seeking funding for and a network of contacts that can help fulfil them - that way, if an appropriate scheme is announced, it can quickly pull together the various partners.
There are also questions over efficiency. Competitions are most effective when they focus on a specific output - such as producing an energy-efficient battery - and offer one award (or at most, just a handful). But that invariably means some perfectly good ideas will be ruled out because they don't meet the specific goals. From 10,000 outline assessments made by the Technology Strategy Board since 2004, for example, only 500 projects have been approved for funding. This ratio is likely to improve now that the TSB has streamlined its two-stage process: in this year's spring competition, a new Fast Track approach made it easier and quicker for small businesses to gain smaller awards under �250,000.
'If [the competition organisers] know where they want to go and how to get there, then broadly competitions are good; they set a goal and let the market meet it,' says Richard Halkett, executive director of policy and research at the National Endowment for Science, Technology and the Arts (Nesta). 'But there's a lot of waste in them - they are not a perfect market mechanism.' Steps are rarely taken to capture the rejected ideas, for example. 'If they don't take account of the waste, they can be a blunt instrument and quite damaging - if they do, then it's more of a contract than a competition.'
Streamlining grants
By contrast, the world of grants can appear a sea of calm. The DTI has reduced the number of business support schemes over the past few years from several hundred to 10, but this is in the context of an ongoing reduction of business support schemes across all central and local government departments from 3,000 to 100. 'It's all about making things simpler for business,' says a spokesperson.
Devolving administration of various grants to the regional development agencies has also made things more straightforward. Hellen says the R&D grant programme used to be a competition itself but adds: 'Rolling programmes tend to be more flexible than competitions and more customer-friendly. Competitions have closing dates and are not open door.'
One common mistake entrepreneurs make is to look for funding after a project has already started, which rules it out of a competition. Under a rolling grant programme, however, the concept of 'additionality' allows the entrepreneur to return to a grants body for funding once the project enters its next phase.
It's also worth bearing in mind that most grant schemes require some sort of output in the form of commercial demand for the product you're developing and a route to market. There are exceptions, of course - the Grant for Investigating an Innovative Idea, for example, refunds consultancy costs in early stages of research projects. But generally speaking, you'll need to be able to explain the commercial potential of what you are developing.
Ultimately, the application process itself can be a useful exercise for future funding rounds when you find yourself in front of potential investors. 'People know their technology but not necessarily how to run a business,' says Hellen. 'This process tends to make them think about preparing accounts and bookkeeping and so on. Most people do find the structure useful, but we do sometimes spend some time going back and forth with them.'
By David Longworth, Webster Buchanan Research
Getting funding under the DTI's R&D grants programme is like going to counselling, according to one entrepreneur. You don't think you need it, it feels pretty terrible when you're sitting on the couch - but on balance you're probably better off for having done it.
The R&D grants programme is just one of many government-backed schemes that provide funding for start-ups beyond traditional venture capital and bank lending. Competitions differ from grants in the way they're administered and in how the money is awarded, and they're often perceived to be more difficult to apply for. So which approach will work best for you?
A perfect fit?
First of all, don't be put off by the rules and regulations of either scheme. Invariably, there are conditions attached to the awards, which often require match funding and specific project deliverables. But many entrepreneurs who've successfully gone through the process argue that it's relatively straightforward so long as you provide all the information the administrators are looking for first time round. The most important consideration, they say, is to find a scheme that fits what you're trying to achieve - not to try to force your business idea to fit a scheme's requirements.
'People do try to shoehorn an inappropriate idea into a grant application,' says Gary Hellen, manager of the Grant for R&D programme at the London Development Agency. 'Some applications try to bundle several projects into one and that's often a reason we have to turn them down. If it's inappropriate we'll find out.'
Novacta Biosystems in Hatfield won over �500,000 funding in the Spring 2005 Collaborative R&D competition with its partner, Edinburgh-based Ingenza. The project was a three-year initiative to find new industrial processes using enzymes, and according to Dr Mike Dawson, research director at Novacta, meeting the scheme's criteria was key. 'It fitted pretty well, not just in terms of the science but on the commercial side and the objectives of the funding scheme,' he says. 'There are a whole load of criteria that the funding mechanism is looking for and it's important to meet them all.'
Winners and losers in competitions
When it comes to choosing between grants and competitions, bear in mind that the latter can be harder to apply for, primarily because they have very specific aims and cut-off dates that often provide little room for manoeuvre. The Autumn Technology Strategy Board Collaborative R&D competition, for example, opened at the Innovate Conference in November with a �50m pot for six priority areas. But if you're thinking of applying now, you're probably already too late - applications need to be in by January 15th. Likewise a �10m Competition of Ideas at the Ministry of Defence, which kicked off in October, closes on January 31st.
'The timelines are very tight from the announcement of the scheme to the deadline for submission of applications,' says Dawson. 'Given the collaborative goals, it's a relatively short timeframe to bring a consortium together.' To tackle that problem, Novacta keeps a rolling programme of ideas that it's seeking funding for and a network of contacts that can help fulfil them - that way, if an appropriate scheme is announced, it can quickly pull together the various partners.
There are also questions over efficiency. Competitions are most effective when they focus on a specific output - such as producing an energy-efficient battery - and offer one award (or at most, just a handful). But that invariably means some perfectly good ideas will be ruled out because they don't meet the specific goals. From 10,000 outline assessments made by the Technology Strategy Board since 2004, for example, only 500 projects have been approved for funding. This ratio is likely to improve now that the TSB has streamlined its two-stage process: in this year's spring competition, a new Fast Track approach made it easier and quicker for small businesses to gain smaller awards under �250,000.
'If [the competition organisers] know where they want to go and how to get there, then broadly competitions are good; they set a goal and let the market meet it,' says Richard Halkett, executive director of policy and research at the National Endowment for Science, Technology and the Arts (Nesta). 'But there's a lot of waste in them - they are not a perfect market mechanism.' Steps are rarely taken to capture the rejected ideas, for example. 'If they don't take account of the waste, they can be a blunt instrument and quite damaging - if they do, then it's more of a contract than a competition.'
Streamlining grants
By contrast, the world of grants can appear a sea of calm. The DTI has reduced the number of business support schemes over the past few years from several hundred to 10, but this is in the context of an ongoing reduction of business support schemes across all central and local government departments from 3,000 to 100. 'It's all about making things simpler for business,' says a spokesperson.
Devolving administration of various grants to the regional development agencies has also made things more straightforward. Hellen says the R&D grant programme used to be a competition itself but adds: 'Rolling programmes tend to be more flexible than competitions and more customer-friendly. Competitions have closing dates and are not open door.'
One common mistake entrepreneurs make is to look for funding after a project has already started, which rules it out of a competition. Under a rolling grant programme, however, the concept of 'additionality' allows the entrepreneur to return to a grants body for funding once the project enters its next phase.
It's also worth bearing in mind that most grant schemes require some sort of output in the form of commercial demand for the product you're developing and a route to market. There are exceptions, of course - the Grant for Investigating an Innovative Idea, for example, refunds consultancy costs in early stages of research projects. But generally speaking, you'll need to be able to explain the commercial potential of what you are developing.
Ultimately, the application process itself can be a useful exercise for future funding rounds when you find yourself in front of potential investors. 'People know their technology but not necessarily how to run a business,' says Hellen. 'This process tends to make them think about preparing accounts and bookkeeping and so on. Most people do find the structure useful, but we do sometimes spend some time going back and forth with them.'
By David Longworth, Webster Buchanan Research
Thursday, July 12, 2007
Imcreasing your business performance
Your shareholders know your company objectives - but what about your employees? Do they do their jobs with one eye on your strategic goals, and does their pay reflect their true performance?
If you're running a tech start-up, you're already familiar with the financial compromises that come with setting up your own business - the loans from friends and family; the personal credit card debt that keeps the company afloat when cash gets tight; the fact that you're usually the last person to draw a salary. But what about everyone else in the company? You're paying them - but are they really pulling their weight, and more importantly, are they helping drive your company in the right direction?
Measuring individual and company performance isn't rocket science, but it's often one of the hardest management tasks to get right. Some components are straightforward - it's not difficult to calculate if you've hit your monthly revenue and cost targets, for example - but others tend to be a mixture of hard and soft measures that can be tricky to manage. Assessing individual employees' contributions is particularly difficult, given that it usually combines specific task-based objectives with fluffier qualities such as attitude, team-working and motivation. Assessing those contributions in the context of your broader company objectives can be even trickier.
Some of the world's largest companies now take a formalised, top-down approach to performance management, setting objectives at board level and then 'cascading' them down through different management tiers, ending in departmental and individual goals that are each tied to the organisational layer above. Smaller companies have far less complex hierarchies and there's often an assumption that because they have their finger on the pulse, this kind of alignment happens naturally - but that's not always true. For one thing, priorities quickly get out of shape - some of your employees may be devoting too much time to non-essential or non-strategic activities at the expense of more critical work, for the simple reason that they're easier to do. Likewise, you can't always assume that your managers and senior employees are perfectly tuned in to your long-term strategy, particularly when short-term practicalities and day-to-day crises get in the way.
In fact, performance management is most effective when it's applied as a formal process. As with any management discipline, the real value comes not from measuring, but from drawing conclusions and following through on them. It's best thought of as a continual loop built around goal-setting, regular reviews (both informally and through regular appraisals), employee development initiatives such as training, and ongoing refinement of your high-level objectives as your business needs change.
In addition, performance should be closely linked to how you pay people. Many professions have a long tradition of linking pay to performance, from commission-based salespeople to senior managers working on quarterly bonuses. The problem is that their goals are often too short-term. A salesperson who's rushing to meet a quarterly revenue target, for example, is more likely to close a deal early to meet their numbers than pursue a more lucrative long-term agreement.
Similarly, it's still common to reward employees on revenue rather than profitability. But if you sell multiple products with different profit margins, why not pay more commission on the ones that add most to your bottom line? In some cases, you might even want to incentivise your salespeople to sell nothing - if you've landed a big deal from a customer, you may be better off cementing the relationship for a few months than trying to upsell them.
It's also important to bear in mind that not everyone is motivated by cash. For many people, as long as their pay is competitive and covers their practical needs, 'softer' factors such as job satisfaction, creative stimulation, learning opportunities and the chance to advance their careers are more significant. Some of them may be just as interested in other parts of the compensation package - like healthcare, pensions or a company car - and it may be worth adopting a 'cafeteria'-style approach that allows them to mix and match their own packages. Share options, of course, are also a common tool in the high-tech world, and despite the current furore over 'backdating' scandals in the US, many investors will expect to see them used to lock in key employees and senior managers.
Finally, bear in mind that performance goals change over time, and if they're no longer relevant, they quickly become disincentives. If your company strategy changes, so should your incentive schemes. In a small business, objectives set at the start of the year will often be out of date by the summer.
By Keith Rodgers, Webster Buchanan Research
If you're running a tech start-up, you're already familiar with the financial compromises that come with setting up your own business - the loans from friends and family; the personal credit card debt that keeps the company afloat when cash gets tight; the fact that you're usually the last person to draw a salary. But what about everyone else in the company? You're paying them - but are they really pulling their weight, and more importantly, are they helping drive your company in the right direction?
Measuring individual and company performance isn't rocket science, but it's often one of the hardest management tasks to get right. Some components are straightforward - it's not difficult to calculate if you've hit your monthly revenue and cost targets, for example - but others tend to be a mixture of hard and soft measures that can be tricky to manage. Assessing individual employees' contributions is particularly difficult, given that it usually combines specific task-based objectives with fluffier qualities such as attitude, team-working and motivation. Assessing those contributions in the context of your broader company objectives can be even trickier.
Some of the world's largest companies now take a formalised, top-down approach to performance management, setting objectives at board level and then 'cascading' them down through different management tiers, ending in departmental and individual goals that are each tied to the organisational layer above. Smaller companies have far less complex hierarchies and there's often an assumption that because they have their finger on the pulse, this kind of alignment happens naturally - but that's not always true. For one thing, priorities quickly get out of shape - some of your employees may be devoting too much time to non-essential or non-strategic activities at the expense of more critical work, for the simple reason that they're easier to do. Likewise, you can't always assume that your managers and senior employees are perfectly tuned in to your long-term strategy, particularly when short-term practicalities and day-to-day crises get in the way.
In fact, performance management is most effective when it's applied as a formal process. As with any management discipline, the real value comes not from measuring, but from drawing conclusions and following through on them. It's best thought of as a continual loop built around goal-setting, regular reviews (both informally and through regular appraisals), employee development initiatives such as training, and ongoing refinement of your high-level objectives as your business needs change.
In addition, performance should be closely linked to how you pay people. Many professions have a long tradition of linking pay to performance, from commission-based salespeople to senior managers working on quarterly bonuses. The problem is that their goals are often too short-term. A salesperson who's rushing to meet a quarterly revenue target, for example, is more likely to close a deal early to meet their numbers than pursue a more lucrative long-term agreement.
Similarly, it's still common to reward employees on revenue rather than profitability. But if you sell multiple products with different profit margins, why not pay more commission on the ones that add most to your bottom line? In some cases, you might even want to incentivise your salespeople to sell nothing - if you've landed a big deal from a customer, you may be better off cementing the relationship for a few months than trying to upsell them.
It's also important to bear in mind that not everyone is motivated by cash. For many people, as long as their pay is competitive and covers their practical needs, 'softer' factors such as job satisfaction, creative stimulation, learning opportunities and the chance to advance their careers are more significant. Some of them may be just as interested in other parts of the compensation package - like healthcare, pensions or a company car - and it may be worth adopting a 'cafeteria'-style approach that allows them to mix and match their own packages. Share options, of course, are also a common tool in the high-tech world, and despite the current furore over 'backdating' scandals in the US, many investors will expect to see them used to lock in key employees and senior managers.
Finally, bear in mind that performance goals change over time, and if they're no longer relevant, they quickly become disincentives. If your company strategy changes, so should your incentive schemes. In a small business, objectives set at the start of the year will often be out of date by the summer.
By Keith Rodgers, Webster Buchanan Research
Thursday, May 24, 2007
Science Parks: good or not?
The 1980s saw a surge of activity in the science park movement, with the number of parks rising from just two in 1981 (at Cambridge and Herriot-Watt Universities) to 36 by the end of the decade. Although the concept was born in 1950s America to help academics commercialise their technology, their growth in the UK was driven by the need to revive regions that suffered badly from the collapse of traditional industries and the economic downturn in the early 1980s. Today, with the knowledge economy replacing industrialisation, science parks continue to flourish - they now number over 100, according to the UK Science Park Association (UKSPA).
UKSPA defines a science park as 'a cluster of knowledge-based businesses, where support and advice are supplied to assist in the growth of companies'. To confuse matters, they can also be called research or technology parks, as well as incubators and innovation centres. But there are some important distinctions, says UKSPA. An incubator, for example, typically supports start-ups in their early stages: an innovation centre does the same, but it may also take companies well beyond the incubation phase.
Where they all differ from business parks - which are simply property developments - is that they also offer technology and business support services. These vary from one centre to another, but science parks tend to offer practical help with things like business plans, marketing and funding, as well as standard business support services and research facilities.
'A nice environment, with good security, catering facilities and modern meeting rooms, helps to support companies on a science park,' says Roz Bird, UKSPA's business development manager.
A science park location also helps with access to finance, she says. It gives banks and other lenders a better perception of the company, since they know tenants will have been through a fairly rigorous checking process and will also be operating within a supportive environment. Many science parks also have their own funds. The Nucleus - the London Science Park's science and innovation centre, which is due to open this month - provides access to a �500,000 seed capital fund.
The focus of science parks has tended to remain local or regional - the London Science Park at Dartford, for example, will be part of the Thames Regeneration Scheme - and they often have links to local higher education or research institutes. The Nucleus has ties to Imperial College and the Universities of Kent, Greenwich and East London.
The Nucleus will provide 30,000 square feet of accommodation for start-up and stage two science and technology companies. But in common with other science parks, the Dartford development will eventually accommodate more established organisations alongside newer businesses. This, says Bird, is one of the key attractions of science parks to young companies. 'Most healthy science parks have a mix of large and small organisations. In some sectors where it's possible to share expensive pieces of equipment, this mix is beneficial to the small companies as they're able to borrow equipment that they could never afford to buy.' That also extends to employees. Working among other science and technology companies makes it easier for small companies to share talent when they need help with specific projects.
The mix also benefits large companies, says Bird, enabling them to speed up time to market by outsourcing some product development work to their smaller neighbours.
But it's the flexibility of science park facilities and leases that particularly appeal to occupiers, she says, providing them with the option to scale up to larger premises if things go well, or quit their premises if they don't. Agreements are typically 'easy in, easy out', normally on a month-by-month basis. Occupiers of the Nucleus, for example, will be able to expand into self-contained office and lab space as they grow.
So how does the commercial performance of science park tenants compare to similar businesses located elsewhere? The last available research from UKSPA, published in 2003, shows that the majority of respondents didn't see any perceived benefits of a science park location in terms of access to new markets, technological development and business networking. But intriguingly, the research indicates that companies based in science parks have seen higher growth rates than those elsewhere. The research team surveyed senior managers at 876 companies, of whom 617 were based on science parks. It found that, over a three-year period, a 'significantly higher' number of science park tenants had bigger turnovers than three years previously, compared to those that were off-park. It also found that a higher proportion had 10% more full-time employees than three years earlier.
By Alison Hjul, Webster Buchanan Research
UKSPA defines a science park as 'a cluster of knowledge-based businesses, where support and advice are supplied to assist in the growth of companies'. To confuse matters, they can also be called research or technology parks, as well as incubators and innovation centres. But there are some important distinctions, says UKSPA. An incubator, for example, typically supports start-ups in their early stages: an innovation centre does the same, but it may also take companies well beyond the incubation phase.
Where they all differ from business parks - which are simply property developments - is that they also offer technology and business support services. These vary from one centre to another, but science parks tend to offer practical help with things like business plans, marketing and funding, as well as standard business support services and research facilities.
'A nice environment, with good security, catering facilities and modern meeting rooms, helps to support companies on a science park,' says Roz Bird, UKSPA's business development manager.
A science park location also helps with access to finance, she says. It gives banks and other lenders a better perception of the company, since they know tenants will have been through a fairly rigorous checking process and will also be operating within a supportive environment. Many science parks also have their own funds. The Nucleus - the London Science Park's science and innovation centre, which is due to open this month - provides access to a �500,000 seed capital fund.
The focus of science parks has tended to remain local or regional - the London Science Park at Dartford, for example, will be part of the Thames Regeneration Scheme - and they often have links to local higher education or research institutes. The Nucleus has ties to Imperial College and the Universities of Kent, Greenwich and East London.
The Nucleus will provide 30,000 square feet of accommodation for start-up and stage two science and technology companies. But in common with other science parks, the Dartford development will eventually accommodate more established organisations alongside newer businesses. This, says Bird, is one of the key attractions of science parks to young companies. 'Most healthy science parks have a mix of large and small organisations. In some sectors where it's possible to share expensive pieces of equipment, this mix is beneficial to the small companies as they're able to borrow equipment that they could never afford to buy.' That also extends to employees. Working among other science and technology companies makes it easier for small companies to share talent when they need help with specific projects.
The mix also benefits large companies, says Bird, enabling them to speed up time to market by outsourcing some product development work to their smaller neighbours.
But it's the flexibility of science park facilities and leases that particularly appeal to occupiers, she says, providing them with the option to scale up to larger premises if things go well, or quit their premises if they don't. Agreements are typically 'easy in, easy out', normally on a month-by-month basis. Occupiers of the Nucleus, for example, will be able to expand into self-contained office and lab space as they grow.
So how does the commercial performance of science park tenants compare to similar businesses located elsewhere? The last available research from UKSPA, published in 2003, shows that the majority of respondents didn't see any perceived benefits of a science park location in terms of access to new markets, technological development and business networking. But intriguingly, the research indicates that companies based in science parks have seen higher growth rates than those elsewhere. The research team surveyed senior managers at 876 companies, of whom 617 were based on science parks. It found that, over a three-year period, a 'significantly higher' number of science park tenants had bigger turnovers than three years previously, compared to those that were off-park. It also found that a higher proportion had 10% more full-time employees than three years earlier.
By Alison Hjul, Webster Buchanan Research
Virtual Networking Bennefits
Popular wisdom has it that if you walk down University Avenue in Palo Alto, in the heart of Silicon Valley, one in twenty of the people you walk past will be worth $3 million. It’s probably not strictly accurate – for one thing, people with that kind of money don’t need to walk anywhere – but it’s a good indication of just how many people have made it good.
What would the figure be for London? Within the Square Mile, no doubt fairly impressive - but outside the financial sector, would you encounter the same percentage of millionaires? If you assume that the official capacity of a tube carriage is about 150 – I can’t vouch for that figure, but it’s the best that a Google search can throw up – the next time you squeeze into a packed train, ask yourself how likely it is that seven and a half people in the same compartment have started to hit the big time.
The preponderance of wealthy people in Silicon Valley isn’t just an interesting statistic, it’s an important part of what makes the area’s unique entrepreneurial mix. While the wealth is badly distributed – the city of East Palo Alto, in fact, has long been plagued by crime and poverty – there are certain democratising forces at play. It’s partly a cultural thing, an expectation that those who make it big will put something back into the business community – and what they’re putting back, of course, is both money and expertise.
Lots of people have tried to put their finger on what makes Silicon Valley unique – just last Friday, in fact, it was the closing topic at a global tech conference in Palo Alto – and the answers are always complex. It’s partly the risk-taking mentality – a combination of Gold Rush legacy and the day-to-day reality of driving over bridges and working in high-rise buildings on top of a patchwork of earthquake fault lines. It’s partly the fact that the symbols of entrepreneurial success are so visible, from the garage where HP was set up to the sprawling Mountain View complex occupied by Google and the HQ of Genentech.
And it’s partly that these companies go so far out of their way to promote entrepreneurialism within their own ranks – which is why Google engineers are famously encouraged to work on their own development projects one day a week, and why at least two of Genentech’s blockbuster therapies had their roots in years of unofficial ‘underground’ research carried out by their own scientists.
But it’s also partly an engrained belief in sharing knowledge and experiences. The stereotype of the British stiff upper lip has long been diluted, but many Brits do still demonstrate a reluctance to boast about their achievements and residual embarrassment about past cock-ups, business or otherwise. The stereotypical Californian may come across as more laid back than many of their East Coast peers, but they’ve never been shy to talk about either success or failure. Failure, in fact, is still seen as a learning experience – so long as you can prove you did actually learn and won’t repeat the same kind of mistake, investors will often see it as a plus point on the road to entrepreneurial wisdom.
This knowledge sharing helps explain how Silicon Valley has evolved into a series of micro-clusters, each of them representing a community of all the different skills and services required to develop particular types of products and services. The New York Times recently reported on how Silicon Valley is effectively “a collection of remarkably local clusters based on industry niches, skills, school ties, traffic patterns, ethnic groups and even weekend sports teams”. The Times pointed out that if you’re looking to set up an IT hardware company – particularly in networking or semi-conductors – you’re best off in the south of the Valley around San Jose (home among others to Cisco Systems) and Santa Clara (where Intel is based). San Francisco in the north, meanwhile, is a hub for digital design and online advertising. If you’re a hybrid of two different disciplines – combining software engineers with consumer marketing, for example – you either need to locate yourself somewhere in the middle, set up separate operations, or be prepared to spend a disproportionate amount of your life driving along Highway 101.
Clusters tend to be self-fulfilling, attracting skilled resources in the form of both prospective employees and potential business partners, from specialist lawyers to public relations agencies. Because of the relative openness of the Valley, particularly in terms of the community’s willingness to share experiences, start-ups that are drawn to clusters of like-minded companies effectively end up operating with an in-built support mechanism.
Even if it’s not possible to recreate a business and social environment like Silicon Valley elsewhere – and many have tried but failed – many of the same positive characteristics have become evident in London in recent years, from support networks to micro-clusters. For entrepreneurs, this presents both practical and strategic opportunities. At a practical level, the cluster factor is probably a better factor to base location decisions on than proximity to your home, your favourite restaurants, or any of the other arbitrary factors that tend to come into play. At a more strategic level, everything company founders can do to suck out knowledge from people who’ve made it is going to help them. London’s culture may not yet match Silicon Valley’s in terms of the experience that successful entrepreneurs routinely put back into the business community – but there’s nothing to stop entrepreneurs seeking out knowledge themselves.
By Keith Rodgers, Webster Buchanan Research
What would the figure be for London? Within the Square Mile, no doubt fairly impressive - but outside the financial sector, would you encounter the same percentage of millionaires? If you assume that the official capacity of a tube carriage is about 150 – I can’t vouch for that figure, but it’s the best that a Google search can throw up – the next time you squeeze into a packed train, ask yourself how likely it is that seven and a half people in the same compartment have started to hit the big time.
The preponderance of wealthy people in Silicon Valley isn’t just an interesting statistic, it’s an important part of what makes the area’s unique entrepreneurial mix. While the wealth is badly distributed – the city of East Palo Alto, in fact, has long been plagued by crime and poverty – there are certain democratising forces at play. It’s partly a cultural thing, an expectation that those who make it big will put something back into the business community – and what they’re putting back, of course, is both money and expertise.
Lots of people have tried to put their finger on what makes Silicon Valley unique – just last Friday, in fact, it was the closing topic at a global tech conference in Palo Alto – and the answers are always complex. It’s partly the risk-taking mentality – a combination of Gold Rush legacy and the day-to-day reality of driving over bridges and working in high-rise buildings on top of a patchwork of earthquake fault lines. It’s partly the fact that the symbols of entrepreneurial success are so visible, from the garage where HP was set up to the sprawling Mountain View complex occupied by Google and the HQ of Genentech.
And it’s partly that these companies go so far out of their way to promote entrepreneurialism within their own ranks – which is why Google engineers are famously encouraged to work on their own development projects one day a week, and why at least two of Genentech’s blockbuster therapies had their roots in years of unofficial ‘underground’ research carried out by their own scientists.
But it’s also partly an engrained belief in sharing knowledge and experiences. The stereotype of the British stiff upper lip has long been diluted, but many Brits do still demonstrate a reluctance to boast about their achievements and residual embarrassment about past cock-ups, business or otherwise. The stereotypical Californian may come across as more laid back than many of their East Coast peers, but they’ve never been shy to talk about either success or failure. Failure, in fact, is still seen as a learning experience – so long as you can prove you did actually learn and won’t repeat the same kind of mistake, investors will often see it as a plus point on the road to entrepreneurial wisdom.
This knowledge sharing helps explain how Silicon Valley has evolved into a series of micro-clusters, each of them representing a community of all the different skills and services required to develop particular types of products and services. The New York Times recently reported on how Silicon Valley is effectively “a collection of remarkably local clusters based on industry niches, skills, school ties, traffic patterns, ethnic groups and even weekend sports teams”. The Times pointed out that if you’re looking to set up an IT hardware company – particularly in networking or semi-conductors – you’re best off in the south of the Valley around San Jose (home among others to Cisco Systems) and Santa Clara (where Intel is based). San Francisco in the north, meanwhile, is a hub for digital design and online advertising. If you’re a hybrid of two different disciplines – combining software engineers with consumer marketing, for example – you either need to locate yourself somewhere in the middle, set up separate operations, or be prepared to spend a disproportionate amount of your life driving along Highway 101.
Clusters tend to be self-fulfilling, attracting skilled resources in the form of both prospective employees and potential business partners, from specialist lawyers to public relations agencies. Because of the relative openness of the Valley, particularly in terms of the community’s willingness to share experiences, start-ups that are drawn to clusters of like-minded companies effectively end up operating with an in-built support mechanism.
Even if it’s not possible to recreate a business and social environment like Silicon Valley elsewhere – and many have tried but failed – many of the same positive characteristics have become evident in London in recent years, from support networks to micro-clusters. For entrepreneurs, this presents both practical and strategic opportunities. At a practical level, the cluster factor is probably a better factor to base location decisions on than proximity to your home, your favourite restaurants, or any of the other arbitrary factors that tend to come into play. At a more strategic level, everything company founders can do to suck out knowledge from people who’ve made it is going to help them. London’s culture may not yet match Silicon Valley’s in terms of the experience that successful entrepreneurs routinely put back into the business community – but there’s nothing to stop entrepreneurs seeking out knowledge themselves.
By Keith Rodgers, Webster Buchanan Research
Sunday, May 20, 2007
Planning the Perfect Pitch
First impressions really count when you present to investors, but even well-established companies can struggle to get their message across. Every entrepreneur out there wants to make sure they have the perfect investor pitch deck with which to impress investors.
One of Gateway 2 Investment's first clients is typical of the paradox many start-ups face when they look for finance. The company, which helps media organisations communicate with their clients across different channels and counts Mercedes, Channel Five, Endemol and The Guardian as customers, says: 'It's a complex environment. Our customers understand what we do, but investors didn't. What they wanted was the elevator pitch, but it always seemed to take us 22 minutes to do the one-minute pitch. That was the problem.'
Here was a company that has proven technology and a solid customer base, and yet it couldn't get the ear of investors. G2I helped by bringing investors to the table who were prepared to listen to a more complex proposition, and the company now has agreements in place for a considerable investment to follow: 'It allowed us to engage with investors for a longer period of time and in a way that suited us, so we could explain our business better and its benefits.'
It's not uncommon for smaller organisations to struggle with the presentation of a business idea. In fact, the government-backed Access 2 Finance scheme was set up in response to research backed by the London Development Agency, which found that the key reason businesses failed to raise finance was the way they presented themselves to investors. 'You want investors to ask questions,' says Richard Ellis, a business advisor with Business Link 4 London. 'But you don't want them to have reams and reams of questions. The business plan should cover off most of what they need to know.'
In many cases, however, poor presentation is a symptom of deeper running problems, and many start-ups struggle with more fundamental issues than merely explaining their idea. Geoff Sankey, managing director of The Capital Fund, says a surprising number of companies neglect the basics of sales, product and management - out of some 40 opportunities he receives every month, 'quite a number' are purely conceptual. 'People say they have an idea - and would we like to invest in it?'
Doug Richard, chairman of Library House, has had plenty of experience of entrepreneurs with great ideas but little perception of their market potential. As well as providing an on-line investment readiness test at Library House, Richard is a panellist on the 'Dragon's Den' TV programme, for which he spent 180 hours listening to pitches from 82 companies. 'I know what it's like when things don't exist to make entrepreneurs investment-ready,' he says, adding: 'But it's not rocket science - if it was then companies like Microsoft wouldn't exist. It's a matter of step-by-step planning and approaching that in a logical fashion.'
Richard says many entrepreneurs get so caught up in their idea that they ignore core issues such as whether there's a market for their product. 'I call them Hamlet investments [after the cigar adverts] - fantastic opportunities that are fatally flawed.' Richard agrees what entrepreneurs need is 'to be put in a position where they can get an honest answer, to understand what investors think about, what they look for and how to approach them.' Advisors may be able to help pick holes in a presentation and present the company in a more favourable light. 'Sometimes the business is ready, but it needs to fix or consolidate a few things, then come back in six months,' says Ellis. 'It's a clich�, but you'll never get a second chance to make a first impression.'
One of the key pieces of advice any professional adviser will offer is to give the process enough time and effort. Companies need to be prepare upfront for the fact that it can take six to nine months to hone a business plan, present to investors and get money in. 'If you go into this half-baked, you'll get a half-baked outcome,' says John Blowers, managing director of equity funding exchange AngelBourse. 'But if you can get together enough funds to spend on the right advisor and raise enough finance to extend the runway sufficiently, then it's worth the effort.'
By David Longworth
One of Gateway 2 Investment's first clients is typical of the paradox many start-ups face when they look for finance. The company, which helps media organisations communicate with their clients across different channels and counts Mercedes, Channel Five, Endemol and The Guardian as customers, says: 'It's a complex environment. Our customers understand what we do, but investors didn't. What they wanted was the elevator pitch, but it always seemed to take us 22 minutes to do the one-minute pitch. That was the problem.'
Here was a company that has proven technology and a solid customer base, and yet it couldn't get the ear of investors. G2I helped by bringing investors to the table who were prepared to listen to a more complex proposition, and the company now has agreements in place for a considerable investment to follow: 'It allowed us to engage with investors for a longer period of time and in a way that suited us, so we could explain our business better and its benefits.'
It's not uncommon for smaller organisations to struggle with the presentation of a business idea. In fact, the government-backed Access 2 Finance scheme was set up in response to research backed by the London Development Agency, which found that the key reason businesses failed to raise finance was the way they presented themselves to investors. 'You want investors to ask questions,' says Richard Ellis, a business advisor with Business Link 4 London. 'But you don't want them to have reams and reams of questions. The business plan should cover off most of what they need to know.'
In many cases, however, poor presentation is a symptom of deeper running problems, and many start-ups struggle with more fundamental issues than merely explaining their idea. Geoff Sankey, managing director of The Capital Fund, says a surprising number of companies neglect the basics of sales, product and management - out of some 40 opportunities he receives every month, 'quite a number' are purely conceptual. 'People say they have an idea - and would we like to invest in it?'
Doug Richard, chairman of Library House, has had plenty of experience of entrepreneurs with great ideas but little perception of their market potential. As well as providing an on-line investment readiness test at Library House, Richard is a panellist on the 'Dragon's Den' TV programme, for which he spent 180 hours listening to pitches from 82 companies. 'I know what it's like when things don't exist to make entrepreneurs investment-ready,' he says, adding: 'But it's not rocket science - if it was then companies like Microsoft wouldn't exist. It's a matter of step-by-step planning and approaching that in a logical fashion.'
Richard says many entrepreneurs get so caught up in their idea that they ignore core issues such as whether there's a market for their product. 'I call them Hamlet investments [after the cigar adverts] - fantastic opportunities that are fatally flawed.' Richard agrees what entrepreneurs need is 'to be put in a position where they can get an honest answer, to understand what investors think about, what they look for and how to approach them.' Advisors may be able to help pick holes in a presentation and present the company in a more favourable light. 'Sometimes the business is ready, but it needs to fix or consolidate a few things, then come back in six months,' says Ellis. 'It's a clich�, but you'll never get a second chance to make a first impression.'
One of the key pieces of advice any professional adviser will offer is to give the process enough time and effort. Companies need to be prepare upfront for the fact that it can take six to nine months to hone a business plan, present to investors and get money in. 'If you go into this half-baked, you'll get a half-baked outcome,' says John Blowers, managing director of equity funding exchange AngelBourse. 'But if you can get together enough funds to spend on the right advisor and raise enough finance to extend the runway sufficiently, then it's worth the effort.'
By David Longworth
Saturday, March 24, 2007
International Investment Capital
London may be the top European city for tech investment, but it still lags Silicon Valley. Entrepreneurs and investors gathered last week to discuss the challenges they face - and some solutions
'London is like a country in its own right,' observed Jens Lapinski, VP of analysis and consulting at Library House, about the capital's success in attracting venture capital. He was speaking at an event at Grant Thornton House last week to mark the unveiling of a new report from g2i, 'London: Anchoring European Technology Investment', which describes London as the best city to attract investment across Europe.
According to Library House's analysis of recognised investment deals, London received �485m venture capital in 2005, which is 38% of the total invested in the UK and more than the total invested in the whole of France (�457m) and Germany (�363m). The picture is particularly bright for technology companies, with IT accounting for a third of that investment, closely followed by the retail and services sector.
However, to put those figures in context, Silicon Valley attracts ten times the investment of London, according to Ernst and Young's Global Venture Capital Insights Report 2006. In fact, over 35% of the �12bn venture capital invested in the US went into Silicon Valley. Lapinski suggested that in order to catch up, London should form a 'super-cluster' with Oxford and Cambridge and 'build the things we need to support that - the infrastructure, finance and access to markets.' The aim would be to encourage collaboration across the South East, rather than each investment centre doing its own thing.
Just as important, while VC funds may be flowing, there are still significant obstacles for entrepreneurs to overcome earlier in the business cycle, not least in bridging the gap between early stage finance and venture capital. Angel funding is widely available in London - it's accessing it that's the problem, according to David Hunter, managing director of investment at funding body Nesta. Initiatives are in hand to formalise London's angel networks, including the recent formation of the British Business Angels Association, supported by Nesta. But Hunter said networks need to be clustered together better as they are around the universities in Oxford and Cambridge.
At the same time, many believe that more can be done with grants. Nesta itself handed out �22m in grants last year, many of which were in London, and the capital accounts for the single largest share of research grants. Nonetheless, Hunter suggested that some companies were leaving London because they thought they stood a better chance of accessing regional development grants.
Serial entrepreneur Philip Birch, CEO of Imperial College London spin-outs Veryan Medical and Heliswirl, called on the government to provide more help for London's entrepreneurs: 'There's a tendency [for the government] to think London is so well catered for, with experienced management teams and a truly fantastic investor base, that we'll find our own money. But a grant provides that first bit of undiluted capital that can get a company out of the starting blocks.'
Sarika Patel, director of enterprise and technology at Grant Thornton, one of the g2i partner companies, agreed that early stage funding was still a weakness in the capital, but argued that g2i was going some way to redressing this by helping companies access funding from the �50,000 to �2m mark: 'Before g2i there was nothing that connected the money and the companies seeking it across London,' she said. 'g2i brings a wide skillset and is putting those networks in place.' In assessing up to 25 companies a month for investment readiness, g2i looks at factors like skills gaps in management teams, technology weaknesses and the IP potential, as well as investigating joint venture opportunities and routes to market for its candidate companies.
Part of the investment equation is about growth potential, and many start-ups fall into the category of 'lifestyle businesses' that are happy to keep ticking over and surviving on cash flow, but with no dramatic ambitions to grow. One entrepreneur presenting at the event, Jon Holmes, CEO of Michelson Diagnostics, said it came down to motivation. 'You've got to be clear on why you're going into this. If you want to make a bit of money to support your family, that's not enough. You've got to really crave success.'
By David Longworth, Webster Buchanan Research
'London is like a country in its own right,' observed Jens Lapinski, VP of analysis and consulting at Library House, about the capital's success in attracting venture capital. He was speaking at an event at Grant Thornton House last week to mark the unveiling of a new report from g2i, 'London: Anchoring European Technology Investment', which describes London as the best city to attract investment across Europe.
According to Library House's analysis of recognised investment deals, London received �485m venture capital in 2005, which is 38% of the total invested in the UK and more than the total invested in the whole of France (�457m) and Germany (�363m). The picture is particularly bright for technology companies, with IT accounting for a third of that investment, closely followed by the retail and services sector.
However, to put those figures in context, Silicon Valley attracts ten times the investment of London, according to Ernst and Young's Global Venture Capital Insights Report 2006. In fact, over 35% of the �12bn venture capital invested in the US went into Silicon Valley. Lapinski suggested that in order to catch up, London should form a 'super-cluster' with Oxford and Cambridge and 'build the things we need to support that - the infrastructure, finance and access to markets.' The aim would be to encourage collaboration across the South East, rather than each investment centre doing its own thing.
Just as important, while VC funds may be flowing, there are still significant obstacles for entrepreneurs to overcome earlier in the business cycle, not least in bridging the gap between early stage finance and venture capital. Angel funding is widely available in London - it's accessing it that's the problem, according to David Hunter, managing director of investment at funding body Nesta. Initiatives are in hand to formalise London's angel networks, including the recent formation of the British Business Angels Association, supported by Nesta. But Hunter said networks need to be clustered together better as they are around the universities in Oxford and Cambridge.
At the same time, many believe that more can be done with grants. Nesta itself handed out �22m in grants last year, many of which were in London, and the capital accounts for the single largest share of research grants. Nonetheless, Hunter suggested that some companies were leaving London because they thought they stood a better chance of accessing regional development grants.
Serial entrepreneur Philip Birch, CEO of Imperial College London spin-outs Veryan Medical and Heliswirl, called on the government to provide more help for London's entrepreneurs: 'There's a tendency [for the government] to think London is so well catered for, with experienced management teams and a truly fantastic investor base, that we'll find our own money. But a grant provides that first bit of undiluted capital that can get a company out of the starting blocks.'
Sarika Patel, director of enterprise and technology at Grant Thornton, one of the g2i partner companies, agreed that early stage funding was still a weakness in the capital, but argued that g2i was going some way to redressing this by helping companies access funding from the �50,000 to �2m mark: 'Before g2i there was nothing that connected the money and the companies seeking it across London,' she said. 'g2i brings a wide skillset and is putting those networks in place.' In assessing up to 25 companies a month for investment readiness, g2i looks at factors like skills gaps in management teams, technology weaknesses and the IP potential, as well as investigating joint venture opportunities and routes to market for its candidate companies.
Part of the investment equation is about growth potential, and many start-ups fall into the category of 'lifestyle businesses' that are happy to keep ticking over and surviving on cash flow, but with no dramatic ambitions to grow. One entrepreneur presenting at the event, Jon Holmes, CEO of Michelson Diagnostics, said it came down to motivation. 'You've got to be clear on why you're going into this. If you want to make a bit of money to support your family, that's not enough. You've got to really crave success.'
By David Longworth, Webster Buchanan Research
Why People will always be key to success
Experts argue that getting the right management team can do more for the success of a tech company than the quality of its products. The trouble is, many start-ups can't afford to hire the best talent.
'I would much rather have a first-rate management team with average technology than have the reverse - a first-rate technology with a second-rate management team. The strong management team is much more likely to succeed.'
So says John Preston, associate director of the Entrepreneurship Center at the highly-regarded Massachusetts Institute of Technology, in a paper entitled 'Success Factors in Technology-Based Entrepreneurship'. With extensive experience helping commercialise inventions from MIT students and faculty, he's seen numerous tech start-ups in action, and he believes the composition of the senior management team is one of the key ingredients. 'One of the false impressions about entrepreneurship is that entrepreneurship is an individual behaviour,' Preston says. He points to work carried out by Professor Ed Roberts from the Sloan School of Management, who found that a company's chances of success increased dramatically as the size of the team grew, up to four or five founders.
But for many start-ups, building a management team is ultimately about making the most of whatever resource is available. Many companies are set up by former colleagues or friends of friends who share a common product vision, and it's often more by luck than judgement if the team ends up with the right balance of skills. The majority of hi-tech firms are set up either by a technology specialist with a product vision, or a sales and marketing professional who spots a market opportunity - it's relatively rare for someone to have both skillsets, and it's not uncommon for tech start-ups to fall short on the sales and marketing expertise. These core skills will need to be complemented with day-to-day financial expertise and broader strategic insight: in addition, many companies will seek out a non-executive 'expert' to add credibility in the eyes of investors and customers.
Even if they recognise the need to bring in additional expertise, however, most start-ups lack the resource to do so. As John Blowers, managing director of equity funding exchange AngelBourse, points out: 'Equity capital is so scarce at this level that they can't afford to headhunt key people - so they will try [people] they know who they can beg, steal or borrow. Not many start-ups are in a position to find an 'A' team.'
Most start-ups face up to these recruitment problems with a degree of pragmatism. Temporary help is one solution, although it's not always easy to find the right people - while interim management companies do operate in the start-up tech sector, the shortage of funds makes this a less attractive market for them to focus on. Networking events are also a potential hunting ground, particularly for non-executives, although they need to be approached with a degree of caution. As Blowers points out, at worst you may find 'a rather motley collection of saggy grey suits hoping to pick up some consulting work'.
Some of these senior management challenges ease when organisations make it as far as first round venture funding, where the combination of VC vested interest and a large infusion of cash helps tackle some of the recruitment problems. In many cases, VCs will bring in their own people to fill gaps on a short-term basis, or recommend independent external directors with particular expertise. Mark Albert, Partner at Seattle-based international law firm Perkins Coie, says the most successful start-up he's worked with was a software house that lacked both sales and marketing expertise, and hired two non-executive directors with experience in each. Their role was not confined to the boardroom: as well as attending board meetings, each worked directly with the sales and marketing team on a regular basis to help with both operational and strategic issues. In some companies, a non-executive's industry connections may also open the door for sales opportunities.
Carl Showalter, general partner at early-stage venture specialist Lightspeed Venture Partners in Silicon Valley, points out that given their extensive contact network, these independent directors may also be able to help recruit additional senior executives. That will come as a welcome relief to many technically-oriented founders who are uncomfortable assuming the role of chief executive but are unsure how to find a replacement.
In the long-term, the choice of independent director can prove critical. The typical hi-tech board of a financed company consists of five people - an uneven number designed to avoid paralysis through tied votes - and is usually made up of two founders, two representatives of the VC, and an independent director. There's an inherent conflict in this set-up: although the VC-appointed directors are charged with growing the company, they also have a responsibility to their own venture capital firm, and those interests may not always go hand-in-hand. As a result, the independent director may be in a pivotal position when it comes to bringing an objective view and making decisions.
'The independent person should clearly be an expert in the areas you need most help in,' concludes Albert. 'They should complement, not counteract, the CEO. You have to take a look at where you are today and where you want to be two years from now, and see what areas of your team are most lacking.'
Written by Keith Rogers, Webster Buchanan Research
'I would much rather have a first-rate management team with average technology than have the reverse - a first-rate technology with a second-rate management team. The strong management team is much more likely to succeed.'
So says John Preston, associate director of the Entrepreneurship Center at the highly-regarded Massachusetts Institute of Technology, in a paper entitled 'Success Factors in Technology-Based Entrepreneurship'. With extensive experience helping commercialise inventions from MIT students and faculty, he's seen numerous tech start-ups in action, and he believes the composition of the senior management team is one of the key ingredients. 'One of the false impressions about entrepreneurship is that entrepreneurship is an individual behaviour,' Preston says. He points to work carried out by Professor Ed Roberts from the Sloan School of Management, who found that a company's chances of success increased dramatically as the size of the team grew, up to four or five founders.
But for many start-ups, building a management team is ultimately about making the most of whatever resource is available. Many companies are set up by former colleagues or friends of friends who share a common product vision, and it's often more by luck than judgement if the team ends up with the right balance of skills. The majority of hi-tech firms are set up either by a technology specialist with a product vision, or a sales and marketing professional who spots a market opportunity - it's relatively rare for someone to have both skillsets, and it's not uncommon for tech start-ups to fall short on the sales and marketing expertise. These core skills will need to be complemented with day-to-day financial expertise and broader strategic insight: in addition, many companies will seek out a non-executive 'expert' to add credibility in the eyes of investors and customers.
Even if they recognise the need to bring in additional expertise, however, most start-ups lack the resource to do so. As John Blowers, managing director of equity funding exchange AngelBourse, points out: 'Equity capital is so scarce at this level that they can't afford to headhunt key people - so they will try [people] they know who they can beg, steal or borrow. Not many start-ups are in a position to find an 'A' team.'
Most start-ups face up to these recruitment problems with a degree of pragmatism. Temporary help is one solution, although it's not always easy to find the right people - while interim management companies do operate in the start-up tech sector, the shortage of funds makes this a less attractive market for them to focus on. Networking events are also a potential hunting ground, particularly for non-executives, although they need to be approached with a degree of caution. As Blowers points out, at worst you may find 'a rather motley collection of saggy grey suits hoping to pick up some consulting work'.
Some of these senior management challenges ease when organisations make it as far as first round venture funding, where the combination of VC vested interest and a large infusion of cash helps tackle some of the recruitment problems. In many cases, VCs will bring in their own people to fill gaps on a short-term basis, or recommend independent external directors with particular expertise. Mark Albert, Partner at Seattle-based international law firm Perkins Coie, says the most successful start-up he's worked with was a software house that lacked both sales and marketing expertise, and hired two non-executive directors with experience in each. Their role was not confined to the boardroom: as well as attending board meetings, each worked directly with the sales and marketing team on a regular basis to help with both operational and strategic issues. In some companies, a non-executive's industry connections may also open the door for sales opportunities.
Carl Showalter, general partner at early-stage venture specialist Lightspeed Venture Partners in Silicon Valley, points out that given their extensive contact network, these independent directors may also be able to help recruit additional senior executives. That will come as a welcome relief to many technically-oriented founders who are uncomfortable assuming the role of chief executive but are unsure how to find a replacement.
In the long-term, the choice of independent director can prove critical. The typical hi-tech board of a financed company consists of five people - an uneven number designed to avoid paralysis through tied votes - and is usually made up of two founders, two representatives of the VC, and an independent director. There's an inherent conflict in this set-up: although the VC-appointed directors are charged with growing the company, they also have a responsibility to their own venture capital firm, and those interests may not always go hand-in-hand. As a result, the independent director may be in a pivotal position when it comes to bringing an objective view and making decisions.
'The independent person should clearly be an expert in the areas you need most help in,' concludes Albert. 'They should complement, not counteract, the CEO. You have to take a look at where you are today and where you want to be two years from now, and see what areas of your team are most lacking.'
Written by Keith Rogers, Webster Buchanan Research
Wednesday, March 14, 2007
The New Rules on Outsourcing
Outsourcing product development is an attractive option for many start-ups. But as the services industry matures, entrepreneurs face new challenges in the way they manage their business partners
If you're wondering how to tap into the Indian skills markets and take advantage of the huge IT talent pool in Eastern Europe, it may be worth taking a quick trip to Richmond. Just along the Sheen Road you'll find the UK sales offices of GlobalLogic, a software engineering services company. With a global HQ in the US and development centres in India, China and Ukraine, it provides early and mid-stage software developers with a range of outsourced services, from help with initial design through to usability testing.
Given that the ratio of people costs to infrastructure has become so heavily-weighted in favour of the employee in the UK and US, it's no surprise that the idea of outsourcing parts of the product development cycle is becoming such an attractive option. Finding the right skills at a reasonable price can be a real challenge in some sectors, both geographically and in particular specialities - and finding the right combination of talent, price and personality can be even tougher, particularly in start-ups where team dynamics matter so much. Tapping into offshore skills, where the cost base is so much lower, definitely has a lot going for it.
One of the many challenges with offshoring, though, is that you have to know where to start. You might have a vague idea where Kiev is - you might even have an in-depth understanding of the nuances behind the explosive economic growth of India. But it's not as if you can just turn up in a hotel and start interviewing the locals. Companies like GlobalLogic, which has a bank of recruiters in India and clams to be the largest IT employer in Kiev, do have something of an edge in terms of brand, reach and hiring clout.
GlobalLogic operates as an offshore partner, working closely with client teams and handling the heavyweight coding and management of software development projects. Providing these kinds of services takes you several steps higher up the value stack than traditional infrastructure outsourcing, which tends to focus on providing infrastructure and tools to work with - these types of services, by contrast, are core to your business proposition. But ultimately, the principles underpinning any kind of outsourcing arrangement are the same. It's all about drawing a line to work out where you're comfortable collaborating with third parties, and where you feel functions are so critical that you have to run them in-house.
The problem start-ups face, of course, is that working in this kind of partnership is often unfamiliar territory. Many entrepreneurs have limited experience working alongside third party suppliers, and there's inevitably some level of friction as they muddle through the business processes and communications issues. In the future, this gap in experience may well broaden, because service providers' own expectations are now evolving.
Take GlobalLogic itself. When I met Tarun Upadhyay, the company's chief software architect, at a recent conference in San Francisco, he argued that what GlobalLogic offers is 'second generation' outsourcing. Early forms of outsourcing, particularly in the IT sector, tended to be characterised by arms-length relationships - put crudely, the idea from the customer's perspective was to get rid of a problem and wait to get the results. But that's not a particularly strong basis for a business relationship. For one thing, it's adversarial - so when problems crop up, they tend to erupt in bouts of finger-pointing rather than a combined effort to put things right. Given that blame usually lies on both sides of the fence when things go wrong, especially when it comes to communications breakdowns or missed commitments in complex collaborative tasks, it's not particularly helpful to start totting up who made the biggest number of screw-ups.
Upadhyay argues that start-ups need to approach the outsourced business relationship on the basis of building a single team - and this has some radical implications. To begin with, he believes entrepreneurs need to treat outsourced contractors in the same way they do their own employees. If you give your in-house technical people an unscheduled bonus when things go well, count the outsourced staff in as well. In fact, he says, some customers go as far as taking part in joint performance appraisals of GlobalLogic employees, and one or two of them have even handed over stock options to outsourced staff.
This kind of collaborative model isn't going to work for everybody, of course, but it may be one more indication of how working patterns are shifting - and of the opportunities and challenges that lie ahead as they evolve. Entrepreneurial companies of all sizes are having to work out how to partner and collaborate with independent individuals and third party organizations as they bring together the different skills they need. Treating outsourcers as collaborative partners rather than mere service providers is just one more piece of that puzzle.
By Keith Rodgers, Webster Buchanan Research
If you're wondering how to tap into the Indian skills markets and take advantage of the huge IT talent pool in Eastern Europe, it may be worth taking a quick trip to Richmond. Just along the Sheen Road you'll find the UK sales offices of GlobalLogic, a software engineering services company. With a global HQ in the US and development centres in India, China and Ukraine, it provides early and mid-stage software developers with a range of outsourced services, from help with initial design through to usability testing.
Given that the ratio of people costs to infrastructure has become so heavily-weighted in favour of the employee in the UK and US, it's no surprise that the idea of outsourcing parts of the product development cycle is becoming such an attractive option. Finding the right skills at a reasonable price can be a real challenge in some sectors, both geographically and in particular specialities - and finding the right combination of talent, price and personality can be even tougher, particularly in start-ups where team dynamics matter so much. Tapping into offshore skills, where the cost base is so much lower, definitely has a lot going for it.
One of the many challenges with offshoring, though, is that you have to know where to start. You might have a vague idea where Kiev is - you might even have an in-depth understanding of the nuances behind the explosive economic growth of India. But it's not as if you can just turn up in a hotel and start interviewing the locals. Companies like GlobalLogic, which has a bank of recruiters in India and clams to be the largest IT employer in Kiev, do have something of an edge in terms of brand, reach and hiring clout.
GlobalLogic operates as an offshore partner, working closely with client teams and handling the heavyweight coding and management of software development projects. Providing these kinds of services takes you several steps higher up the value stack than traditional infrastructure outsourcing, which tends to focus on providing infrastructure and tools to work with - these types of services, by contrast, are core to your business proposition. But ultimately, the principles underpinning any kind of outsourcing arrangement are the same. It's all about drawing a line to work out where you're comfortable collaborating with third parties, and where you feel functions are so critical that you have to run them in-house.
The problem start-ups face, of course, is that working in this kind of partnership is often unfamiliar territory. Many entrepreneurs have limited experience working alongside third party suppliers, and there's inevitably some level of friction as they muddle through the business processes and communications issues. In the future, this gap in experience may well broaden, because service providers' own expectations are now evolving.
Take GlobalLogic itself. When I met Tarun Upadhyay, the company's chief software architect, at a recent conference in San Francisco, he argued that what GlobalLogic offers is 'second generation' outsourcing. Early forms of outsourcing, particularly in the IT sector, tended to be characterised by arms-length relationships - put crudely, the idea from the customer's perspective was to get rid of a problem and wait to get the results. But that's not a particularly strong basis for a business relationship. For one thing, it's adversarial - so when problems crop up, they tend to erupt in bouts of finger-pointing rather than a combined effort to put things right. Given that blame usually lies on both sides of the fence when things go wrong, especially when it comes to communications breakdowns or missed commitments in complex collaborative tasks, it's not particularly helpful to start totting up who made the biggest number of screw-ups.
Upadhyay argues that start-ups need to approach the outsourced business relationship on the basis of building a single team - and this has some radical implications. To begin with, he believes entrepreneurs need to treat outsourced contractors in the same way they do their own employees. If you give your in-house technical people an unscheduled bonus when things go well, count the outsourced staff in as well. In fact, he says, some customers go as far as taking part in joint performance appraisals of GlobalLogic employees, and one or two of them have even handed over stock options to outsourced staff.
This kind of collaborative model isn't going to work for everybody, of course, but it may be one more indication of how working patterns are shifting - and of the opportunities and challenges that lie ahead as they evolve. Entrepreneurial companies of all sizes are having to work out how to partner and collaborate with independent individuals and third party organizations as they bring together the different skills they need. Treating outsourcers as collaborative partners rather than mere service providers is just one more piece of that puzzle.
By Keith Rodgers, Webster Buchanan Research
Saturday, February 24, 2007
The Problem with Investors
Everyone works hard to ensure that investment deals get completed once they're agreed in principle - but a surprising number don't. What are the most common problems, and how can you head them off?
If you're worried about going through due diligence, spare a thought for some of the world's less mature entrepreneurial environments. A staggering 70 per cent of deals in emerging markets fall through after investors have conducted background checks, according to a survey of foreign investment executives by Deloitte - often, it seems, because company founders lack the necessary 'integrity' for their investment. In the UK, start-ups tend to feature more reputable management teams, but - depending on whose figures you believe - anywhere up to a third of deals can fall apart after the initial terms sheet has been issued.
It's the last thing anyone wants to happen after all the hard work that's put into pitching for deals, but the final negotiations in any investment can be a fraught time. Either side can get cold feet when they're confronted with the reality of the deal. So what are the most common causes of deals falling down after they've been agreed in principle?
The first cause is when due diligence turns up something unexpected. 'In our experience of working with one of the early-stage investment funds, one in four deals have fallen through in the past two years,' says John Foundling, head of corporate finance at chartered accountancy firm Morley and Scott. 'But our whole approach to due diligence on behalf of investors is about driving into any issues that emerge as soon as possible, getting prompt responses and feedback and suggesting how we believe a potential risk area can be mitigated against in some way.'
This approach is reflected in the due diligence report it produces, which the investee company may be shown and asked to vouchsafe as to its factual accuracy. Foundling says it's like an 'exception report', drilling into any potential issues that may arise.
Foundling gives the example of financial projections, which can cause problems but are usually not a deal breaker. 'We look at the mechanics and the structure, the assumptions behind them and check all the basics, and if we find a problem, in conjunction with the investor we may ask for a new set of projections.' Problems usually revolve around technical issues - such as a creditor or debtor not being factored in correctly, or some other discrepancy between the cash flow and the balance sheet. Morley and Scott may even recommend that a new management accounting system be introduced - it's that practical.
It will also look at the credibility of projections, running what Foundling calls a 'sensitivity test', and will flag up if they seem over-optimistic, although the ultimate say on believability rests with the investment manager themselves. A set of projections was highlighted in a recent deal because they appeared to be too linear, for example. 'That's not necessarily a problem, but it implies a simplistic approach. It depends how bullish they've been as to whether it's an issue or not.'
More likely to emerge as a problem in due diligence is the issue of Intellectual Property (IP) ownership, according to Ted Dewhurst, an associate at legal firm Nabarro. 'The area where most early-stage high-tech companies encounter problems is to do with IP, and the most common thing we find is they don't own their technology. If it's owned by the founders, that's quite simple to sort out. But if it's licensed from somebody else that can be a problem.'
Dewhurst says once you look into the licence, alarm bells start ringing if it's capable of being revoked at short notice, or if it's non-exclusive or ambiguous. 'If the business is built on licensed software you want that licence to be perpetual and irrevocable. If it can be terminated or it's not exclusive, then that's not good news.'
A third reason for a deal falling through - and probably the most common - is that the two parties fail to agree a price, or the entrepreneur has a better offer, otherwise known as gazumping. Dewhurst says this was more common last year and the year before when there were a lot of funds looking to invest in a relatively small pool of investment-ready companies.
It's not necessarily a bad strategy for a start-up to get to an advanced stage with a couple of investors - in fact, it can help push a deal through if you let it be known that another investor is waiting to step in. But the investment community is relatively small and deals that are done on trust can be soured if you don't play the game with a straight bat. 'We always assume that having got that far, the investee company will complete the deal,' says Dewhurst. 'But over the last two years there has been sufficient competition for good deals for gazumping to happen.'
Time, of course, is of the essence, and advisors are all too aware of the need for speed. Dewhurst says Nabarro is typically asked to have its draft assessment documents with the client within 48 hours and to complete the assessment in two to three weeks. Foundling, however, points out that for smaller deals, early-stage investors will be unlikely to want to expend too much time on a complex due diligence, given the associated opportunity costs. 'I would say that investors tend to be relatively risk averse,' he adds, 'by which I mean that if by waiting a few more weeks the risk in the investment becomes clearer, then they will wait. It's much easier to wait for the circumstances to change than decline an investment or rush forward with an investment they're not comfortable with.'
Which helps explain the next reason - a downturn in the company's fortunes. 'Poor results in terms of the current trading falling short of projections is a reason deals fall through,' says Dewhurst. 'It could be that trading has taken a turn for the worse or perhaps it's never picked up in the way they were projecting.'
The final reason is perhaps the hardest to guard against - the human factor. Dewhurst says that if an entrepreneur isn't used to dealing with VCs, they can be intimidated by the documents when they first see them. 'When they start talking to investors it's all very friendly, but when they see what they're asked to give in the way of warrants and assurances, restrictions on employment, service contracts, share transfers, putting in place share option schemes - they sometimes think it's outrageous. We can usually calm them down and it won't throw the deal.
'When VCs invest millions in a company, it's their duty to protect their clients' investment and they really have no power other than what's in the investment document.'
Foundling, whose firm also acts as a lead advisor to companies seeking investment, adds that it's important to think about the deal in the round from the very start. 'At the beginning, the focus in nine out of ten cases is on the percentage [of equity they are giving away]. It's only later, as they take legal advice and tie up the legal documents, that they understand the warranties they have to give - that the business plan is accurate and complete and not misleading, for example. What I try to impress on companies as a lead advisor is that they shouldn't be afraid to give warranties, because if they're asked to give a warranty they're not happy about, then there's already a potential problem between them and the investor.'
He concludes: 'At the end of the day it's about the convergence of interests between the investee and the investor. It's important that you choose the right investor, and what the deal means for you is often hidden in the terms and conditions and the details.'
By David Longworth, Webster Buchanan Research
For South African Business Invetment Opportunities and Capital check out SA Investors Network
If you're worried about going through due diligence, spare a thought for some of the world's less mature entrepreneurial environments. A staggering 70 per cent of deals in emerging markets fall through after investors have conducted background checks, according to a survey of foreign investment executives by Deloitte - often, it seems, because company founders lack the necessary 'integrity' for their investment. In the UK, start-ups tend to feature more reputable management teams, but - depending on whose figures you believe - anywhere up to a third of deals can fall apart after the initial terms sheet has been issued.
It's the last thing anyone wants to happen after all the hard work that's put into pitching for deals, but the final negotiations in any investment can be a fraught time. Either side can get cold feet when they're confronted with the reality of the deal. So what are the most common causes of deals falling down after they've been agreed in principle?
The first cause is when due diligence turns up something unexpected. 'In our experience of working with one of the early-stage investment funds, one in four deals have fallen through in the past two years,' says John Foundling, head of corporate finance at chartered accountancy firm Morley and Scott. 'But our whole approach to due diligence on behalf of investors is about driving into any issues that emerge as soon as possible, getting prompt responses and feedback and suggesting how we believe a potential risk area can be mitigated against in some way.'
This approach is reflected in the due diligence report it produces, which the investee company may be shown and asked to vouchsafe as to its factual accuracy. Foundling says it's like an 'exception report', drilling into any potential issues that may arise.
Foundling gives the example of financial projections, which can cause problems but are usually not a deal breaker. 'We look at the mechanics and the structure, the assumptions behind them and check all the basics, and if we find a problem, in conjunction with the investor we may ask for a new set of projections.' Problems usually revolve around technical issues - such as a creditor or debtor not being factored in correctly, or some other discrepancy between the cash flow and the balance sheet. Morley and Scott may even recommend that a new management accounting system be introduced - it's that practical.
It will also look at the credibility of projections, running what Foundling calls a 'sensitivity test', and will flag up if they seem over-optimistic, although the ultimate say on believability rests with the investment manager themselves. A set of projections was highlighted in a recent deal because they appeared to be too linear, for example. 'That's not necessarily a problem, but it implies a simplistic approach. It depends how bullish they've been as to whether it's an issue or not.'
More likely to emerge as a problem in due diligence is the issue of Intellectual Property (IP) ownership, according to Ted Dewhurst, an associate at legal firm Nabarro. 'The area where most early-stage high-tech companies encounter problems is to do with IP, and the most common thing we find is they don't own their technology. If it's owned by the founders, that's quite simple to sort out. But if it's licensed from somebody else that can be a problem.'
Dewhurst says once you look into the licence, alarm bells start ringing if it's capable of being revoked at short notice, or if it's non-exclusive or ambiguous. 'If the business is built on licensed software you want that licence to be perpetual and irrevocable. If it can be terminated or it's not exclusive, then that's not good news.'
A third reason for a deal falling through - and probably the most common - is that the two parties fail to agree a price, or the entrepreneur has a better offer, otherwise known as gazumping. Dewhurst says this was more common last year and the year before when there were a lot of funds looking to invest in a relatively small pool of investment-ready companies.
It's not necessarily a bad strategy for a start-up to get to an advanced stage with a couple of investors - in fact, it can help push a deal through if you let it be known that another investor is waiting to step in. But the investment community is relatively small and deals that are done on trust can be soured if you don't play the game with a straight bat. 'We always assume that having got that far, the investee company will complete the deal,' says Dewhurst. 'But over the last two years there has been sufficient competition for good deals for gazumping to happen.'
Time, of course, is of the essence, and advisors are all too aware of the need for speed. Dewhurst says Nabarro is typically asked to have its draft assessment documents with the client within 48 hours and to complete the assessment in two to three weeks. Foundling, however, points out that for smaller deals, early-stage investors will be unlikely to want to expend too much time on a complex due diligence, given the associated opportunity costs. 'I would say that investors tend to be relatively risk averse,' he adds, 'by which I mean that if by waiting a few more weeks the risk in the investment becomes clearer, then they will wait. It's much easier to wait for the circumstances to change than decline an investment or rush forward with an investment they're not comfortable with.'
Which helps explain the next reason - a downturn in the company's fortunes. 'Poor results in terms of the current trading falling short of projections is a reason deals fall through,' says Dewhurst. 'It could be that trading has taken a turn for the worse or perhaps it's never picked up in the way they were projecting.'
The final reason is perhaps the hardest to guard against - the human factor. Dewhurst says that if an entrepreneur isn't used to dealing with VCs, they can be intimidated by the documents when they first see them. 'When they start talking to investors it's all very friendly, but when they see what they're asked to give in the way of warrants and assurances, restrictions on employment, service contracts, share transfers, putting in place share option schemes - they sometimes think it's outrageous. We can usually calm them down and it won't throw the deal.
'When VCs invest millions in a company, it's their duty to protect their clients' investment and they really have no power other than what's in the investment document.'
Foundling, whose firm also acts as a lead advisor to companies seeking investment, adds that it's important to think about the deal in the round from the very start. 'At the beginning, the focus in nine out of ten cases is on the percentage [of equity they are giving away]. It's only later, as they take legal advice and tie up the legal documents, that they understand the warranties they have to give - that the business plan is accurate and complete and not misleading, for example. What I try to impress on companies as a lead advisor is that they shouldn't be afraid to give warranties, because if they're asked to give a warranty they're not happy about, then there's already a potential problem between them and the investor.'
He concludes: 'At the end of the day it's about the convergence of interests between the investee and the investor. It's important that you choose the right investor, and what the deal means for you is often hidden in the terms and conditions and the details.'
By David Longworth, Webster Buchanan Research
For South African Business Invetment Opportunities and Capital check out SA Investors Network
Saturday, February 10, 2007
Entrepreneurs & Technology
Most technology entrepreneurs are creative by nature - but they don't always know how to hire the other innovators they need. Management guru Dr John Sullivan has strong views on how to get that right
Dr John Sullivan isn't known for holding back on his opinions. A professor at San Francisco State University and a well-known authority on people management issues, he's a frequent fixture at conferences and in the media expounding his views on how poorly most companies handle their employees. And talking to him a couple of weeks ago, one thing that's particularly irking him today is how companies mismanage their innovators.
While some of his views will be largely academic to smaller companies - his complaints about the inadequacies of many HR professionals make for entertaining reading, for example, but don't really matter if your workforce isn't big enough to hire one - much of his agenda drives to the heart of what makes a business succeed. Firstly, like a growing number of experts in the people management arena, Dr Sullivan believes recruitment is a sales and marketing activity rather than an HR discipline (see 'Candidate or Customer?' [TECHNICAL; 220035]). Good quality people are in high demand, and you need to adopt the same techniques to sign them up as you apply to winning a customer. While old school recruitment philosophy says candidates need to convince you to hire them, securing good people today is as much about convincing them that you're the best place for them to work.
So how exactly do you do that? To begin with, argues Dr Sullivan, you need to find out what factors they'll take into account when they decide on a job - what he calls their acceptance criteria. You can ask them direct when they put in an application or during the job interview - or you can be a little more circumspect and simply ask them to describe their dream job. Either way, it's unlikely that their goal is going to correspond exactly with the role you've created, so you need to adjust your sales pitch to hone in on areas where the two do cross over. In fact, if you've found a really good candidate, you might even change the role you'd mapped out - better to have a great person in a slightly different job than a mediocre operator who ticks all the boxes.
Secondly, you need to stand out from the rest of the people fighting for talent - so you've got to have what Dr Sullivan calls the 'wow' factor. In the technology field, companies like Google and Genentech have long attracted applicants by doing things differently. Google in particular has ripped up much of the employee rule book, famously shipping its Bay Area employees into work in limousine shuttles and providing free gourmet food at its campus restaurants. It also encourages engineers to work on their own projects one day a week, a policy that has helped spawn a huge number of its inventions. Likewise, biotech giant Genentech owes much of the success of one of its most successful therapies, Herceptin, to the 'underground' research culture it fostered, where scientists were encouraged to research their own projects. Breaking the rules to foster creativity creates a buzz and gets people talking.
Of course, 'wow recruiting' is easier to pull off when it's backed by the resource of an industry giant like Google, but that's not to say Dr Sullivan's philosophy can't be adopted by entrepreneurs. One advantage smaller businesses have, in fact, is that they can rewrite job roles much more easily than their large counterparts, which have to steer through internal politics and adapt complex hierarchies. Another is that, by their very nature, entrepreneurs tend to be trying something different - so if you're looking for an experienced software engineer, your ground-breaking technology concept could be the thing that woos them. The flipside, of course, is that new ideas don't do it for everybody - a great salesperson won't be excited by new technology, they'll be excited by new technology that looks like it will generate big dollars.
Thirdly, if you're going to 'wow' people, you need to target the right ones, and be clear about how to handle them. Dr Sullivan argues that companies need to distinguish between high performers, who've traditionally been the target for recruiters, and innovators, who are more likely to be the people driving today's companies forward. 'In a world that changes so fast, you have to innovate consistently,' he says. 'You've got top performers and innovators - the innovators are the critical ones. The top performer will make the wired phone better - the innovator will say 'Let's not have the wire'.'
The challenge with innovators, however, is that they're not just unconventional in their thinking - they also tend to be unconventional in their work habits. So you'll probably need to reciprocate by being flexible about your working practices. The reason Google offers employees breakfast, lunch and dinner on campus isn't just to keep them in the office for longer - it also knows that creative people work odd hours. In fact, some innovators won't want to be tied down to an office at all. Innovation has never been a nine-to-five job - so if you want to tap into someone's creativity, you might need to grab it wherever you can get it.
By Keith Rodgers, Webster Buchanan Research
Dr John Sullivan isn't known for holding back on his opinions. A professor at San Francisco State University and a well-known authority on people management issues, he's a frequent fixture at conferences and in the media expounding his views on how poorly most companies handle their employees. And talking to him a couple of weeks ago, one thing that's particularly irking him today is how companies mismanage their innovators.
While some of his views will be largely academic to smaller companies - his complaints about the inadequacies of many HR professionals make for entertaining reading, for example, but don't really matter if your workforce isn't big enough to hire one - much of his agenda drives to the heart of what makes a business succeed. Firstly, like a growing number of experts in the people management arena, Dr Sullivan believes recruitment is a sales and marketing activity rather than an HR discipline (see 'Candidate or Customer?' [TECHNICAL; 220035]). Good quality people are in high demand, and you need to adopt the same techniques to sign them up as you apply to winning a customer. While old school recruitment philosophy says candidates need to convince you to hire them, securing good people today is as much about convincing them that you're the best place for them to work.
So how exactly do you do that? To begin with, argues Dr Sullivan, you need to find out what factors they'll take into account when they decide on a job - what he calls their acceptance criteria. You can ask them direct when they put in an application or during the job interview - or you can be a little more circumspect and simply ask them to describe their dream job. Either way, it's unlikely that their goal is going to correspond exactly with the role you've created, so you need to adjust your sales pitch to hone in on areas where the two do cross over. In fact, if you've found a really good candidate, you might even change the role you'd mapped out - better to have a great person in a slightly different job than a mediocre operator who ticks all the boxes.
Secondly, you need to stand out from the rest of the people fighting for talent - so you've got to have what Dr Sullivan calls the 'wow' factor. In the technology field, companies like Google and Genentech have long attracted applicants by doing things differently. Google in particular has ripped up much of the employee rule book, famously shipping its Bay Area employees into work in limousine shuttles and providing free gourmet food at its campus restaurants. It also encourages engineers to work on their own projects one day a week, a policy that has helped spawn a huge number of its inventions. Likewise, biotech giant Genentech owes much of the success of one of its most successful therapies, Herceptin, to the 'underground' research culture it fostered, where scientists were encouraged to research their own projects. Breaking the rules to foster creativity creates a buzz and gets people talking.
Of course, 'wow recruiting' is easier to pull off when it's backed by the resource of an industry giant like Google, but that's not to say Dr Sullivan's philosophy can't be adopted by entrepreneurs. One advantage smaller businesses have, in fact, is that they can rewrite job roles much more easily than their large counterparts, which have to steer through internal politics and adapt complex hierarchies. Another is that, by their very nature, entrepreneurs tend to be trying something different - so if you're looking for an experienced software engineer, your ground-breaking technology concept could be the thing that woos them. The flipside, of course, is that new ideas don't do it for everybody - a great salesperson won't be excited by new technology, they'll be excited by new technology that looks like it will generate big dollars.
Thirdly, if you're going to 'wow' people, you need to target the right ones, and be clear about how to handle them. Dr Sullivan argues that companies need to distinguish between high performers, who've traditionally been the target for recruiters, and innovators, who are more likely to be the people driving today's companies forward. 'In a world that changes so fast, you have to innovate consistently,' he says. 'You've got top performers and innovators - the innovators are the critical ones. The top performer will make the wired phone better - the innovator will say 'Let's not have the wire'.'
The challenge with innovators, however, is that they're not just unconventional in their thinking - they also tend to be unconventional in their work habits. So you'll probably need to reciprocate by being flexible about your working practices. The reason Google offers employees breakfast, lunch and dinner on campus isn't just to keep them in the office for longer - it also knows that creative people work odd hours. In fact, some innovators won't want to be tied down to an office at all. Innovation has never been a nine-to-five job - so if you want to tap into someone's creativity, you might need to grab it wherever you can get it.
By Keith Rodgers, Webster Buchanan Research
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