Are you making the most of the web to build your business? With the right combination of classic marketing principles and clever techniques, even the smallest companies can reach a big audience
Type 'treatment abroad' into Google and the top four non-sponsored results take you to a site run by Berkhamsted-based Intuition Communication. 'Private health' produces the top two results for Intuition. And for 'breast implant' and 'cosmetic surgery', its private healthcare website appears in a prime spot at the top of the second listings page. Intuition is only a small company and it doesn't pay a penny in banner ads or pay-per-click advertising, but there it is topping the most popular method of finding services on the web. That's the power of internet marketing.
'We have a search engine optimisation expert and every month of his life is spent optimising our content for the search engines,' says Intuition managing director Keith Pollard. 'We have around 2,000 search terms which we target and our average position on Google is 6.2. The reason that's important to us is not only for our own sake, but also our clients, who advertise with us because of our positioning.'
For many entrepreneurs, internet marketing will be less about driving traffic to the site and more about establishing their business's credentials in a particular area - a marketing brochure to the outside world. But lessons from internet businesses still provide useful pointers. Using the internet as part of the marketing mix is an extremely cost-effective way of getting your message out there. It's also a good way of targeting a particular audience, since visits, clicks and links are so transparent on the web. The internet marketer has a number of tools to help - including the site itself, blogs, forums, links, and of course search engine optimisation. But it's important to bear in mind that some of these are more effective than others.
To a certain extent, the four Ps of marketing hold true in the web domain - product, place, price and promotion are still the most important considerations. It's relatively easy, for example, to drive some level of traffic to your website, but if visitors don't find what you've promised them when they arrive, they'll soon go elsewhere. Equally, you could spend a lot of time and effort promoting your website through articles on other sites, blogs, and links, but if there's not a compelling reason to visit right now, then you won't pull people in.
Creating the right site
So what ranks as a good website from a marketing perspective? It's the combination of strong content, good design and clear, easy navigation that scores highly, according to the Web Marketing Association. It recently released its 2007 web awards report, which features a decade of data on what its judges decided were the best websites across a wide range of industries since it started in 1997. The sites are scored by independent judges against seven criteria: design, innovation, content, technology, interactivity, copywriting and ease of use. Although the competition is largely US-based, UK sites did well, rated the best in Europe.
Industry-wise, the airlines came out best, scoring above average every year and achieving the highest average score in 2006. The judges noted that airline sites were moving from being purely transactional sites where you could book flights to providing in-depth travel information on destinations. The top pick was the American Airlines site.
In the technology space, biotech was slightly better than average, using design and copywriting well, including flash presentations to convey complex ideas. Cara Therapeutics, a New York-based drug development company came out on top in 2006. Computer hardware meanwhile, was also a high performer, with HP.com voted the best site for the three years before this year, when the accolade was handed to Broadcom. It's easy to see why HP's site scores so highly, with a clear demarcation as to where its different audiences should navigate and strong offers encouraging visitors to take further action.
Misunderstanding the audience and poorly targeting offers are the most frequent mistakes firms make in internet marketing. But another advantage of the web as a marketing medium is it's relatively easy to test, monitor and continually improve sites based on audience feedback. Studying visitor stats can show which elements of the site are most popular, and where visitors are experiencing difficulties finding what they're looking for.
Driving traffic
Once your site is as strong as it can be, you need to think about driving traffic back to it - but it's important to consider first what sort of traffic you want. Pay-per-click advertising - where you're only charged when a user clicks back to your site - is offered by various online agencies and can be a good way of targeting a user with a particular interest. Fees can be high though, particularly for popular keywords or titles and you may have to bid for a particular spot. Equally, banner ads can help drive targeted traffic to your site - and since each page on your site can serve a different banner, you can ensure your message is targeted to a particular niche. However, static banner ads can seem outdated now, and you're not guaranteed a specific number of clicks.
The sort of viral marketing that led to much of the early excitement about the web is perhaps more relevant, particularly in terms of mentions and links from other sites on the internet, which also help guarantee good ranking in the search engines. No one knows the exact algorithms Google uses to determine the relevance of sites, but links from other sites are part of the equation, along with regularly updated content and longevity.
'The fact that we've been around 10 years makes us an established presence, an authority in the eyes of Google,' says Intuition's Pollard. 'The fact that our content is changing daily, has 6,000 pages and over 1,000 other websites linking to us says to Google this is a fresh, interesting and important site. All these factors are in our favour and we make the most of that by tweaking content, and title tags.' Pollard recommends ensuring URLs are search engine friendly - those delivered out of a database with odd characters like question marks will not necessarily be spotted by the search engines.
And the results are impressive - at least for Pollard's business. 'Across all our sites, we probably had around 450,000 visits last month and all of that activity comes from natural visibility on search engines. We don't advertise, buy pay-per-click or promote ourselves through other sites.'
Finally, it may be that your ultimate goal isn't to drive traffic back to your site. An equally valid strategy for some companies would be to contribute blogs and articles elsewhere which simply establish your expertise in a particular area. It's curious to note that the worst performing sites in the web awards report were those you might expect to score higher, but which have no real reason to be out there in the full public glare: credit unions (where members just input transactions), brokerages (which simply facilitate trading for existing clients) and, the backbone of the internet (but mostly behind the scenes), ISPs.
By David Longworth, Webster Buchanan Research
For South African Business Invetment Opportunities and Capital check out SA Investors Network
Showing posts with label International Business News. Show all posts
Showing posts with label International Business News. Show all posts
Sunday, May 24, 2009
Friday, April 24, 2009
Investors are Still Keen to Invest
We may all be mired in economic uncertainty, but if you’re looking for funding, there’s no need to be unduly discouraged by the current slowdown. Getting funded has never been a pushover, but the current economic uncertainties don’t seem to be stopping the right people with the right product.
In recent weeks there have been a plenty of upbeat messages from funding groups - it’s just that the reassuring words tend to be couched with more caveats these days. One venture capitalist told me that business plans were being scrutinised more closely in 2008, especially market forecasts, growth estimates and profit margins. As he succinctly put it: “The dumb money has long gone. The smart money is still there. We back favourites, not the long shots.” Or as David Giampaolo of Pi Capital says: “We are still looking at plenty of deals – but we are in no rush”.
So if funding is still available for the right people with the right ideas – even if they might have to wait longer and it costs them more – how can you make sure you’re first in the queue? One thing to bear in mind is that VCs are looking for more than just a good product, and a compelling business case: it’s also about how you structure your company, how you make it responsive in changing times, and what people you surround yourself with. The latter is often the hardest for entrepreneurs. You know you need someone on your team who’s done it all before – but where do you find them?
For some start-ups, the answer lies with one of the biggest growth areas in the UK in recent years – organisations offering management consultants, business advisors and non executive directors to help young businesses to grow and thrive. It’s not surprising that so many of them are successful – nor that so many are successfully finding funding themselves – since in the main they’re owned by people with a long track record in business advice.
Hiring a non executive director or a business advisor can be a daunting task, but approach it in the same way as you would hire a new employee. Ask them about their experience, to make sure it’s relevant, and establish what they expect to be able to contribute. Start them on a definable task, to see if your ways of working are compatible, and measure their results carefully against their fees. If you feel comfortable with the advisor, and you can see there’s a quantifiable benefit, involve them in more activities. Some advisors will be part of larger networks, offering specialist skills and experience when it’s required. There’s lots of information about what these experts can bring on sites like http://www.non-execs.com/.
Working with a business advisor or a non executive director isn’t just about what they bring to your business – it also sends a clear signal to the investment community that you’re serious about what you’re trying to achieve. It doesn’t guarantee success, of course – but at least you’ll be one of the favourites rather than one of the long shots.
By George Fletcher, Webster Buchanan Research
In recent weeks there have been a plenty of upbeat messages from funding groups - it’s just that the reassuring words tend to be couched with more caveats these days. One venture capitalist told me that business plans were being scrutinised more closely in 2008, especially market forecasts, growth estimates and profit margins. As he succinctly put it: “The dumb money has long gone. The smart money is still there. We back favourites, not the long shots.” Or as David Giampaolo of Pi Capital says: “We are still looking at plenty of deals – but we are in no rush”.
So if funding is still available for the right people with the right ideas – even if they might have to wait longer and it costs them more – how can you make sure you’re first in the queue? One thing to bear in mind is that VCs are looking for more than just a good product, and a compelling business case: it’s also about how you structure your company, how you make it responsive in changing times, and what people you surround yourself with. The latter is often the hardest for entrepreneurs. You know you need someone on your team who’s done it all before – but where do you find them?
For some start-ups, the answer lies with one of the biggest growth areas in the UK in recent years – organisations offering management consultants, business advisors and non executive directors to help young businesses to grow and thrive. It’s not surprising that so many of them are successful – nor that so many are successfully finding funding themselves – since in the main they’re owned by people with a long track record in business advice.
Hiring a non executive director or a business advisor can be a daunting task, but approach it in the same way as you would hire a new employee. Ask them about their experience, to make sure it’s relevant, and establish what they expect to be able to contribute. Start them on a definable task, to see if your ways of working are compatible, and measure their results carefully against their fees. If you feel comfortable with the advisor, and you can see there’s a quantifiable benefit, involve them in more activities. Some advisors will be part of larger networks, offering specialist skills and experience when it’s required. There’s lots of information about what these experts can bring on sites like http://www.non-execs.com/.
Working with a business advisor or a non executive director isn’t just about what they bring to your business – it also sends a clear signal to the investment community that you’re serious about what you’re trying to achieve. It doesn’t guarantee success, of course – but at least you’ll be one of the favourites rather than one of the long shots.
By George Fletcher, Webster Buchanan Research
Learning from the academics
Accessing research skills is easier than you might think through business-university collaboration schemes. But beware - it's not 'free' R&D, and you need to be crystal clear about your objectives
If you're looking for first-mover advantage, you can't do much better than tap into the UK's research talent. Our talent base is up there with the best - a recent report shows that we produce nine per cent of the world's scientific papers and receive 12 per cent of all citations. But accessing academic research isn't simply a case of ringing up your nearest University, and it doesn't necessarily come cheap.
In fact, with some 200 technology departments at around 50 universities in the South East alone, it can literally be a case of sticking a pin in a UK-shaped map. And when you do find that elusive expertise, somebody is probably going to have to pay for it, since universities are becoming more and more aware of their commercial value. The good news, though, is that there's a host of schemes available that can help you navigate your way round and gain funding.
The UK has always had a good track record of collaboration between its research base and industry. A study by Warwick University showed that UK universities generate one spin-off company for every EURO 25m of research budget (as compared to one per EUR 87m in the US). They also disclose one invention for every EUR 2m (compared to EUR 3m in the US) and form one spin-off for every 13 disclosures (29 in the US). Technology transfer success can't just be measured in the number of spin-offs, however - starting an ill-conceived spin-out that crashes and burns is far worse than striking a licensing deal with an established company.
Brian Graves, director of engineering technology transfer at Imperial Innovations, which floated on the AIM market a year ago, says: '[The success of spin-outs] is one measure. But having a good flow of Intellectual Property into the business is also a key factor, as well as being able to find the appropriate route to commercialisation. Another key to our success is investment activity and getting exits around our investments, and finally, building up a licence portfolio that generates a good revenue stream.'
Graves says 'brokering activity' - building relationships between business and academia - is a relatively new activity for Imperial Innovations. And while Imperial covers a wide range of subject areas, the company is particularly focused on two: incubating low-carbon technologies with funding from the Carbon Trust, and recycling technologies funded by the Waste and Resources Action Programme (WRAP).
'This is an important route of access for the [small and mid-sized business]. We can help in developing their business strategy, help with marketing requirements, IP protection issues - anything that's necessary in getting the technology into a fit state for commercialisation.' Graves points out that Imperial Innovations tends to get involved later in the research cycle, for example in Proof of Concept trials to develop technology and bring it to market as a product.
The London Development Agency supports four Proof of Concept funds which divide the capital's 24 universities into groups, one led by Imperial. These provide funding of between �5,000 and �25,000 and are intended to feed into the g2i programme. Another government-funded research programme is the Knowledge Transfer Partnerships (KTPs). Formerly known as the Teaching Company Scheme, KTPs celebrated their thirtieth anniversary last year and are currently responsible for more than a thousand projects where knowledge, technology and skills in various sectors are transferred from academia to businesses. With an average project size of �60,000, businesses with less than 250 employees should expect to contribute a third of this cost.
Aside from these government schemes, the London Technology Network provides access to over 6,000 academics from diverse research centres in the South and East, from Cranfield University to Cambridge. It's also responsible for the London arm of the Innovation Relay Centre, which collates research projects from Universities around Europe. Peter Reid, chief executive of the LTN, says: 'If companies are adopting new technologies they often need external help, which is often available in universities. University departments are either developing new technology or new applications for it and are involved in design, influencing how a product looks so consumers want to engage with it.'
The LTN, like many of the universities themselves, has a structured process for enabling companies to interact with academia, starting with a technology audit of their requirements. Reid says companies are sometimes unclear about what they need, or how a university might be able to help. 'Our job is to help create a market, so first we help businesses understand what the problems are that universities can help them address.'
LTN holds networking events focused on specific technology sectors - upcoming events focus on nutrition and health, grid technology and digital content - to help create these connections. It then passes a short statement of need to various university contacts, which come up with different ways they could help through consulting, training or skills transfer. Once a company chooses which offer it wants to take up, the LTN will also help in framing a contract.
Those who have been involved in business-university collaboration point out that it's important to clearly state the expected outcomes. Kevin Davey, director at The Innovatory, says MBA students can be particularly helpful for a small business and can arrive on placement while they complete a dissertation or carry out a project as part of their course. But he adds: 'It can be something complex and high-level they work on, such as developing a marketing plan or a patent strategy, but it has to be a clearly defined project with boundaries and measurement in terms of the outcomes.'
Ultimately, the key to success in any business-university relationship is to provide benefits for both sides. Graves says the days of companies expecting universities to provide skills or consulting for free are gone: 'There's a greater awareness now that universities deal on a commercial basis and it's all about finding a deal with fits for both sides. It's important to look for mutual inputs.'
For South African Business Invetment Opportunities and Capital check out SA Investors Network
If you're looking for first-mover advantage, you can't do much better than tap into the UK's research talent. Our talent base is up there with the best - a recent report shows that we produce nine per cent of the world's scientific papers and receive 12 per cent of all citations. But accessing academic research isn't simply a case of ringing up your nearest University, and it doesn't necessarily come cheap.
In fact, with some 200 technology departments at around 50 universities in the South East alone, it can literally be a case of sticking a pin in a UK-shaped map. And when you do find that elusive expertise, somebody is probably going to have to pay for it, since universities are becoming more and more aware of their commercial value. The good news, though, is that there's a host of schemes available that can help you navigate your way round and gain funding.
The UK has always had a good track record of collaboration between its research base and industry. A study by Warwick University showed that UK universities generate one spin-off company for every EURO 25m of research budget (as compared to one per EUR 87m in the US). They also disclose one invention for every EUR 2m (compared to EUR 3m in the US) and form one spin-off for every 13 disclosures (29 in the US). Technology transfer success can't just be measured in the number of spin-offs, however - starting an ill-conceived spin-out that crashes and burns is far worse than striking a licensing deal with an established company.
Brian Graves, director of engineering technology transfer at Imperial Innovations, which floated on the AIM market a year ago, says: '[The success of spin-outs] is one measure. But having a good flow of Intellectual Property into the business is also a key factor, as well as being able to find the appropriate route to commercialisation. Another key to our success is investment activity and getting exits around our investments, and finally, building up a licence portfolio that generates a good revenue stream.'
Graves says 'brokering activity' - building relationships between business and academia - is a relatively new activity for Imperial Innovations. And while Imperial covers a wide range of subject areas, the company is particularly focused on two: incubating low-carbon technologies with funding from the Carbon Trust, and recycling technologies funded by the Waste and Resources Action Programme (WRAP).
'This is an important route of access for the [small and mid-sized business]. We can help in developing their business strategy, help with marketing requirements, IP protection issues - anything that's necessary in getting the technology into a fit state for commercialisation.' Graves points out that Imperial Innovations tends to get involved later in the research cycle, for example in Proof of Concept trials to develop technology and bring it to market as a product.
The London Development Agency supports four Proof of Concept funds which divide the capital's 24 universities into groups, one led by Imperial. These provide funding of between �5,000 and �25,000 and are intended to feed into the g2i programme. Another government-funded research programme is the Knowledge Transfer Partnerships (KTPs). Formerly known as the Teaching Company Scheme, KTPs celebrated their thirtieth anniversary last year and are currently responsible for more than a thousand projects where knowledge, technology and skills in various sectors are transferred from academia to businesses. With an average project size of �60,000, businesses with less than 250 employees should expect to contribute a third of this cost.
Aside from these government schemes, the London Technology Network provides access to over 6,000 academics from diverse research centres in the South and East, from Cranfield University to Cambridge. It's also responsible for the London arm of the Innovation Relay Centre, which collates research projects from Universities around Europe. Peter Reid, chief executive of the LTN, says: 'If companies are adopting new technologies they often need external help, which is often available in universities. University departments are either developing new technology or new applications for it and are involved in design, influencing how a product looks so consumers want to engage with it.'
The LTN, like many of the universities themselves, has a structured process for enabling companies to interact with academia, starting with a technology audit of their requirements. Reid says companies are sometimes unclear about what they need, or how a university might be able to help. 'Our job is to help create a market, so first we help businesses understand what the problems are that universities can help them address.'
LTN holds networking events focused on specific technology sectors - upcoming events focus on nutrition and health, grid technology and digital content - to help create these connections. It then passes a short statement of need to various university contacts, which come up with different ways they could help through consulting, training or skills transfer. Once a company chooses which offer it wants to take up, the LTN will also help in framing a contract.
Those who have been involved in business-university collaboration point out that it's important to clearly state the expected outcomes. Kevin Davey, director at The Innovatory, says MBA students can be particularly helpful for a small business and can arrive on placement while they complete a dissertation or carry out a project as part of their course. But he adds: 'It can be something complex and high-level they work on, such as developing a marketing plan or a patent strategy, but it has to be a clearly defined project with boundaries and measurement in terms of the outcomes.'
Ultimately, the key to success in any business-university relationship is to provide benefits for both sides. Graves says the days of companies expecting universities to provide skills or consulting for free are gone: 'There's a greater awareness now that universities deal on a commercial basis and it's all about finding a deal with fits for both sides. It's important to look for mutual inputs.'
For South African Business Invetment Opportunities and Capital check out SA Investors Network
Tuesday, March 24, 2009
Cash is still king
The typical response of a business in hard times is to start cutting costs. But managing cash more effectively can have equally significant results. According to the Credit Management Research Centre (CMRC) at Leeds University, there’s one and a half times the volume of the primary money supply (from banks and financial institutions) swilling around in unpaid debt. Since over 80% of B2B business is done on credit, revising your credit policy, improving debtor management or even outsourcing parts of the equation can make a big difference.
Implement and communicate your credit policy
A survey by the CMRC found that trade debtor liabilities are the major and riskiest assets on corporate balance sheets, representing up to 30-35% of total assets. Trade credit, it says, is a key source of funding for companies, particularly at the smaller level, where it is typically twice the size of funds from bank credit. But it also points out that this is a two-way street. Credit is both an asset and a liability – many companies, particularly those at an intermediate point in the value chain both use trade credit as customers (accounts payable) and provide it as suppliers (accounts receivable). The key is balancing the two to improve cash flow.
The Better Payment Practice Group has been campaigning over the past few years to improve payment terms for small businesses. A good starting point, it says, is to establish a company credit policy which includes credit limits, both in days and sums outstanding, and a framework for staged payments. However, the CMRC research says that for small businesses this is a particular sticking point. Its report found that 52% of all companies had a written credit policy, but at the smaller-end the figure was much lower – a separate online survey by the BPPG found that only a quarter of small firms confirm their credit terms with customers in writing.
The CMRC points out that now is a good time to revisit your credit policy. “Pro-active credit management is necessary to cope with constant change to adapt to market and economic conditions and that may result in the need to make a change in any credit policy,” it states.
A good credit policy should be prescribed by the senior management of a company but it must also filter down to the different levels of the business to ensure it’s applied. Part of the problem in credit management is that if the policy is not part of common parlance with customers, sales, marketing and account management staff are likely to invent their own credit terms to win business and then pass the buck when it comes to chasing debts.
Focus everyone on debtor management
Debtor management is also a good discipline to focus on – and here the organisational challenges come into sharp focus even in the smallest of company set-ups. Debtor management attempts to pull together the different and often conflicting interests within an organisation towards the common goal of ensuring a debtor pays up the agreed sum on time.
The problem with debtor management is that different parts of your company have different agendas. Sales wants to maximise the value of a deal – and if given carte blanche will do everything it can to ensure the customer gets the best credit terms available. Support will want to ensure that it’s delivering consistent service to the customer on an ongoing basis, regardless of whether they are actually paying their bills. Finance is responsible for chasing the payment, but won’t want to step on anyone’s toes and ruin an ongoing customer relationship.
The financial systems and processes a company uses to log and communicate customers’ ongoing payment situation can help. When a payment is overdue, for example, a flag to the sales team to not continue advancing credit to that customer and to the support team to mention the outstanding payment on an account will often spur the customer into action – preventing the more heavy-handed collections that kick into place when a customer becomes a bad debt.
Taking a risk-based approach to debtor management is also a good idea. To take control of a credit situation, a company needs to understand which customers are least likely to pay on-time, what their credit-worthiness is, where the greatest exposure lies (if for example a handful of large customers account for most of its sales) and what the impact of non-payment would be on the ongoing health of the business – in other words, how much risk it can afford to take.
Drafting in a third party
Involving third parties is another option, one that enables management to focus on its core business while handing over financial management concerns. One approach is to factor debts, where you effectively sell your invoices off to a third-party factoring company. The third party will pay you up to 90% of the invoice value up front, easing the impact of customer delays on cash flows.
One potential downside of factoring is that customer relationships could be damaged if a factoring company is too heavy-handed – and it can be perceived as a sign of a company in trouble. You also might still need to step in if the debts turn bad as the arrangement cannot be terminated until all the debts are settled.
There are other outsourcing options too, such as invoice discounting (where the third party gives you an advance on your debt but you are still responsible for chasing it), credit insurance and using debt collection agencies. In practice, firms will use a combination of devices depending on their situation.
The CMRC survey found that late payment was more of an issue for small firms, where average debtor days was 43. And despite the introduction of the EU late payment directive in 2002, a majority were still not making customers aware of it. Small firms told the CMRC they would wait an average of 39 days before withholding the supply of goods to a late payer – compared with 22 days for large companies. Clearly small firms are still seen as a soft touch when it comes to credit. Perhaps now is a good time to get tough.
For South African Business Invetment Opportunities and Capital check out SA Investors Network
Implement and communicate your credit policy
A survey by the CMRC found that trade debtor liabilities are the major and riskiest assets on corporate balance sheets, representing up to 30-35% of total assets. Trade credit, it says, is a key source of funding for companies, particularly at the smaller level, where it is typically twice the size of funds from bank credit. But it also points out that this is a two-way street. Credit is both an asset and a liability – many companies, particularly those at an intermediate point in the value chain both use trade credit as customers (accounts payable) and provide it as suppliers (accounts receivable). The key is balancing the two to improve cash flow.
The Better Payment Practice Group has been campaigning over the past few years to improve payment terms for small businesses. A good starting point, it says, is to establish a company credit policy which includes credit limits, both in days and sums outstanding, and a framework for staged payments. However, the CMRC research says that for small businesses this is a particular sticking point. Its report found that 52% of all companies had a written credit policy, but at the smaller-end the figure was much lower – a separate online survey by the BPPG found that only a quarter of small firms confirm their credit terms with customers in writing.
The CMRC points out that now is a good time to revisit your credit policy. “Pro-active credit management is necessary to cope with constant change to adapt to market and economic conditions and that may result in the need to make a change in any credit policy,” it states.
A good credit policy should be prescribed by the senior management of a company but it must also filter down to the different levels of the business to ensure it’s applied. Part of the problem in credit management is that if the policy is not part of common parlance with customers, sales, marketing and account management staff are likely to invent their own credit terms to win business and then pass the buck when it comes to chasing debts.
Focus everyone on debtor management
Debtor management is also a good discipline to focus on – and here the organisational challenges come into sharp focus even in the smallest of company set-ups. Debtor management attempts to pull together the different and often conflicting interests within an organisation towards the common goal of ensuring a debtor pays up the agreed sum on time.
The problem with debtor management is that different parts of your company have different agendas. Sales wants to maximise the value of a deal – and if given carte blanche will do everything it can to ensure the customer gets the best credit terms available. Support will want to ensure that it’s delivering consistent service to the customer on an ongoing basis, regardless of whether they are actually paying their bills. Finance is responsible for chasing the payment, but won’t want to step on anyone’s toes and ruin an ongoing customer relationship.
The financial systems and processes a company uses to log and communicate customers’ ongoing payment situation can help. When a payment is overdue, for example, a flag to the sales team to not continue advancing credit to that customer and to the support team to mention the outstanding payment on an account will often spur the customer into action – preventing the more heavy-handed collections that kick into place when a customer becomes a bad debt.
Taking a risk-based approach to debtor management is also a good idea. To take control of a credit situation, a company needs to understand which customers are least likely to pay on-time, what their credit-worthiness is, where the greatest exposure lies (if for example a handful of large customers account for most of its sales) and what the impact of non-payment would be on the ongoing health of the business – in other words, how much risk it can afford to take.
Drafting in a third party
Involving third parties is another option, one that enables management to focus on its core business while handing over financial management concerns. One approach is to factor debts, where you effectively sell your invoices off to a third-party factoring company. The third party will pay you up to 90% of the invoice value up front, easing the impact of customer delays on cash flows.
One potential downside of factoring is that customer relationships could be damaged if a factoring company is too heavy-handed – and it can be perceived as a sign of a company in trouble. You also might still need to step in if the debts turn bad as the arrangement cannot be terminated until all the debts are settled.
There are other outsourcing options too, such as invoice discounting (where the third party gives you an advance on your debt but you are still responsible for chasing it), credit insurance and using debt collection agencies. In practice, firms will use a combination of devices depending on their situation.
The CMRC survey found that late payment was more of an issue for small firms, where average debtor days was 43. And despite the introduction of the EU late payment directive in 2002, a majority were still not making customers aware of it. Small firms told the CMRC they would wait an average of 39 days before withholding the supply of goods to a late payer – compared with 22 days for large companies. Clearly small firms are still seen as a soft touch when it comes to credit. Perhaps now is a good time to get tough.
For South African Business Invetment Opportunities and Capital check out SA Investors Network
Tuesday, February 24, 2009
Opportunity during challenging times
Talk of recession may be gradually morphing into talk of depression, but many business leaders continue to point to the opportunities that a recession brings. Despite constraints on funding for small businesses, a host of experts point out that things will turn around – and when they do, entrepreneurs need to be ready with their next big idea.
The economy may not get so bad this time around, but a historic parallel exists with the view of some business leaders in the Great Depression of the 1930s. Take then-retired industrialist John D Rockefeller, who said in 1929: “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.” Prosperity did eventually return, but not even Rockefeller, who died a few years later, could have predicted how the Great Depression sparked by the Wall Street crash of that year would lead to nearly a decade of decline and significant political upheaval.
That said, his optimism is mirrored by public figures and business leaders today as they try to encourage businesses – particularly at the smaller end of the economy – to ride out the storm. But are they right to be accentuating the positives? What historical precedent is there for the idea that we’re currently surrounded not just by threats, but by opportunities? And how can businesses keep going until the next tranche of money arrives?
History lesson
Many of the optimists point to similar crises in the past. Mike Harris, founding CEO of First Direct, Egg, Mercury Communications and now Garlik, points to the last time a massive financial crisis was averted, in 1998. That was when hedge fund Long Term Capital Management was bailed out by a coalition of banks and creditors, including Merrill Lynch – itself recently saved by Bank of America. Harris is optimistic: “If you believe the economists in the US, we are on the verge of a complete financial breakdown. But this is the seventh financial crisis I’ve lived through and none of them have led to a depression. The authorities would have to be inept to turn this into a depression.”
In fact, he sees only opportunities. “What happens when you come out of a recession is that [new opportunities emerge]. The easiest way to describe it is like a forest fire, it clears away all the dead wood and there’s space for new growth. There’s all this pent-up demand - from consumers to buy and investors to invest.”
Speaking at the “Double Everything” evening for entrepreneurs last week, Harris cited the example of the 1970s recession, which saw the emergence of the personal computer market and Bill Gates’ determination to put a PC “in every home and on every desk”. Similarly, the economic problems of the 1980s heralded the arrival of the enterprise software market and the likes of Oracle, SAP and CA. And then there was the dot com collapse, which according to Harris, spawned the digital world and e-mail and web communications.
One of Harris’ fellow speakers was Roger Hamilton, founder of 18 businesses in 15 different countries. Hamilton also harked back to the 1970s, citing the Chinese calendar and the last time we were in this specific cycle, in 1972. In the US, President Nixon was suffering after Watergate, the value of the dollar was plummeting, the oil crisis was in full flow, America was waging a war in Vietnam, terrorism reared its head at the Munich Olympics and the West was looking to the East for inspiration.
Hamilton noted many parallels with the situation in the world today, saying: “There are times when it’s a perfect moment for a big idea.” And sure enough back in 1972, Richard Branson was just starting out with Virgin and Gates with Microsoft. This month, as the money markets struggled, Virgin was busy investing in a Portugese space port for its galactic airline, Google launched its first phone, GM the first fully electric car and there was a new age of giving, with $3bn pledged to end malaria and progress made towards the UN’s 2015 target to halve world poverty.
But Hamilton’s big message is that power in the world’s economy is moving to the East. He maintains Google launched the G1 phone in China because it expects to conduct more business there than in the failing Western economies, and he claims there are already more Internet users in China than in the US and there will soon be more than the entire population of the US. “This is marking the end of the greatest transfer of wealth in the history of man. We see the flow of expertise and human capital to the East in the same way that money has already flown out.”
So how do entrepreneurs take advantage? To Hamilton, it’s all about building an extended network where needs and opportunities are matched across continents. For Harris, the answer is to hang on. “Companies beg, borrow and steal to resource themselves, but you do have to be in the sort of business where you can bootstrap it.” Yet he remains optimistic. “I’m looking forward to seeing what this [recession] is going to create. I think it’s going to be something truly spectacular.”
For South African Business Invetment Opportunities and Capital check out SA Investors Network
The economy may not get so bad this time around, but a historic parallel exists with the view of some business leaders in the Great Depression of the 1930s. Take then-retired industrialist John D Rockefeller, who said in 1929: “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.” Prosperity did eventually return, but not even Rockefeller, who died a few years later, could have predicted how the Great Depression sparked by the Wall Street crash of that year would lead to nearly a decade of decline and significant political upheaval.
That said, his optimism is mirrored by public figures and business leaders today as they try to encourage businesses – particularly at the smaller end of the economy – to ride out the storm. But are they right to be accentuating the positives? What historical precedent is there for the idea that we’re currently surrounded not just by threats, but by opportunities? And how can businesses keep going until the next tranche of money arrives?
History lesson
Many of the optimists point to similar crises in the past. Mike Harris, founding CEO of First Direct, Egg, Mercury Communications and now Garlik, points to the last time a massive financial crisis was averted, in 1998. That was when hedge fund Long Term Capital Management was bailed out by a coalition of banks and creditors, including Merrill Lynch – itself recently saved by Bank of America. Harris is optimistic: “If you believe the economists in the US, we are on the verge of a complete financial breakdown. But this is the seventh financial crisis I’ve lived through and none of them have led to a depression. The authorities would have to be inept to turn this into a depression.”
In fact, he sees only opportunities. “What happens when you come out of a recession is that [new opportunities emerge]. The easiest way to describe it is like a forest fire, it clears away all the dead wood and there’s space for new growth. There’s all this pent-up demand - from consumers to buy and investors to invest.”
Speaking at the “Double Everything” evening for entrepreneurs last week, Harris cited the example of the 1970s recession, which saw the emergence of the personal computer market and Bill Gates’ determination to put a PC “in every home and on every desk”. Similarly, the economic problems of the 1980s heralded the arrival of the enterprise software market and the likes of Oracle, SAP and CA. And then there was the dot com collapse, which according to Harris, spawned the digital world and e-mail and web communications.
One of Harris’ fellow speakers was Roger Hamilton, founder of 18 businesses in 15 different countries. Hamilton also harked back to the 1970s, citing the Chinese calendar and the last time we were in this specific cycle, in 1972. In the US, President Nixon was suffering after Watergate, the value of the dollar was plummeting, the oil crisis was in full flow, America was waging a war in Vietnam, terrorism reared its head at the Munich Olympics and the West was looking to the East for inspiration.
Hamilton noted many parallels with the situation in the world today, saying: “There are times when it’s a perfect moment for a big idea.” And sure enough back in 1972, Richard Branson was just starting out with Virgin and Gates with Microsoft. This month, as the money markets struggled, Virgin was busy investing in a Portugese space port for its galactic airline, Google launched its first phone, GM the first fully electric car and there was a new age of giving, with $3bn pledged to end malaria and progress made towards the UN’s 2015 target to halve world poverty.
But Hamilton’s big message is that power in the world’s economy is moving to the East. He maintains Google launched the G1 phone in China because it expects to conduct more business there than in the failing Western economies, and he claims there are already more Internet users in China than in the US and there will soon be more than the entire population of the US. “This is marking the end of the greatest transfer of wealth in the history of man. We see the flow of expertise and human capital to the East in the same way that money has already flown out.”
So how do entrepreneurs take advantage? To Hamilton, it’s all about building an extended network where needs and opportunities are matched across continents. For Harris, the answer is to hang on. “Companies beg, borrow and steal to resource themselves, but you do have to be in the sort of business where you can bootstrap it.” Yet he remains optimistic. “I’m looking forward to seeing what this [recession] is going to create. I think it’s going to be something truly spectacular.”
For South African Business Invetment Opportunities and Capital check out SA Investors Network
Friday, October 24, 2008
Looking for Foreign Investment
Is there not just a hint of xenophobia in the way the British press has set against US private equity house TPG Capital, the key investor in a restructuring plan for troubled Bradford & Bingley?
This week, as B&B’s UK Shareholders Association advised retail investors to consider voting against the TPG offer at B&B’s upcoming general meeting, TPG has been on a charm offensive in the City of London to win round investors. With its wide experience of turning round struggling financial institutions, it proposes to parachute in two senior executives to head the rescue bid. But with several major institutional investors unimpressed by the terms, British financial entrepreneur Clive Cowdery has been lined up behind a rival offer – giving newspapers a chance for “Plucky Brit versus US Giant” headlines.
The world of private equity is a very different place to venture capital, of course. PE firms typically look to buy out established companies in need of a cash injection, and take them on to the next stage of growth before splitting them up or selling them on. VCs, meanwhile, look for medium- to long-term equity positions in high-growth companies. But in both areas, US money is still readily available – and US buyout firms are thought to be circling UK companies en mass. So why is the prospect of US investment so often seen as a bad thing?
Research from Library House shows how the investment picture is changing. Last year’s report, “Funding Growth in a Changing World: The UBS UK Venture Backed Report 2007”, found 1,668 venture-backed businesses in the UK, which had raised a total of £1.4bn in 2006. According to its preliminary figures for 2007, Library House estimates that the total investment fell to around £1bn, still a sizeable chunk of money but back to the levels experienced in 2003. It also found that outside the UK, US-based investors were the principal source of finance for these UK venture-backed companies. And although China is overtaking the UK as a recipient for US finance with India soon to follow suit, the UK still leads the rest of Europe.
These findings were reinforced by new research from the BVCA (now known as the British Venture Capital and Private Equity Association). It found that investments by UK-based VCs fell by almost half last year from £1.3bn to £683m. The total number of early stage deals completed by its 214 members remained pretty constant at 584, however, indicating that average deal size is falling. These figures were no doubt influenced by the much-publicised exit of 3i and Panmure Ventures from the early stage investment sector.
Overall – including private equity – the BVCA recorded a 45% rise in 2007 investment activity to £31.6bn. So clearly it’s the buyout sector that’s most buoyant for UK investors, particularly for AIM-listed companies.
So what should entrepreneurs make of the continuing interest from US firms, whether private equity or VC? Firstly, US firms are particularly excited about the UK’s mobile sector, seeing it as a gateway into Europe – but interest across the whole of the technology sector is strong, as well as certain areas of life science and of course, our much-vaunted creative industries. One company founder at a recent Library House event professed to be taken aback at the level of interest from US funds, while UK investors were noticeable by their absence. “There were wall-to-wall VCs and many were American,” he told me. “They said they were coming over to get the deals because we are more innovative.”
Although he was in the market for angel rather than VC investment, he was positive about his experiences with US investors. “UK investors tend to look at your business and ask: ‘What are the risks involved?’ whereas the US investors are much more concerned with the opportunities.”
Buoyed by this kind of attitude, the US route has been taken by several UK start-ups over the past few years. As Toby Strauss, chairman and co-founder of IT skills marketplace Orderwork, told g2i, the difference in attitude between the two countries is marked. “We found that the UK continues to be averse to investing in start-ups, whereas in the US, leading financiers are prepared to put seed money into ideas and see what happens. That difference in philosophy became apparent early on.”
There are of course some challenges to dealing with US money. There’s the small matter of the large pool of water that separates you from your investor, although many US VCs with a strategic interest in the UK either have offices in London or work with partners. Entrepreneurs and advisors who’ve dealt with US investors also advise you to set realistic expectations and keep on communicating your delivery against pre-agreed goals – which is good practice with any investor.
Most importantly, entrepreneurs need to ask what they’re getting out of the relationship, whether it’s strategic advice from a top US investor who’s been through the process of helping establish other start-ups, or a longer-term opportunity to access the US market. Whatever the value proposition, if the deal works for you at a strategic level, the colour of the money probably shouldn’t matter.
By David Longworth, Webster Buchanan Research
This week, as B&B’s UK Shareholders Association advised retail investors to consider voting against the TPG offer at B&B’s upcoming general meeting, TPG has been on a charm offensive in the City of London to win round investors. With its wide experience of turning round struggling financial institutions, it proposes to parachute in two senior executives to head the rescue bid. But with several major institutional investors unimpressed by the terms, British financial entrepreneur Clive Cowdery has been lined up behind a rival offer – giving newspapers a chance for “Plucky Brit versus US Giant” headlines.
The world of private equity is a very different place to venture capital, of course. PE firms typically look to buy out established companies in need of a cash injection, and take them on to the next stage of growth before splitting them up or selling them on. VCs, meanwhile, look for medium- to long-term equity positions in high-growth companies. But in both areas, US money is still readily available – and US buyout firms are thought to be circling UK companies en mass. So why is the prospect of US investment so often seen as a bad thing?
Research from Library House shows how the investment picture is changing. Last year’s report, “Funding Growth in a Changing World: The UBS UK Venture Backed Report 2007”, found 1,668 venture-backed businesses in the UK, which had raised a total of £1.4bn in 2006. According to its preliminary figures for 2007, Library House estimates that the total investment fell to around £1bn, still a sizeable chunk of money but back to the levels experienced in 2003. It also found that outside the UK, US-based investors were the principal source of finance for these UK venture-backed companies. And although China is overtaking the UK as a recipient for US finance with India soon to follow suit, the UK still leads the rest of Europe.
These findings were reinforced by new research from the BVCA (now known as the British Venture Capital and Private Equity Association). It found that investments by UK-based VCs fell by almost half last year from £1.3bn to £683m. The total number of early stage deals completed by its 214 members remained pretty constant at 584, however, indicating that average deal size is falling. These figures were no doubt influenced by the much-publicised exit of 3i and Panmure Ventures from the early stage investment sector.
Overall – including private equity – the BVCA recorded a 45% rise in 2007 investment activity to £31.6bn. So clearly it’s the buyout sector that’s most buoyant for UK investors, particularly for AIM-listed companies.
So what should entrepreneurs make of the continuing interest from US firms, whether private equity or VC? Firstly, US firms are particularly excited about the UK’s mobile sector, seeing it as a gateway into Europe – but interest across the whole of the technology sector is strong, as well as certain areas of life science and of course, our much-vaunted creative industries. One company founder at a recent Library House event professed to be taken aback at the level of interest from US funds, while UK investors were noticeable by their absence. “There were wall-to-wall VCs and many were American,” he told me. “They said they were coming over to get the deals because we are more innovative.”
Although he was in the market for angel rather than VC investment, he was positive about his experiences with US investors. “UK investors tend to look at your business and ask: ‘What are the risks involved?’ whereas the US investors are much more concerned with the opportunities.”
Buoyed by this kind of attitude, the US route has been taken by several UK start-ups over the past few years. As Toby Strauss, chairman and co-founder of IT skills marketplace Orderwork, told g2i, the difference in attitude between the two countries is marked. “We found that the UK continues to be averse to investing in start-ups, whereas in the US, leading financiers are prepared to put seed money into ideas and see what happens. That difference in philosophy became apparent early on.”
There are of course some challenges to dealing with US money. There’s the small matter of the large pool of water that separates you from your investor, although many US VCs with a strategic interest in the UK either have offices in London or work with partners. Entrepreneurs and advisors who’ve dealt with US investors also advise you to set realistic expectations and keep on communicating your delivery against pre-agreed goals – which is good practice with any investor.
Most importantly, entrepreneurs need to ask what they’re getting out of the relationship, whether it’s strategic advice from a top US investor who’s been through the process of helping establish other start-ups, or a longer-term opportunity to access the US market. Whatever the value proposition, if the deal works for you at a strategic level, the colour of the money probably shouldn’t matter.
By David Longworth, Webster Buchanan Research
Tuesday, June 24, 2008
What lies on the horizon
Most software is bloated, hard to use and ill-equipped for the task it’s designed to tackle. That’s the view of one Silicon Valley entrepreneur who’s taking a strikingly different approach to development by deliberately keeping his products simple and his team small – despite multimillion dollar growth.
Jason Fried, founder and CEO of 37Signals, is already something of a legend in Internet circles. Basecamp, the popular project management software developed by 37Signals, was the first ever package to be written using the Ruby programming language on the web-based Rails framework. In fact, it was Fried’s company that took the work it had done with the framework in Basecamp and released it to the open source community as Rails.
According to IT industry analyst group Gartner, Ruby will reach 4 million programmers in the next five years, positioning it as a mainstream programming language to rival the likes of Java. Unlike Microsoft’s C++, Ruby is a dynamic language making the code more “expressive” and potentially easier to read – it’s like the difference between reading lines of code and reading English. Ruby also gives developers the ability to more easily modify and extend it while it’s running –and it’s this power that the Rails framework exploits in a big way.
Basecamp was originally built in February 2004 to manage projects internally for 37Signals, which at the time was a web design company. But as the company started using it with clients and showing it to colleagues, it became clear that people needed something to manage their own projects. Fried says: “The lightbulb went off and we started thinking that we could make a product out of it. So we polished it up, named it Basecamp, slapped some prices on it and put it out on the market.”
Fried says the company’s early ambitions were modest, telling himself that if he made $5,000 a month in recurring revenue after 12 months he would be happy. “We hit that number in six weeks, so we knew we were on to something. The rest is history.”
'We love small teams... no keeping people busy just because they are on the payroll'
The company has made a lot of improvements to Basecamp since it launched, adding file sharing, the wiki-like writeboards, time tracking and images, but Fried says the “spirit” of Basecamp is all about keeping it simple. “We’ve received thousand of feature requests but we only add the ones we feel are in the best spirit of the product. It’s easy to mess up a good thing by doing too much. Most software is slow, complicated and bloated because the developers aren’t disciplined to know when enough is enough.”
Microsoft, of course, has always taken a different tack, forever adding new features and interfaces to its products and tackling new business challenges. So how can companies in the user-oriented Web 2.0 world hope to compete with the mighty development resources coming out of Redmond? The answer is that some of them don’t actually want to. “Basecamp is intentionally simple,” says Fried. “We don’t compete against other software products but against habit. Most people still manage projects via e-mail, phone, paper and fax. That’s why keeping Basecamp simple is so important – when the alternative is habit, simple is the only possible victor.”
This does of course mean that at some point you’re going to outgrow Basecamp, but that’s a fact that Fried and other web 2.0 start-ups are more than comfortable with. “We love small teams, we love simple software, we love stuff that just works. Most software sucks because it’s too hard to use, too packed with stuff you don’t need and too tailored for huge teams and people with technical backgrounds. Our stuff is simple, clear, intuitive, hosted and so easy to use you can get started in 30 seconds. No manuals to read, no IT staff required. It just works.”
It’s a philosophy that’s been extended to the company itself, which still has a headcount of 10, even though it’s poised to double its multimillion dollar revenue this year. “No management required, no muddled communication, no keeping people busy just because they’re on the payroll. Just focused happy people working on exactly what needs to get done.” Fried says the company could have 50 people by now, but he believes small is beautiful and intends to stay as small as possible “forever”. How long he can keep that up is an interesting question – it’s a wonder he even has time to answer my questions – but if small, focused teams are the future, then he’s certainly pointing the way.
By David Longworth, Webster Buchanan Research
Jason Fried, founder and CEO of 37Signals, is already something of a legend in Internet circles. Basecamp, the popular project management software developed by 37Signals, was the first ever package to be written using the Ruby programming language on the web-based Rails framework. In fact, it was Fried’s company that took the work it had done with the framework in Basecamp and released it to the open source community as Rails.
According to IT industry analyst group Gartner, Ruby will reach 4 million programmers in the next five years, positioning it as a mainstream programming language to rival the likes of Java. Unlike Microsoft’s C++, Ruby is a dynamic language making the code more “expressive” and potentially easier to read – it’s like the difference between reading lines of code and reading English. Ruby also gives developers the ability to more easily modify and extend it while it’s running –and it’s this power that the Rails framework exploits in a big way.
Basecamp was originally built in February 2004 to manage projects internally for 37Signals, which at the time was a web design company. But as the company started using it with clients and showing it to colleagues, it became clear that people needed something to manage their own projects. Fried says: “The lightbulb went off and we started thinking that we could make a product out of it. So we polished it up, named it Basecamp, slapped some prices on it and put it out on the market.”
Fried says the company’s early ambitions were modest, telling himself that if he made $5,000 a month in recurring revenue after 12 months he would be happy. “We hit that number in six weeks, so we knew we were on to something. The rest is history.”
'We love small teams... no keeping people busy just because they are on the payroll'
The company has made a lot of improvements to Basecamp since it launched, adding file sharing, the wiki-like writeboards, time tracking and images, but Fried says the “spirit” of Basecamp is all about keeping it simple. “We’ve received thousand of feature requests but we only add the ones we feel are in the best spirit of the product. It’s easy to mess up a good thing by doing too much. Most software is slow, complicated and bloated because the developers aren’t disciplined to know when enough is enough.”
Microsoft, of course, has always taken a different tack, forever adding new features and interfaces to its products and tackling new business challenges. So how can companies in the user-oriented Web 2.0 world hope to compete with the mighty development resources coming out of Redmond? The answer is that some of them don’t actually want to. “Basecamp is intentionally simple,” says Fried. “We don’t compete against other software products but against habit. Most people still manage projects via e-mail, phone, paper and fax. That’s why keeping Basecamp simple is so important – when the alternative is habit, simple is the only possible victor.”
This does of course mean that at some point you’re going to outgrow Basecamp, but that’s a fact that Fried and other web 2.0 start-ups are more than comfortable with. “We love small teams, we love simple software, we love stuff that just works. Most software sucks because it’s too hard to use, too packed with stuff you don’t need and too tailored for huge teams and people with technical backgrounds. Our stuff is simple, clear, intuitive, hosted and so easy to use you can get started in 30 seconds. No manuals to read, no IT staff required. It just works.”
It’s a philosophy that’s been extended to the company itself, which still has a headcount of 10, even though it’s poised to double its multimillion dollar revenue this year. “No management required, no muddled communication, no keeping people busy just because they’re on the payroll. Just focused happy people working on exactly what needs to get done.” Fried says the company could have 50 people by now, but he believes small is beautiful and intends to stay as small as possible “forever”. How long he can keep that up is an interesting question – it’s a wonder he even has time to answer my questions – but if small, focused teams are the future, then he’s certainly pointing the way.
By David Longworth, Webster Buchanan Research
Thursday, April 24, 2008
The Girls are Comming
Female-led businesses are on the increase both in South Africa and around the world, but better access to financial networks and enterprise training are key to catching up with their male counterparts.
The gender pay gap may have narrowed over the last 30 years, but it will be another 150 years before women enjoy equal pay with men, say analysts at the London School of Economics. Girls are outperforming boys in the classroom, yet the number of women appointed to boardroom positions in FTSE 100 companies is falling.
So what's a woman to do? Leave the corporate posturing to the men and set up her own business, by the looks of this year's London Annual Business Survey (LABS). Produced by the London Development Agency and Business Link for London, the survey found that female-owned businesses in London accounted for one in six of all businesses last year, compared to less than 10% in 2003.
And the majority of female entrepreneurs love being their own boss, says business support organisation, Everywoman. Its research reveals that 94% of women running their own businesses had 'no regrets' and said it 'exceeded' or 'lived up to' their expectations.
'Application, tenacity and believing you can do it,' are the ingredients of a successful entrepreneur, says Marcia Lazar, founder of clothing software start-up F2IT, who taught herself to programme rather than struggle to impart her 30 years' of fashion industry experience to a programming team.
Having decided to seek investment to further develop her software, Lazar then spent three months writing the 'ultimate business plan', following 'very intense but superb' training through the g2i programme. She's therefore surprised at the LABS's finding that women-owned businesses are far less likely than their male counterparts to have business planning tools in place. 'Women are more organised and better at multi-tasking than men,' Lazar says, 'and more likely to look after the budget at home.'
Connie Sprague, external communications manager at Business Link, agrees that women make good entrepreneurs because they're more efficient, adaptable and better able to juggle work and life demands. But their companies tend to be smaller - averaging 3.8 employees compared to 7.7 for male businesses - and therefore require less management structure. 'Women are playing catch-up,' she says. 'And not having a business plan reduces their chances of getting funding.'
Just 3% of venture capital goes to women-owned businesses, says women's business support network Aurora, with most of their start-up capital coming from personal savings and loans from friends and families.
Women are also more risk-averse and cautious, typically asking for a third less capital than men, according to the Global Entrepreneurship Monitor (GEM). Female-owned businesses start with, on average, capital of �10,000 against �15,000 for men, and, at start-up, expect to have an annual turnover of �20,000 against �50,000 for men. Five years on, they expect their turnover to have reached �40,000 compared to �130,000 for men.
Sarika Patel, director of enterprise and technology at g2i partner Grant Thornton, argues that the problem is not so much that women are less prepared, but that they're less plugged into financial networks. 'I go to lots of corporate finance evenings and they're very male-dominated. Women don't fit investors' typical role model of what they think an entrepreneur is.' One exception is the UK's first investment fund for women-owned businesses. Founded by Gita Patel, StarGate Capital Management's Trapezia fund closed last month after pulling in �5 million of capital for female-led businesses, including a web-based health club and an online villa booking service.
While technology has traditionally been less female-focused, Sarika Patel says the increase in internet-led technology businesses is helping to redress the balance. 'These are often more about networks - such as Mykindaplace [the teenage girls' website sold earlier this year to BSkyB].'
Aurora also reports that women are increasingly starting technology-based businesses in high-income countries. It says women-led firms tend to raise more than 10% of the total investment in several sectors including biotech, healthcare, HR and business software, imaging technologies, and email/messaging software.
While the GEM reports a growing desire to start their own business among 18 to 24-year-olds, the gender gap is greatest in this age group. However, women who had undergone some enterprise training were twice as likely to be engaged in entrepreneurial activity.
In addition, while only 17% of UK computer science degree entrants are currently from women (mostly from overseas), research from the British Computing Society shows that two thirds of girls found their computer lessons interesting, while a quarter would consider a career in computing.
All the same, female enterprise in general still lags some way behind male-led businesses. According to the latest GEM, there's nowhere in the world where women are more likely to set up in business than men. And, across the UK, female-owned businesses comprise just 15% of companies, compared to 30% in the US, where women-owned firms are growing at twice the rate of their male counterparts.
At last week's Women's Enterprise Day, Margaret Hodge, minister of state for the DTI, said she wanted to see the UK emulate the US in terms of the numbers of female business owners. Announcing the appointment of two chairs to lead the DTI's Women's Enterprise Task Force - launched a year ago to encourage more women to set up their own businesses - Hodge said the Task Force's objective is to take the UK closer to US levels of entrepreneurship. She added that if those levels were matched, it's estimated there would be at least 700,000 more businesses in the UK.
By Alison Hjul, Webster Buchanan Research
The gender pay gap may have narrowed over the last 30 years, but it will be another 150 years before women enjoy equal pay with men, say analysts at the London School of Economics. Girls are outperforming boys in the classroom, yet the number of women appointed to boardroom positions in FTSE 100 companies is falling.
So what's a woman to do? Leave the corporate posturing to the men and set up her own business, by the looks of this year's London Annual Business Survey (LABS). Produced by the London Development Agency and Business Link for London, the survey found that female-owned businesses in London accounted for one in six of all businesses last year, compared to less than 10% in 2003.
And the majority of female entrepreneurs love being their own boss, says business support organisation, Everywoman. Its research reveals that 94% of women running their own businesses had 'no regrets' and said it 'exceeded' or 'lived up to' their expectations.
'Application, tenacity and believing you can do it,' are the ingredients of a successful entrepreneur, says Marcia Lazar, founder of clothing software start-up F2IT, who taught herself to programme rather than struggle to impart her 30 years' of fashion industry experience to a programming team.
Having decided to seek investment to further develop her software, Lazar then spent three months writing the 'ultimate business plan', following 'very intense but superb' training through the g2i programme. She's therefore surprised at the LABS's finding that women-owned businesses are far less likely than their male counterparts to have business planning tools in place. 'Women are more organised and better at multi-tasking than men,' Lazar says, 'and more likely to look after the budget at home.'
Connie Sprague, external communications manager at Business Link, agrees that women make good entrepreneurs because they're more efficient, adaptable and better able to juggle work and life demands. But their companies tend to be smaller - averaging 3.8 employees compared to 7.7 for male businesses - and therefore require less management structure. 'Women are playing catch-up,' she says. 'And not having a business plan reduces their chances of getting funding.'
Just 3% of venture capital goes to women-owned businesses, says women's business support network Aurora, with most of their start-up capital coming from personal savings and loans from friends and families.
Women are also more risk-averse and cautious, typically asking for a third less capital than men, according to the Global Entrepreneurship Monitor (GEM). Female-owned businesses start with, on average, capital of �10,000 against �15,000 for men, and, at start-up, expect to have an annual turnover of �20,000 against �50,000 for men. Five years on, they expect their turnover to have reached �40,000 compared to �130,000 for men.
Sarika Patel, director of enterprise and technology at g2i partner Grant Thornton, argues that the problem is not so much that women are less prepared, but that they're less plugged into financial networks. 'I go to lots of corporate finance evenings and they're very male-dominated. Women don't fit investors' typical role model of what they think an entrepreneur is.' One exception is the UK's first investment fund for women-owned businesses. Founded by Gita Patel, StarGate Capital Management's Trapezia fund closed last month after pulling in �5 million of capital for female-led businesses, including a web-based health club and an online villa booking service.
While technology has traditionally been less female-focused, Sarika Patel says the increase in internet-led technology businesses is helping to redress the balance. 'These are often more about networks - such as Mykindaplace [the teenage girls' website sold earlier this year to BSkyB].'
Aurora also reports that women are increasingly starting technology-based businesses in high-income countries. It says women-led firms tend to raise more than 10% of the total investment in several sectors including biotech, healthcare, HR and business software, imaging technologies, and email/messaging software.
While the GEM reports a growing desire to start their own business among 18 to 24-year-olds, the gender gap is greatest in this age group. However, women who had undergone some enterprise training were twice as likely to be engaged in entrepreneurial activity.
In addition, while only 17% of UK computer science degree entrants are currently from women (mostly from overseas), research from the British Computing Society shows that two thirds of girls found their computer lessons interesting, while a quarter would consider a career in computing.
All the same, female enterprise in general still lags some way behind male-led businesses. According to the latest GEM, there's nowhere in the world where women are more likely to set up in business than men. And, across the UK, female-owned businesses comprise just 15% of companies, compared to 30% in the US, where women-owned firms are growing at twice the rate of their male counterparts.
At last week's Women's Enterprise Day, Margaret Hodge, minister of state for the DTI, said she wanted to see the UK emulate the US in terms of the numbers of female business owners. Announcing the appointment of two chairs to lead the DTI's Women's Enterprise Task Force - launched a year ago to encourage more women to set up their own businesses - Hodge said the Task Force's objective is to take the UK closer to US levels of entrepreneurship. She added that if those levels were matched, it's estimated there would be at least 700,000 more businesses in the UK.
By Alison Hjul, Webster Buchanan Research
The Power of Collaboration
Citizen Space bills itself as ‘a nice place to work in San Francisco’ – and for many of the people who take advantage of its central location, it’s also a free place to work. Espousing the principle of ‘co-working’ – where self-employed people come together to exchange ideas and enjoy the community aspects of a traditional office – it’s one example of a new approach to working practices that’s gaining ground in the US and to a lesser extent, around the world. For some businesses, it holds out the promise of cracking one of the toughest challenges of workplace management – balancing the upsides of remote working, including employment flexibility and cost control, with the social and creative benefits that come when people get together and interact.
Remote working has become much more of a viable option for businesses over the last few years. In part that’s down to improvements in broadband connectivity and wireless coverage, which keep people connected whether they’re at home, at an airport or in a coffee shop. In part, too, it’s down to the plethora of web-based collaborative tools that have emerged under the banner of Web 2.0. It’s now possible to run your company with a combination of traditional PC software and shared applications accessed over the web, avoiding all the hassles that come with running and maintaining office servers.
Webster Buchanan Research does just that, connecting employees, contractors, partners and even clients together from their homes or offices around Europe, the US and Hong Kong. We collaborate on research documents, media plans and sales forecasts using Google Docs and Spreadsheets, a ‘hosted service’ that’s run on Google servers and available over the Internet to anyone we give access to. We store documents and manage projects with a hosted application from Huddle, a UK-based company that’s participated in the g2i programme (see Huddle case study). We use web-based email systems, and we’ve experimented with hosted customer management systems to track sales and marketing activities. We’re hoping to persuade at least one of our accountants to convert to hosted services as their favourite software packages are converted to the web. We even use an outsourced receptionist service in the UK, Moneypenny, which takes calls via a London number and reroutes them around the world.
In Silicon Valley, where vast numbers of technology entrepreneurs are looking to take advantage of Web 2.0 as a business opportunity, this kind of approach raises few eyebrows. While the first dot com boom was all about flash office space and indescribable wealth, the second mini-boom is a much more measured affair. Home-working is de rigeur - angel investors and VCs are much happier to see their funds spent on product development or sales and marketing than sunk into office rent, and many customers also buy into the argument that they’re getting a better deal if the bills they pay go towards knowledge, skills, services and products rather than fixed overhead.
With every new initiative, however, there are always downsides, and remote working has plenty of its own. Professor Timothy Golden, from the Lally School of Management & Technology at Rensselaer Polytechnic Institute, recently published research in ‘Human Relations’ (http://hum.sagepub.com/cgi/content/abstract/60/11/1641) showing that the greater the percentage of telecommuters in a workgroup, the less satisfied their office-bound colleagues were. Golden explained to the Wall Street Journal (http://blogs.wsj.com/biztech/2008/01/16/telecommuters-make-work-rougher-for-the-office-bound/) that this was partly because people miss the social interactions with their remote peers, and partly because of the greater logistical challenges of getting hold of people who are out of the office.
For remote workers, meanwhile, life can get lonely. It’s not just the idle chatter that people miss over coffee – it’s the chance to vent when sales calls go badly, bounce ideas around, find things out and benefit from the general buzz that comes from impromptu conversations.
That’s what Citizen Space and other similar organizations are setting out to change, creating a space that combines office with coffee shop. Regular visitors can pay $350 a month to rent a desk – but if you’re just looking for space on a casual basis, you can simply drop in and use the facilities for free. The venture is built around the core principles of collaboration – working with people to share skills and knowledge – community and openness. “In a world where people are free, but ideas are not, only a few benefit,” says its website. “When ideas are free, everyone benefits. Therefore, we encourage open spaces and discussions. Sorry, no NDAs allowed.”
This kind of service is likely to become increasingly common as more entrepreneurs look to encourage home and remote working, particularly as the potential business benefits become clearer. Cost is a big driver in a tightening economy – the fewer people you have in a traditional office set-up at any one time, the less desks and floor space you need. But letting employees work remotely also allows you to tap into non-traditional talent pools, hiring people whose family or other commitments make daily commuting an unviable option. If you encourage these employees to seek out coworking set-ups, you’ll help to provide some of the social and creative infrastructure they miss out on when they work from home – and if the collaboration with strangers really works, you may even be able to tap into valuable knowledge sources without paying a penny.
By Keith Rodgers, Webster Buchanan Research
Remote working has become much more of a viable option for businesses over the last few years. In part that’s down to improvements in broadband connectivity and wireless coverage, which keep people connected whether they’re at home, at an airport or in a coffee shop. In part, too, it’s down to the plethora of web-based collaborative tools that have emerged under the banner of Web 2.0. It’s now possible to run your company with a combination of traditional PC software and shared applications accessed over the web, avoiding all the hassles that come with running and maintaining office servers.
Webster Buchanan Research does just that, connecting employees, contractors, partners and even clients together from their homes or offices around Europe, the US and Hong Kong. We collaborate on research documents, media plans and sales forecasts using Google Docs and Spreadsheets, a ‘hosted service’ that’s run on Google servers and available over the Internet to anyone we give access to. We store documents and manage projects with a hosted application from Huddle, a UK-based company that’s participated in the g2i programme (see Huddle case study). We use web-based email systems, and we’ve experimented with hosted customer management systems to track sales and marketing activities. We’re hoping to persuade at least one of our accountants to convert to hosted services as their favourite software packages are converted to the web. We even use an outsourced receptionist service in the UK, Moneypenny, which takes calls via a London number and reroutes them around the world.
In Silicon Valley, where vast numbers of technology entrepreneurs are looking to take advantage of Web 2.0 as a business opportunity, this kind of approach raises few eyebrows. While the first dot com boom was all about flash office space and indescribable wealth, the second mini-boom is a much more measured affair. Home-working is de rigeur - angel investors and VCs are much happier to see their funds spent on product development or sales and marketing than sunk into office rent, and many customers also buy into the argument that they’re getting a better deal if the bills they pay go towards knowledge, skills, services and products rather than fixed overhead.
With every new initiative, however, there are always downsides, and remote working has plenty of its own. Professor Timothy Golden, from the Lally School of Management & Technology at Rensselaer Polytechnic Institute, recently published research in ‘Human Relations’ (http://hum.sagepub.com/cgi/content/abstract/60/11/1641) showing that the greater the percentage of telecommuters in a workgroup, the less satisfied their office-bound colleagues were. Golden explained to the Wall Street Journal (http://blogs.wsj.com/biztech/2008/01/16/telecommuters-make-work-rougher-for-the-office-bound/) that this was partly because people miss the social interactions with their remote peers, and partly because of the greater logistical challenges of getting hold of people who are out of the office.
For remote workers, meanwhile, life can get lonely. It’s not just the idle chatter that people miss over coffee – it’s the chance to vent when sales calls go badly, bounce ideas around, find things out and benefit from the general buzz that comes from impromptu conversations.
That’s what Citizen Space and other similar organizations are setting out to change, creating a space that combines office with coffee shop. Regular visitors can pay $350 a month to rent a desk – but if you’re just looking for space on a casual basis, you can simply drop in and use the facilities for free. The venture is built around the core principles of collaboration – working with people to share skills and knowledge – community and openness. “In a world where people are free, but ideas are not, only a few benefit,” says its website. “When ideas are free, everyone benefits. Therefore, we encourage open spaces and discussions. Sorry, no NDAs allowed.”
This kind of service is likely to become increasingly common as more entrepreneurs look to encourage home and remote working, particularly as the potential business benefits become clearer. Cost is a big driver in a tightening economy – the fewer people you have in a traditional office set-up at any one time, the less desks and floor space you need. But letting employees work remotely also allows you to tap into non-traditional talent pools, hiring people whose family or other commitments make daily commuting an unviable option. If you encourage these employees to seek out coworking set-ups, you’ll help to provide some of the social and creative infrastructure they miss out on when they work from home – and if the collaboration with strangers really works, you may even be able to tap into valuable knowledge sources without paying a penny.
By Keith Rodgers, Webster Buchanan Research
Tuesday, January 22, 2008
When to Cut Your Losses
Do you really need all the funds you're asking for - or would you take less in exchange for a quick deal? It's the kind of dilemma you might have to square up to when you're seeking VC investment
Imagine the scenario. You're standing in front of a VC you've never dealt with before, you've presented your business plan, and you've concluded with a detailed explanation of why you need ₤2m funding. The VC thanks you, pauses - and asks what you could do with a quarter of that amount if it was with you by the end of the week. Would you take the bait?
It's worth thinking through the answer, because it really could happen. Among other people, it's a technique favoured by Howard Hartenbaum, general partner at San Francisco-based VC firm Draper Richards. And it works. According to Hartenbaum, some entrepreneurs quickly concede that they'd asked for more than they really need and go on to explain just what they could do with a fraction of the funding. If he and his colleagues like the answers, they'll offer a deal on the spot and secure their stake. As he points out with just a hint of exaggeration, entrepreneurs sometimes leave his meetings unsure whether they've been 'blessed or screwed'.
Hartenbaum's story was just one example of the deal-maker's mentality that emerged during a panel discussion at IBF's 18th Annual Venture Capital Investing Conference in San Francisco earlier this month. From the merits of receiving investment in tranches to the steps entrepreneurs need to take to ensure they don't end up losing their shirt, dealing with VCs can get pretty complex. As Vince Occhipinti, managing director of Woodside Fund, wryly pointed out: 'If you could get manna from heaven and not deal with a VC, you probably would choose that option.'
Not surprisingly, trust was a recurrent theme among the panellists - and VCs acknowledged that it works both ways. While most of the focus during fund-raising cycles is on how companies can impress potential investors, entrepreneurs also need to do a little due diligence of their own. Panellists advised companies to check out VCs' references, for example, calling their portfolio companies to see what it's like to work with them and getting the inside view on how they respond when things go wrong. Some VCs, in fact, actively encourage you to find out the worst about them. George Ugras, general partner at Adams Capital Management, tends to work with first time entrepreneurs and is blunt about the difficulties of growing a relationship from scratch: 'How can you build trust with someone who's on a boat with you and never sailed before?' he asked. That's why his firm specifically puts new CEOs in touch with entrepreneurs from previous deals that didn't go well. 'We tell them our mistakes first. We have never lost a deal in ten years where those calls are made - we really expose everything about ourselves,' he said.
VCs also warned that an efficient investment model often depends on them bringing in new senior people. That doesn't necessarily mean a new CEO - although entrepreneurs whose passion is more in the technology than building a business shouldn't be too surprised if their investors want a change of leadership. As Ugras pointed out, part of the VC's role is to reduce the risk of their investment, so if the technology team looks a little shaky or the company's struggling to set up an effective sales channel, that's where talent has to be brought in. 'Upgrading the management team is always something you've got to do,' he argued. Ajit Nazre, general partner at Kleiner Perkins Caufield & Byers, agreed: 'We will find the best person, no matter what it costs, even for Series A [funding] - it doesn't matter.'
Where VCs were split, however, was on the controversial practice of handing over investment in tranches, usually built around milestones. A perennial topic at VC conferences and one that frequently divides panellists, tranching is preferred by some investors as a way of drip-feeding funds to minimise their exposure. Occhipinti at Woodside Fund does it if the right syndicate is in place, where all the partners agree on the business goals and there's no danger of anyone losing patience mid-cycle. 'Having an extra $5m in the bank - believe me, there is a tendency to spend it,' he pointed out. For his part, Nazre argued that if he could, he'd tranche every month. 'It gives the company an internal goal to accomplish something,' he said. 'It's not a question of trust - it's discipline, for the entrepreneur and us.'
But not everyone agrees with that philosophy. Hartenbaum at Draper Richards said the firm rarely takes the tranching route unless there's a disagreement over valuations. 'In my experience, it's generally been a negative for the company - it causes a lot of stress and a lot of angst,' he said. He believes that tranching can actually make it harder for a company to hire new people - if you have less cash in the bank, you offer less security to a new recruit. Just as important, to his mind it's not a good reflection of the VC's role.
'We're a service provider,' he concludes. 'The entrepreneur provides the blood, sweat and tears - and we put in the money.'
By Keith Rodgers, Webster Buchanan Research
Imagine the scenario. You're standing in front of a VC you've never dealt with before, you've presented your business plan, and you've concluded with a detailed explanation of why you need ₤2m funding. The VC thanks you, pauses - and asks what you could do with a quarter of that amount if it was with you by the end of the week. Would you take the bait?
It's worth thinking through the answer, because it really could happen. Among other people, it's a technique favoured by Howard Hartenbaum, general partner at San Francisco-based VC firm Draper Richards. And it works. According to Hartenbaum, some entrepreneurs quickly concede that they'd asked for more than they really need and go on to explain just what they could do with a fraction of the funding. If he and his colleagues like the answers, they'll offer a deal on the spot and secure their stake. As he points out with just a hint of exaggeration, entrepreneurs sometimes leave his meetings unsure whether they've been 'blessed or screwed'.
Hartenbaum's story was just one example of the deal-maker's mentality that emerged during a panel discussion at IBF's 18th Annual Venture Capital Investing Conference in San Francisco earlier this month. From the merits of receiving investment in tranches to the steps entrepreneurs need to take to ensure they don't end up losing their shirt, dealing with VCs can get pretty complex. As Vince Occhipinti, managing director of Woodside Fund, wryly pointed out: 'If you could get manna from heaven and not deal with a VC, you probably would choose that option.'
Not surprisingly, trust was a recurrent theme among the panellists - and VCs acknowledged that it works both ways. While most of the focus during fund-raising cycles is on how companies can impress potential investors, entrepreneurs also need to do a little due diligence of their own. Panellists advised companies to check out VCs' references, for example, calling their portfolio companies to see what it's like to work with them and getting the inside view on how they respond when things go wrong. Some VCs, in fact, actively encourage you to find out the worst about them. George Ugras, general partner at Adams Capital Management, tends to work with first time entrepreneurs and is blunt about the difficulties of growing a relationship from scratch: 'How can you build trust with someone who's on a boat with you and never sailed before?' he asked. That's why his firm specifically puts new CEOs in touch with entrepreneurs from previous deals that didn't go well. 'We tell them our mistakes first. We have never lost a deal in ten years where those calls are made - we really expose everything about ourselves,' he said.
VCs also warned that an efficient investment model often depends on them bringing in new senior people. That doesn't necessarily mean a new CEO - although entrepreneurs whose passion is more in the technology than building a business shouldn't be too surprised if their investors want a change of leadership. As Ugras pointed out, part of the VC's role is to reduce the risk of their investment, so if the technology team looks a little shaky or the company's struggling to set up an effective sales channel, that's where talent has to be brought in. 'Upgrading the management team is always something you've got to do,' he argued. Ajit Nazre, general partner at Kleiner Perkins Caufield & Byers, agreed: 'We will find the best person, no matter what it costs, even for Series A [funding] - it doesn't matter.'
Where VCs were split, however, was on the controversial practice of handing over investment in tranches, usually built around milestones. A perennial topic at VC conferences and one that frequently divides panellists, tranching is preferred by some investors as a way of drip-feeding funds to minimise their exposure. Occhipinti at Woodside Fund does it if the right syndicate is in place, where all the partners agree on the business goals and there's no danger of anyone losing patience mid-cycle. 'Having an extra $5m in the bank - believe me, there is a tendency to spend it,' he pointed out. For his part, Nazre argued that if he could, he'd tranche every month. 'It gives the company an internal goal to accomplish something,' he said. 'It's not a question of trust - it's discipline, for the entrepreneur and us.'
But not everyone agrees with that philosophy. Hartenbaum at Draper Richards said the firm rarely takes the tranching route unless there's a disagreement over valuations. 'In my experience, it's generally been a negative for the company - it causes a lot of stress and a lot of angst,' he said. He believes that tranching can actually make it harder for a company to hire new people - if you have less cash in the bank, you offer less security to a new recruit. Just as important, to his mind it's not a good reflection of the VC's role.
'We're a service provider,' he concludes. 'The entrepreneur provides the blood, sweat and tears - and we put in the money.'
By Keith Rodgers, Webster Buchanan Research
Friday, November 30, 2007
Aiming for the top
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
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
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
Thursday, May 24, 2007
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
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
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
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