Blog Archives

What Bugs Bunny has to do with Startups

Thursday, November 29th, 2012

As a kid my favourite cartoon scene was Bugs Bunny running off a cliff, legs frantically whirring while he goes nowhere, till suddenly he realises he’s no longer on terra firma, and only then plummets to the ground.

We got asked in to help recover a startup recently.  Nice big industrial unit, staff of a dozen or so, just reaching the last of around £1.5m of funding.  “Maybe you can help us refine our investment presentation”.

Sure we can do that.  So, let’s understand what’s really special about your product?  Observe boardroom equivalent of Brownian Motion.  Uh-oh.  So, which markets need this?  Hmm.  Answer to Q1 an input condition to Q2.  This is where Bugs Bunny looks back over his shoulder at the cliff.

In fact, all the investment had gone in on the intuition that this was a great idea, but no-one had ever really checked it out properly.  When the money ran out and the results weren’t quite there yet, investors looked to see what sort of ground they were really standing on.  And only then did they notice no-one knew.

This is, of course, traditionally where Bugs stares in panic at the kids laughing on the lounge floor, and is whipped downward off the screen.  It looks in this case like we might be able to put a trampoline under him in the nick of time, but it’s a nail biter as I write.  If we can get him running again though, he’ll know what the ground under him is this time.

That’s all folks…

Royalties or Equity?

Thursday, October 11th, 2012

Back in 1985, Modigliani and Miller won a Nobel Prize in Economics for showing that a company’s value was unaffected by its debt/equity ratio.   It didn’t matter, they said, how you divided the pie, the pie was still the same pie.

Which returned to mind this week when my colleague Charles Martin was advising an inventor whether he should seek royalties or equity in his project.  So – which is in fact best?

Fundamentally, both are flows of wealth leaving the business.  Imagine first a business with shareholders only.  The inventor is a shareholder and so receives his rewards as his % share of the dividend stream. 

Suppose he switched his shares for a royalty?  Wealth would now leave the business before dividends were paid, diminishing them by that amount.  Let’s take an example:

An inventor has 40% of the shares in a business making £1m sales and yielding 10% net profit (£100k).  So he gets £40k in dividends.  If he charged a royalty instead, a 4% royalty on sales would put him in the same place (4% of £1m = £40k).  The other shareholders would then get 100% of £60k profits.

So it’s a meaningless question?  Well not quite.  Time, risk and tax enter the picture.  Royalties arrive as soon as sales are made.  Dividends may delay – years if the profits are ploughed back in – but then may be much larger.   Royalties depend only on sales, profits depend on costs too.   And the chancellor takes more of some forms of income, less of others. 

So the choice turns on your preferences in timing and risk, and on your tax situation.  Same pie, mind.

Black Coffee and Kicking the Furniture (Or, Why Writing a Decent Business Plan is So Hard).

Sunday, September 23rd, 2012

Black Coffee and Kicking the Furniture (Or, Why Writing a Decent Business Plan is So Hard).

Every year investors receive hundreds, thousands even, of business plans.  And most of them are hopeless.  Worse, they’re dull.  They ramble, they waffle, they pad.  They’re flat.  They do not engage.

Why?  It is, as they say, not rocket science (even if it’s about rocket science).  A quick rummage online will turn up good templates, and investors don’t hide what they seek.  So how come we miss the mark so often?

I believe it’s this:  Crafting a new business proposition is fundamentally a creative act.  As with a novel or a painting, there is no surefire route.  There are techniques but no algorithm.  Approaches but no ‘method’.

You size the market, scan the competitors, do your analysis and tot up the numbers.  But it’s in the fusion of all the elements that a business comes alive.  And that’s hard.  In all good business ideas, there is an element of magic, a creative step, that cannot be distilled to paint-by-numbers, to mere ‘work’.  It needs inspiration.  And inspiration comes hard if it comes at all.

Like good art, it’s easier to recognise than to produce.  It includes skill and discipline but goes beyond them.  And in the going beyond is where the black coffee and kicking the furniture come in.  Until at some point the fog finally lifts.  Everything snicks into place to the satisfying ‘pop’ of synapses forging a new connection, and your head clears. 

Sit back in your chair, and swap the coffee for a glass of something cold.

Why needing money is very often the symptom not the disease.

Tuesday, September 4th, 2012

It’s interesting how resistant this one seems to be.  I’ve lost count of how many times I’ve heard speakers say it, books say it, investors say it.   Opportunity starts with customers.   It’s obvious, right?  Yet it’s a perspective that seems to get lost time and again.  The how obscures the why.

I recently sat down with a very talented inventor. “We’re all ready” he said.  “We just need money.”  My alarm bells began dutifully to ring; shortage of capital is more often symptom than it is disease.  So was all he needed really money?

Well, in the narrow sense that they had a product development plan ready to whirr into action if someone put coins in, yes.  But in business terms, no.

As above, a PD plan doth not a business case make.  What was really needed was evidence someone would write cheques for the resulting product.   In this case, the oddity was that he actually had it; he just hadn’t realised its importance.  One potential customer had paid towards the product development, and another had told him he could sell hundreds of a specific variant of his idea.  But this was nowhere in the documents.

It’s embarrassingly simple but it bears repeating.  The first plank of a business case is evidence that someone will buy the product.   Crunchy evidence.  Evidence that cost something to give.  That evidence should go front and centre in the investment pitch.  Everything else is detail; the journey finishes with customers, but it also starts with customers.

Why a Patent alone is a Liability not an Asset

Monday, August 13th, 2012

We waved  goodbye recently to a prospect with a really great invention.  Not only was it a great invention, but he’d hired top quality patent lawyers, filed it in half the globe and… maintained it for ten years.

Heaven know what all this had cost him.  North of £100k he said and, as he explained in notably flat tones, his wife was none too pleased.

So what went wrong?  Is this bad luck, just more evidence that the odds are stacked against the little guy?  Well, there’s truth in both of those but the failure is more subtle.  He had simply never understood what a patent actually was.

A patent is a rented monopoly.  And anything you rent is a liability.  Anything you rent out is an asset.  He had the rental all sewn up but no plan for renting it out.   It’s like renting a factory and then wondering why nobody is sending you cheques.

Obviously this is hard to swallow, £100k down, which was part and parcel of why we waved goodbye to each other, but he was far from alone in his error.  Which suggests it’s less obvious than it appears.

Painfully often, a patent becomes a liability.  Proudly awarded the right to rent his monopoly, the patent holder lacks the means to rent it out profitably.  As usual, the answer lies in teaming up with  someone who has what you lack but lacks what you have.  Only together do you have an asset.

And our £100k man? It would be easy to call him greedy, but who shares a £100k asset?  Thinking that was what it was, he held on to the whole liability.

Born Global

Friday, August 3rd, 2012

Last month I took part in a technology commercialisation conference in Spain.  The question furrowing brows (European and north American, mostly) was a very focused and interesting one:  If most science based businesses are ‘born global’ by market niche, how do we enable them to actually go global?

The organisers had sought case studies of explicitly international accelerators and found, revealingly, none.  Which suggests that either everyone’s already integrated a global strategy into their work, or no-one thinks it’s terribly important.   Which it clearly is.

Competing views around the conference emphasised planning to be global from the start, getting customer feedback early, and forming partnerships abroad.  All very sensible and no doubt the answer is a blend of all three. 

The interesting thing was less the answers than the primacy given to the question in the first place.  I’ve rarely seen it so addressed in the UK, which suggests that  UK startup leaders might get off the boat in foreign parts to find that others have already beaten them to it.

Science based businesses are born global.  They need a global perspective from the start.  We know this – and elsewhere they’re working on systemic answers. 

Bring out your dying…

Wednesday, June 6th, 2012

If you’ve been involved in startups for more than, oh, a week or so, you’ll have noticed there’s never enough resources in them.  And if you’ve been around a bit longer, you’ll also know that most startups die.

I believe these are linked, and not in the way you may think they are.  Most startups should not be left to die.  In fact they should be killed.  Yes, you read right.  They should be killed – and as quickly as the data permits.

Why?  Because it’s the only way to shift the resources to other projects.  Projects starting to gain momentum, new projects needing a start.  Very often, failure to kill projects stems from less than noble reasons.

  • Reason one:  The project limps on because, having failed to develop a clear business hypothesis, there is no agreement about what results to date mean.
  • Reason two:  Evaluation is distorted by emotional attachment.  Most commonly, the Sunk Cost Fallacy.

It’s a fine line between perseverance and obstinacy.  Recognising that a startup is, to use Steve Blank’s definition, “a temporary organization in search of a scalable and repeatable business model” makes the task easier.  Set a clear hypothesis.  Test it by getting data.   If the data is negative, pivot it or kill it.  If the data is positive, concentrate resources there. 

Woolly-thinking, issue-avoiding, living-dead startups starve the rest.  So kill ‘em off, that others can take their place.

Why is there less innovation than there is creativity?

Tuesday, May 22nd, 2012

According to Theodore Levitt of Harvard Business School, “Creativity is thinking up new things.  Innovation is doing new things”.

Tot up the number of university researchers and potting shed inventors, throw in the army of patent lawyers, TTO staff and others helping them , and it’s clear there is a great deal of Thinking Up New Things going on. 

But is there enough effective innovation going on to match this?   Not by a country mile, I suggest.   In established businesses it happens at the margins if at all.  In startups it’s central but the failure rates are eye-watering. 

Formal understanding of how to innovate is only now emerging.  (We’ve known how to do creativity for decades).  Few organisations have it as their primary activity.  Absent such things, it’s hard to learn to be an innovator.   That means few truly able practitioners, which means few successful innovations.

So when might innovation catch up with creativity?  My belief: when innovating is similarly established as a career, and when its infrastructure looks as mature as the creativity infrastructure.   And when no-one needs a Harvard professor to point out the difference.

Startup management – exactly how is it different?

Tuesday, May 22nd, 2012

Almost all of us who work in technology innovation would agree;  This is very different to blue chip work.  But what exactly makes it so?  Is it the ability to get a lot done on a little money?  Is it flexibility?  Is it even the evident passion so many of us bring to this kind of work?

My colleague David Falzani put his finger on it recently.  “It’s this”, he said.”  In companies you use destination based thinking.  In startups you use iterative thinking.”  Destination based thinking you envision the goal, work back from it, and allocate resources to get from A to B.  In startups you mostly can’t do this.  You normally cannot see B from A.  So instead of calculating back, you iterate forwards.  You craft and test your product and market hypotheses.  You feed the data back in, you run the experiment again.  It’s a mix of intuition, creativity and rigorous analysis, a continuum of discovery, both intellectually and market-based.  It should be cheap, fast and empirical.  More importantly, it’s the way to avoid investment train wrecks.  That’s what makes startup management different.

Don’t Get Clever…

Tuesday, May 22nd, 2012

Don’t Get Clever…

It’s axiomatic that the simplest ideas are often the best.  This can be true in technology, where complexity adds cost and often unreliability.  But it’s equally true of that other fiddly dimension of startups, the legal framework.

Time and again we come across new ventures with such complex arrangements in place that they are effectively uninvestable.  No-one is going to take the time to unpick it.  And we shudder at what must have been spent creating it.

Why do startups let this happen?  My guess is that two temptations get them;  most new venture leaders will have seen these before, and some of us will admit to having fallen for them!

Temptation #1, the eternal human desire to fiddle.  To be too clever for our own good.  In startups, there just isn’t time for this.  Near enough is good enough.

Temptation #2 is more subtle.  This is the temptation to allocate resources to risks we can get a handle on, at the expense of larger risks we cannot define.

I’ve seen seed rounds where almost 20% of the funds invested went in legal fees.  Every what-if problem the negotiation flagged up was chased down and written in by the helpful lawyers.  Everything was covered.  Very diligent.  Problem was, these weren’t the real risks the business faced.  An order of magnitude larger was the risk that they wouldn’t make the needed sales before the money ran out.  And they now had 20% less time to achieve it.

The conclusion?  New businesses face many risks, and the biggest of these are almost always market risks.  Keep in view the relative importance of each category of risk.  Don’t let your money get spent on smaller risks just because they’re the quantifiable ones.  Keep your legal structure and agreements short, standard, and simple.  Use the savings to talk to customers.