Sell for success

Sunday Business Post - Computers in Business magazine (cover story) - June 01 2008
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After developing a product and ensuring its viability, start-up firms must focus on the most critical part of business - the all-important sale, writes Dermot Corrigan.

All start-up companies come to a time when they have to move on from spending capital on developing and perfecting a product, to commercialising it and get a cashflow going. While ingenuity, creativity and an aptitude for technology infrastructure is useful, selling the concept is crucial to a company's chances. Whereas the dotcom boom was awash with start-ups that attracted speculative money, today, it requires a lot more than a bright idea to get a company off the ground. So how is it done?

A technology start-up's first sale often marks a major shift in the company's development, according to Tom Hayes, director of the high potential start-ups division, Enterprise Ireland (EI). “For any company, the first sale reference site is critical, because that can lead to so many other things,” Hayes said. ”If you have a good first sale reference site, it is a calling card when you are looking for other customers. Other customers can see that there is somebody out there willing to buy the product, and if you are looking to recruit people it can swing it.”

Dr Ciara Leonard, manager of enterprise development at the Nova UCD business incubation centre, said that selecting the right customers to aim for could be a challenge. “It depends on the market for their product or service,” said Leonard.” There may be only one or two big customers in the world, and they want to service those, or there may be hundreds of different potential customers.”

Maurice Roche, partner with venture capitalists Delta Partners, said owner managers should think carefully about how to price their product or service. “That is the $64 million question,” said Roche. “Some people will say it should be ’cost-plus' - if it costs €100 to make then work from that, say to go for a 100 per cent mark-up and aim for €200.With software it is very difficult to say, because it is all people costs and development costs, so how do you cost that?

“In my view, you should be looking at value-based pricing. Forget about how much it has cost to develop, and concentrate on how much value it is worth to the customer and how much they are willing to pay for it. It can be hard to figure that out though; you never know until you have had a dialogue with customers.

“You can try and see what your competitors are selling at,” said Roche.” You might decide to sell at that price plus, as you are bringing a lot more benefits, or you can decide to go around the same price.”

Leonard said that tech start-ups often used their first customers as ‘validators', who helped them to iron out the early problems in the product or service that only come to light when a customer gets involved.

“You have to be able to validate your technology,” she said. ”A lot of new businesses benefit from having a reference customer that is in close proximity to them, where they can deal with any queries or faults or whatever else.”

Roche said many companies made their first sale before they had developed the support services necessary to support their product. “There are only so many things an early-stage company can do,” he said. “It would great to be able to say that all early-stage companies are very well organised from the start, but, in reality, they are not. They try to get the product to a stage where they can show it to customers and then they try and get the customer to pay for it. What you sell the first customer will be different from what you sell the tenth customer.”


The A-team

As a start-up begins to deal with customers, the mindset of the whole company must change, Hayes said. “In a technology startup, there can be a switch from a very technical sell to a business sell, where you are selling a solution and a value proposition,” he said.” A technical person understands the technology, but selling to a customer is different. There is a fairly discernible shift required.”

It is important to get the right people in at the right time to ensure a steady growth curve, Leonard said. “The first couple of hires are very important,” she said. ”In a small start-up, you rely on these people heavily, not just for their core competency, but also to carry out other tasks that may need to be done. You need people who will be really loyal, so you can concentrate on other aspects of the business, rather than recruitment.”

Many companies add new board members or engage consultants at this time, to gain access to high-level experience, skills and contacts, according to Leonard. “It is important for an entrepreneur to think about how they can fill the gaps in their experience or skillset,” she said. ”A lot of times, these cannot be filled by just one other person; it might take a few sources of expertise.” Roche said people used to operating in large organisations, with layers of supporting infrastructure, could find it difficult to adapt to smaller early stage companies.

“They would be used to having secretarial support, a brand that they can leverage in the marketplace and a raft of accountants to do business analysis and financial projections,” he said. ”When you take them out of that comfort zone and put them into a three or four-person start-up, it requires a different skillset.

“You have to multi-task in those areas, and grasp the elements of technology, sales, managing people and trying to convince customers that, even though you are a small company, you are a viable entity and you have the best product that suits their needs and you will be around to support it going forward. These are all huge challenges that early stage companies face.”

Assistance

Hayes said that many emerging tech companies looked for support from EI. “We can provide early stage companies with a mentor, who has been there and done that, might have started their own company or might have come from a multinational environment,” he said.

“They might act as a board member or chair a company, or, in certain circumstances, they will also invest in the company, and often, that can be an ideal arrangement.” Leonard said there were plenty of support structures available to help Irish tech start-up owner-managers deal with the day-today challenges of running successful businesses.

“Human resources issues and financial issues can be a challenge for people,” he said. ”Through our training programmes, we help them to manage administration personnel or whoever, and give them financial skills as well.” The shared learning experience of incubation centres can help new companies succeed, according to Leonard.

“For an entrepreneur in a new SME, it can be quite a lonely experience,” she said. ”We would encourage a lot of networking between our companies, and organise a lot of events based on particular areas - it might be funding or product development - and they can strike up a relationship with their peers. A lot of times, a company that is a year or two years ahead of where you are can provide a lot of benefit. We find a lot of benefit comes from sharing experiences and sharing ideas.”

Roche said venture capital firms general ly built close relationships with growing companies they had an interest in. “If we make an investment in the company, formally, we go on the board of directors of the company,” he said. ”In terms of being actively involved, in the early stages we would have a heavy involvement in the company, to try and get it up from the initial start-up phase when it is raising money, to help it make some commercial progress.”

Hurdles

Hayes said the most important hurdle faced by emerging businesses was getting a revenue stream in place in time. “It is always a danger that an early stage company will just run out of time,” he said. ”The funds or resources will run out and their backs can be to the wall. This can be a huge burden on an early stage company, as cash is important and if you run out of cash, you just run out of runway, and you have no business.”

Existing customers should not be neglected as stretched sales teams sought out new business, Hayes said. “It is vital that you do not say,’ fine, we have done the deal now, lets move on to the next customer',” he said. ”It is absolutely vital that an after-sales service is provided, training is provided, support is provided etc. The closer you are locked in to the customer the better. A business development person will see the need to train and skill the customer to use the product, and develop the relationship, because the customer is always king.”

Leonard said companies should be careful not to devote resources to developing a product in ways that the market did not want. “Some people find they are developing X product or service, but what the market really wants is X+1 or X-1,” she said. ”It is key for the company to engage with the market and get plenty of feedback.”

Roche said there were plenty of reasons why new companies might fail. “Sometimes, companies do not raise enough money to get through the first two years,” he said. ”They go ahead and maybe scale up with some staff and they cannot make it. Maybe the product does not work, maybe they are trying to do something that is just very difficult, and they fail.

“Or maybe they cannot get customers, or people are not willing to pay a sufficient amount for it. Maybe competitors are too strong, and will not allow an upstart to come in and take market share. Maybe they are too early to the market - sometimes you can be ahead of your time.”

Diversification and the future

Leonard advised early stage tech companies to concentrate on their primary product and service, and not stray too far from their initial concept. “In the first year, a lot of companies would focus on their first product or service,” she said. “They tend to be working on this product or service al l the time, to make it even more ready for the market. Through their customer engagements over time, they may see other opportunities, but it very much depends on the market they are in, and where the opportunities are.”

Hayes said it was generally easier to sell to your existing customer base than it is to get a new customer. “You should be looking at upgrades, but you should be looking at new challenges and new market segments as well,” he said.

“It is a balancing act, and constant re-investment in research and development is key. It does not have to be a significantly different new direction, it can be enhancement of the product.” Roche said that companies should look to fund further research and development from their own income if possible, rather than returning to a VC or private funder to seek a second round of funding.

“The cheapest source of funding for any new technology company is from its customers,” he said. “‘There is a certain level of funding most companies need to take on board to get up and running, but after that, they should be focused on generating revenue from customers.

“Maybe if they want to expand in front of the market, they will need to take in more outside funding, but companies should be encouraged to take on as little money as possible, because raising money is expensive.” The aim of many tech entrepreneurs is to build the company to a stage where it becomes attractive to a major global player, who could be tempted to come in with a huge takeover bid. Roche said owner-managers should keep these thoughts at the back of their mind during the first few years of trading.

“When is the right time to sell?” he said.’ ‘It is when a company is sufficiently attractive to a number of buyers so you can create an auction, or perhaps a company can come in and make an offer that is good enough to accept. There are exceptions, but it should not be in the first couple of years.

“On average, people would be looking to exit a company in years six to eight. Companies need time to develop, make a name for themselves and grow their revenues.”