Blog - Page 2 of 3 - ConCap Ltd.
This is the third in a six part set of blogs about "how not to raise money for your start-up". The grim stories you read hear are based on real life events – meetings and conversations I have had over the years, and will no doubt form the basis for my next book.
So far I've covered Management in Part I and Valuation in Part II, this week we'll take a look at USP.
When I worked in an EIS fund, USP was a short hand – not just its literal meaning of Unique Selling Proposition, but the whole idea of differentiation, competition, compelling need and reasons to buy. It was whilst digging around in the presenters understanding of their market – and marketability – that you discover how much (or how little) they know about the actual process of selling a product or service to an unsuspecting customer (whether they are a business or a consumer).
This whole area could fill a book (and has done many times) so rather than pick one example I can demonstrate with one of the classic pitfalls for a new business pitching for money, confusing USP with unique product.
1. You don't know your market.
This is often the case (not always). One of the advantages of working exclusively with early stage technology companies is that you get to see some very cool stuff. Not all the cool stuff will become a successful business, but some of it will. As a result of this, you tend have a reasonable finger on the pulse of what is going on in the markets you are interested in – and that includes new developments that you simply cannot find with Google. Sometimes though the competition is out there, easy to find and clearly position! Personally I have generally found that whenever someone tells me about their "totally unique" product I will see a very similar pitch from another start-up within two weeks with basically the same solution.
2. There is no market.
Sometimes you have to stop and think "Is there a reason no-one else is doing this?" and sometimes the answer is simple – there is no commercially viable market for the product or service. The reasons for this can be obvious – the product costs too much to make, no one wants it and sometimes you have to dig out your MBA notes and do a good old fashioned PEST analysis – and discover that regulation changes mean it will no longer be legal to sell your product!
3. You are genuinely the first in the space.
Not necessarily a good thing. You see, being first in the market means you are going to do a lot of learning with your investors funds. You will learn how to position and sell a completely new product, you will learn what features, functions and benefits your customers really value and you will learn where the price/demand curve really lies. And so will all the companies that come after you – with a lot less money.
So to go back to the point, USP does not mean you have a unique product – it means you know how to differentiate your product in your chosen market. The USP will derive from a clear understanding of your target market, their needs, the pricing required to compel them to buy, your competition, and the benefits which you can deliver and your competitors cannot (or cannot do so well).
That is why USP is shorthand for so much more!
As some of you know I have been on jury duty for two weeks, ending today (June 8th). I really didn't know what to expect, so for those of you yet to serve, here is my story. As Aneurin Bevan once said, "This is my truth, tell me yours".
I had already had a deferment of service because my first call coincided with an event I was organising, so I had to attend this time. I've been told that if your run your own business you can get exemption, but given that I have never been called and I'm now over 50, I felt I should do my duty (and I was a little bit curious).
I was under the misguided belief that you are called for a specific trial – so that was the first lesson. You are called for a specific period and are expected to be available for service for as many trials as fit in that 2 week period. So straight away I knew we were in for an easier time than some people – the Jubilee double bank holiday was slap bang in the middle of my service period, thus reducing my service from 10 days to a likely 8, unless my final trial ran into the next week for some reason.
As my service was at Aylesbury Crown Court – just 15 minutes drive from home, it wasn't too inconvenient, and we were called to arrive at 9:15 on the first day (Monday 28th May) for our induction. Some of the jurors had come from Milton Keynes, Great Missenden and places more than 45 minutes drive away.
Aylesbury does not hear murder or manslaughter cases (they go to Reading or Oxford apparently) and we were advised that most trials lasted 1 or 2 days normally. So in theory, if you served your full 10 days, you could have half a dozen trials!
We were inducted by a short video which gave us the basics of how the process works, and what we can (and cannot) say about our service. So you won't read anything here for instance about specific trials. The muster room was hot and cramped – there were 16 of us in what felt like a hospital waiting room. Aylesbury CC is an old building (1793 I think) and therefore not the most modern of facilities. There are two courts – one an old traditional wood panelled job and the other one less formal and doubling as a council chamber.
By 10am we had been inducted, told where the loos and water fountain were located and advised to wait until were called. In the event we had the odd update to say no news, legal process was in play but a trail was not about to start. By 12:30 we were advised that neither trial would proceed, and we were free to go, required back at the court house the next day at 10:30.
We were back on the Tuesday morning, for more of the same – within 2 hours we were advised to go home as we were not required. I got a voice mail later that day to say we were not required on Wednesday, and that we were on call – meaning we had to call the court house every day after 4:30pm to see if we would be required.
I called on Wednesday – not required for the Thursday, and similarly on the Thursday evening – not required on Friday. This worked out rather well for me because I booked (provisionally) two lunch time meetings – one each on Thursday & Friday – and I was able to make them. Although very disruptive to my normally busy meeting schedule, I had time to catch up on paperwork and phone calls and emails – and whilst waiting in the court house the first two days I read business plans, used my iPad and generally acted as if I was at work!
So by the end of the first week, I had been in the court house for a total of about 5 hours, seen no trials! With a 4 day weekend, I called on the Friday night to find that I was required on the Wednesday after the Jubilee.
When we arrived we were now second weekers – a new group of jurors was being inducted and there were two trials on the slate for that day. We were moved "upstairs" to the jury retiring room which is designed for 12 people (and has 12 chairs). There were 16 of us, so we sat in the corridor, and waited. Once again we were told that legal process was being undertaken… and then finally about 12:30 we were told the trial would not go ahead and we were free to go! Ironically the first weekers – the noobs who started that day – got a trial!
We were also advised we would be required on Thursday (yesterday – June 7th) and turned up again at 9:50. By 11:30 we were told the trial was going ahead and duly trooped into the court. The selection process is nothing complicated. All 16 names on cards, the cards are shuffled, the names read out, and the jury is sworn in. The defendant can object before they are sworn in. So out of the 16 jurors available, 12 are picked. And I wasn't one of them! So we 4 trooped out and had to wait to make sure the trial started without the jurors declaring they knew the defendant or witnesses (they didn't) and we 4 were sent home! Yesterday afternoon I got a voicemail to say that there was no need for me today (Friday 8th) and my service was complete!
So week two, only 3 days, I spent about 5 hours in the court house, about 20 minutes in a court room (but not selected), and my service is complete. I cannot be called again for 2 years.
There can be no escaping the economic climate; for all but a rare few, its impact is being felt daily and affects our quality of life, employment, trading and confidence. We are adjusting to this slowly but surely – cutting our cloth accordingly.
The basic steps are survive, thrive and exceed expectation and for many the survival bit is not guaranteed. So it has been refreshing this month to have been involved with entrepreneurs who see opportunity and reasons to optimistic even in the constrained environment we live in.
A fundamental shift in thinking now has spawned what you might call businesses of the hour.
They tend to fall into two camps – the opportunistic advantage takers and the companies that seek to ease the pain whether directly for consumers or for companies. The former are easy to identify – the payday loan companies with interest rates measured in 1000s must surely be brought to book soon and regulated (and probably put out of business). The mood has changed, we are starting to see a re-emergence of community spirit, social responsibility, an ethos of helping rather than exploiting other's pain. The short term loan companies will have their day for a while, but they do not solve anything – they are grubby and will be seen in retrospect as the last vestiges of the greed that got us here in the first place.
The second category of business is more interesting and more sustainable in the long term. There is a deep seated belief in certain quarters that a good business has to be ruthless, cannot "do good" or "be nice". Well I for one think this is symptomatic of the type of people we really don't want running our companies any more – those days are gone just like the days of bigotry and racial stereotyping.
A new breed of entrepreneur is emerging with a strong sense of community, of helping whilst profiting but not exploiting. I have seen several companies recently which give a fixed percentage of their profit to charity from the start of operation (big corporates do this too, I know). The emergence of small community centric companies is a reaction against the excesses and greed. These companies will not appeal to VCs at all (good!) not driven to grow as big and as quickly as possible, they will grow more organically, in tune with their market and clients. They will generate profits, jobs and societal well-being and will be dismissed by the greed & avarice motivated crowd as "life style" companies.
How did "life style" become a negative thing? The implication is a lack of ambition on the part of the owner, the desire to ensure their own comfort at the expense of unbridled greed and lust for profit. This from the people who paid themselves bonuses to lose all our money.
Personally I think the new breed of entrepreneur is more interesting and investable. Less risk, but lower returns. Adjust your sights at this new target and think about it for a while. A large number of small investments, that overall generate lower returns but do not suffer the scale of losses.
Next time you meet a fund manager who tells you about an IRR based on paper profits – ask him or her how many exits they've had, at what value and TOTAL cost to all involved – including the founders & employees. And ask them about their losses which they don't put out press releases for, and the moribund companies they cannot exit and end up "off loading" or "hiving off" to anyone who will buy it simply to release their cash.
And if they are a "tax efficient" investment fund such as an EIS fund, ask them if they have ever liquidated a position to get the loss relief to avoid having to put more cash in (which they probably don't have) or sit out another 3 years whilst the company turns the corner (because they don't have the patience – or their investors don't).
Am I a soft hearted former roadie & hippy as someone recently described me? Yes in a way. But the loathing many members of the public feel for "bankers" covers all aspects of the finance industry – they simply get lumped together and the braying corporate donkey hasn't gone away – at least not yet – as I discovered at a networking event last week.
On the positive side, I met 30 SME clients of UKTI whilst running a training course on Intellectual Property for CASS Business School last week, I met 6 fantastic technology companies at the Shell Springboard Awards, I met a couple of dozen tech entrepreneurs in Milton Keynes at InvesTechMK and even met a passionate entrepreneur at a beer festival in Camden. All of that in one week.
I am a positive person and weeks like this recharge my positive energy batteries for months on end!
Professional investors in early stage companies will talk about scale and scalability as much as, if not more than, other important considerations such as management and valuation. Lack of scalability is a deal breaker and you will often hear these businesses described as "life style" companies as if that is a bad thing.
It might not be to the investor's tastes but so called "life style" companies are the bread and butter of our economy. Whilst they idly dream of finding the next Google or Facebook, the rest of us get on with our lives and focus on earning a living and then achieving a standard of living which goes beyond our basic needs.
In the process we pay taxes, employ people, educate and empower future entrepreneurs and build profitable companies that stabilise – and in the process don't really give a damn that a professional investor on a fat salary and a bonus sneers at our "little" companies that will never become global empires.
We should be making great efforts to support these companies, not just because they represent future growth and stability, but because these more modestly ambitious companies take fewer risks, grow more steadily (and slowly) and will generate modest returns on investment. A basket (portfolio) of these companies will be less risky and yet provide much better returns on capital collectively than a comparable basket of so-called scalable companies.
There are some really good funds & fund managers, but you have to say that the claimed track record of a good number of funds – which are based on a "fair value" of their net assets – are modest to poor. As an investor you will pay dearly for their "success" – whether through initial fees for investing, management fees, carry or poor performance. And good performance is not about paper based value gains – it is about profitable exits.
You also have to ask why such bright sparks are incapable of picking winners. How many potentially successful companies do they turn down for the wrong reasons – scalability being one of them.
In a world where early stage companies basically write their business plans to suit the expectations of investors and still struggle to get funded, maybe there is a role for a group of investors to question the emphasis on scalability, and to start looking for reasonable returns from reasonable opportunities?
In 1986 I was working in Dallas, Texas. I was a rookie salesman (but didn't realise how rookie at the time). One day I went to the loo, and when I came back my boss was waiting for me. That man taught me a lot, and on that day he taught me that time isn't free.
He took me into his office, closed the door and said "How much did that bathroom break cost you"?
"Nothing, the loos are free" said I.
"No they're not, let me show you why".
He cleared the whiteboard and asked "how much do you want to earn this year "?
"$100,000" – I didn't that year but came close the next.
And then he started working on the whiteboard. He told me there are 242 working days in the year, after taking out weekends (104 days), holidays (10 days – only 2 weeks in America!) and public holidays (9 days).
And then he explained that in an 8 hour working day (we were in the office 8-5 every day), and excluding the fact that I actually worked 10-12 hours every day and some weekends, these were the hours my prospects would also be in their offices. So most of my income would be earned in those hours. So in one year there are 1,936 working hours in which I can earn $100,000 – so each hour represented $51.65. So the 10 minutes I had been in the "bathroom" had cost me $8.61.
Now you may think this is nonsense, but I can tell you that I took this to heart. Like him, I started travelling outside work hours. I was flying every day Sunday to Friday, travelling across America to meet prospective clients, sometimes 3 or 4 in each city each day. I would catch a plan in the evening, arrive at a destination, get in a rental car, drive to hotel (arriving late – 10 or 11 at night), get up and start the day with a breakfast meeting. And repeat. Until I arrived back in Dallas on Friday evening. At the airport I made calls (no mobiles). On the flight I wrote up my expenses, report on the day and actions for the next day. At the hotel I ran through my next days presentations and went to sleep.
And when I was in the office, I started focussing on my time management, until I used my time effectively. And my income increased and I became efficient & professional.
This week alone, one prospective client has told me that they just want me to apply my knowledge & expertise to their documents, just a few hours, and naturally they don't expect to have to pay for "just a few hours". Another one told me that by my age they thought I wouldn't need to earn money any more and could just help them out. One man arranged a meeting and didn't show up – no call, no txt, no email (and 3 days later I have not heard from him, but I know he's OK – he met someone else I know the next day).
I value my time, and respect those that act professionally.
I just wish a few more people acted the same way.
Like a Barclays Premier League football club, RIM have sacked the manager in a desperate attempt to avoid relegation. In fact they sacked two Chief Executives (so called co-CEOs – which sounds like your problem right there). They both remain on the board however.
I am of the opinion that the board is responsible for approving the strategy of the business (amongst a few other things) and that the executives are responsible for executing the strategy and delivering the value. So what this says is that RIM are in trouble, the strategy is fine but the execs didn't execute it properly, so we're replacing them. Maybe. But would you then let them be responsible for the strategy? One could deduce from this that actually the strategy team got it wrong and the team needs bolstering by operating management experience.
Founder Mike Lazaridis said "There comes a time in the growth of every successful company when the founders recognize the need to pass the baton to new leadership." Indeed – but the founders most often recognise this moment after the ship has hit the iceberg, not before.
So that means getting back to providing the essential business tool (the Blackberry) and giving up on competing with Apple by making consumer devices such as the ill-fated Playbook? The problem is that BlackBerry lost its way, didn't realise it, started losing customers (and more importantly was losing potential customers) and only now is it reacting.
I was a BlackBerry user (and fanatic) for 8 years and 6 BBs. In one year they managed to erase my apps and personalisation with a poorly executed OS upgrade, and deny me service on two separate occasions. My contract came up for renewal in November, I could switch to iPhone 4S at no charge and didn't hesitate. Just like that, I'm gone, never to return. And the thing is, I know a few more people who went through the same thing – and they know a few more as well.
RIM's shares have lost 75% of their value in the last year, if you were a shareholder you might well want action. Moving the founders upstairs is probably the only thing they could do, but like the football clubs, their chance of avoiding relegation will depend on what their new manager achieves in the first 90 days. If he can articulate a focussed strategy, based on what they have to hand (i.e. not based on future products yet to see the light of day) there maybe a glimmer of hope. I was of the opinion last November that RIM would be acquired this year, and I still feel that is likely. They have lost so much ground to competitors, lost shareholder confidence and are in the doldrums with the customers such that saving the "club" seems unlikely to me – that commercial advantage they have lost will be extremely hard to regain on their own.
I do not wish RIM ill however. They created a new class of device, made access to email for corporate users simple and ubiquitous and I really depended on my many BlackBerries over the years (and they delivered more often than they didn't). The technical innovation seems to have deserted them now – they appear to be reacting to Apple's moves which is never a good sign for their long term survival. Most of all I would not wish to see their employees suffer for the vanity projects of the executive team.