Building An Innovation Ecosystem: Rainforests vs Plantations

Prof. Mary Walshok the founder of Connect in San Diego gave an inspiring talk at the Knowledge Capital Annual Lecture in Manchester focusing on the elements that led to their region to develop beyond tourism, real estate and agriculture into a powerhouse of technical innovation. She emphasised the need for regions to recognise and develop the assets they have but also to address the gaps then connect things together. As she note: "Like in Particle Physics when things collide you get reactions". The Connect program was that catalyst that brought people together. She emphasised the importance of community over company, shared purpose and a "sense of place".

Another interesting observation was that an innovation ecosystem should be more like a rainforest than a plantation. In this environment there is more uncertainty, density and diversity where the hybrid ideas arise from cross fertilisation and serendipity more than any organised linear process. Once a new idea has formed and proved itself to have something new and beneficial to offer to the market that's where cultivation and organisation become important.

Something for Nothing...

Surely the best deal is the one that generates the greatest return on investment. But those apparently in the know keep telling me Proof-of-Concept funds can't make money. But aren't business angels tying to make money and they are managing their own mini -POC fund. If you can make money on a small scale why, I ask, doesn't this scale up?

If you watch Dragon's Den they are always looking for the largest percentage of equity they can get. But 100% of nothing is still nothing, so you could say that it doesn’t matter whether you get 20% or 40% (this has been the argument of a few VCs who seem to cut much more generous offers than the dragons do) given most will fail.

Surely the point is that for the 1 in 10 early stage deals that really do fly, what percentage you have of that one is very much the differentiator when you come to analysing the overall portfolio returns. Is the problem then that larger funds just aren't prepared to get down and dirty with regards to valuations whereas individual business angels are very much focused on getting more for less? The fact that an early stage business will often get the cheapest money it's going to get i.e. grant funding followed immediately by the most expensive in terms of equity investment does little to help the situation!

Web 2.0 Startup - Plain Sailing

I attended the North West Startups event organised by Manoj Ranaweera in sunny Manchester - OK it was raining. Four interesting speakers. Stuart Scott-Goldstone talked about the legal aspects of a venture capital investment - necessary detail. Doug Stellmann of YFM Group gave some candid thoughts on investment from a VC perspective emphasising the importance of a stong management team that can react to change, admiting that very few investments follow closely to their business plan however perfectly crafted. The ability to sail through the trials and tribulations of a startup differentiates the winers from the losers. Paul Barraclough of Tecmentor talk on a subject close to my heart - crossing the chasm from early adopters to the mainstream and that very few companies find this plain sailing which reemphasised the need for agile management. Finally, Pam Holland ex-TeleCity reflected on her experience of staffing up a fast growth technology business - nice problem to have, but they didn't seem to have cracked the basic challenge of how to make more money the more you do. Spending money is a lot easier than making it!

On the Web 2.0 front (which was the main interest of entrepreneurs there) the prevailing view from the VCs was any application that you can code up in 3 months could be easily replicated in Bangalore or China, so from a professional investor perspective they would be unlikely to back it given so little barrier to entry. So think about creating something with a little more substance or have paying users before approaching a VC!

The Best Of Both Worlds

So Facebook has an open API that allows you to add-in your application and tap into the millions of users on the platform. What's so innovative about that? Microsoft opened up their Office applications in the mid-nineties to allow add-in components to be seamlessly integrated into the GUI to complement and extend their platform in niche areas. This was good for the vertical market developers who didn't have to try to duplicate this base functionality and good for Microsoft who could get even better entrenched into these markets.

Similar business models have come to the deep and murky world of relational databases with the ability to create new object types in Oracle via 'data cartridges' that appeared on the scene in the early noughties. So my crystal ball didn't have much difficulty in predicting this development as the Web matures - but as they say hindsight is 20:20 vision. The good thing about this iteration is unlike those that went before the loosely coupled nature of the Web means that these component-based solutions are unlikely to interact in negative ways, but equally you may be able to see the joins, but the Web has taught us its benefits outway these disadvantages.

I look forward to seeing more innovative mashups and better support for component-based Web development rather than everyone reinventing the wheel and having to develop the basic backbones of a Web application. However, the hoards of web development companies that are out there may not quite see it that way! The benefit is that horizontal platforms providing generic capabilities can be extended to do more vertical market things, so the consumer gets the best of both worlds.

Selling Equity: The First Resort

Selling equity in your business is hard, expensive and like oil, it's not a renewable resource. If you have any other easier or cheap alternative source of financing your business you should take it, but equally if you don't, do you really want to miss out on realising your dreams by preciously holding on to it - which is what far too many people do.

In business, a smaller slice of a bigger pie is invariably bigger than 100% of nothing. But therein lies the rub: An equity investor is looking to invest in a business that is scalable i.e. it can grow beyond being a 'lifestyle' business. So if you are serious about changing the world, gaining an equity investment should be your first and highest priority, as this is your only realistic means taking your business to the next level.

Our experience is that you can't be too prepared and our investment readiness process is invaluable in putting the foundations in place on which you can confidently pitch for the investment you need. How much is usually the next question. The reality is you need to find a balance between seeking too little and too much. This is where a business plan with realistic cash flow projections comes in. You need to have enough equity funding to meet you maximum cash requirement to get your product or service to market. Once you start selling something and you (just) need working capital, your funding options are cheaper & more varied: Factoring, overdraft, loans, etc.

Beating A Path To Your Door

Interesting post on TechCrunch on the top ten tips for startups. Not so sure about tip 9: "Don’t plan a big marketing effort. It’s much more important and powerful that your community loves the product."

The biggest mistake a startup can make is to believe if you create a better mousetrap, customers will beat a path to your door. Yes, if it’s a totally great or revolutionary idea maybe word of mouth will out, but the reality is that for us mere morals, we need to find a balance between developing an even better product and selling what we have.

Remember: out of 10 people, one will buy your product just for the hell of it (or they thought it was something it wasn’t); one will never buy it no matter how good it is; and the other eight could generally take it or leave it. How many of those eight you convert into customers, and at what cost, will dictate how successful you ultimately are.

Our FastInvest loan scheme is designed to give young technologies that push needed to get out there marketing and selling their product. Yes, make it better, but it's never too soon to start validating market demand and selling!

New Year Predictions

OK here goes:

Connect Yorkshire helps even more companies get investment ready and pitch for investment through its flagship investment forums, investment challenges and business plan competitions.

The rest of the Northern Way embrace the Connect model and it is rolled out in the North East and North West.

An online community of best practise, participation and support develops that brings together entrepreneurs with the resources to they need to help them succeed that extends beyond our traditional geographic boundary and the Web 2.0 community.

Yorkshire Forward announces a region-wide investment fund as a follow on for Partnership Investment Finance and the South Yorkshire Investment Fund that incorporates a much needed seedcorn element.

Component-based, service-oriented applications finally take centre stage with Web Mashups and loosely-coupled applications 'Web 2.0' increasingly replacing the monoliths of the past.

Connect launches its 'Springboard' initiative to help early stage propositions get their business plans into shape.

I finally access and use a Web site in a meaningful way through my mobile phone.

One can but dream...Happy New Year!