Making Your Own Luck

Gary Player once remarked "It's funny, the more I practise, the luckier I get". So should a failed entrepreneur be given a second chance? The argument goes that you learn valuable learn valuable lessons from failure, so you should be more likely to succeed second time around. But others argue that experience gained from one failed business is unlikely to apply to a second, due to the unpredictability of chance. "You can't learn to win the lottery" No, but if you are lucky you can influence the amount you win (my tip, don't select the numbers 1,2,3,4,5,6 as 10,000 others have then!).

Getting into a position to profit from being a little bit lucky is probably was differentiates successful entrepreneurs, but no one is lucky all of the time. So whether you eventually profit from a bit of good business fortune is very much down to the experience of the management team. All you can do is deal yourself a good hand, but whether you win a particular pot or hole a specific putt is partially down to fate. Embracing this risk is what equity investing is all about. So if anyone says they have only been associated with success they have either are a one-trick pony or very, very lucky! In business, lessons are best learned from those who have been mainly successful...

Gender-Based Finance

Budget 2008 introduces a package of measures to support small businesses access the finance and resources they need to start up and grow. What caught my eye was the announcement of a new £12.5M capital fund to invest in businesses started by women.

I have trawled the HMRC website to try to find out more about how is that going to work but to no avail. Most businesses are built around a team, not one individual. Can men be part of the management team and have any equity share? What if other outside investors gets involved that have more testosterone (chemical structure shown) than they should?

Plenty of companies relocate to access geographically-constrained finance. Are we now going to see the first sex change to gain funding? Surely there are better ways to encourage female entrepreneurs than this. Creating an ecosystem that nurtures and support people seeking to build a business would be a better use of this money than distorting the market in this way. Investors should be backing bright ideas and good people, not worrying about genetic makeup.

Nothing Ventured...

Deirdre Bounds gave a passionate talk at the Venturefest Yorkshire 2008 dinner. As a former stand up comic I expected a few more laughs, but she mainly focused on her journey from 'bedsit to boardroom'.

What was her take home message? Well mainly that if you have got an idea just do it, even if no one around you gets it: if you believe in yourself you can succeed in realising your vision. This was rather at odds with Ajaz Ahmed's talk earlier in the day where he was lamblasting government support agencies for backing 'lame duck' ideas that were destined to fail and that people shouldn't be given 'false hope' that they can become 'supermodels'

I must admit to being more with Deirdre on this one. Sure, we need to screen out the ideas and people that are just plain daft and applaud the ones that are sure fire winners (because they, like Deirdre, will fly without any outside help or an outside investor getting a slice of the action). But in the beauty contest that is innovation and enterprise, the winners and losers will sort themselves out in the marketplace (think dancefloor, not stage). Out there it's execution and the audience vote that counts: the wisdom of crowds, not the opinion of experts. In my experience, most good ideas start off looking pretty ugly or just plain daft to conventional eyes. As Deirdre says 'We need to encourage weird'.

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!

Investor Readiness

The Sunday Times featured an interesting article on Investor Readiness that echoed many of the experiences that we find with people who go through our IRP programme. These are given by experienced professionals and business people who give their time freely to help young technology entrepreneurs understand their proposition from the perspective of an investor. The lessons learnt are invaluable as is the ability to share experiences with other people following a similar journey and seasoned professionals that have heard it all before. Our next IRP workshops are being held in Sheffield on the 7th and 14th November. If you fancy coming along, please contact us.

Distance No Object?

VCs often tell me that it’s the quality of the company that drives the deal, not the geography. So is where you start a business really that important? According to Library House London is a magnet for new venture capital backed businesses despite the expensive rent and salaries. They point to the number of successful exits as a ratio to the number of deals done as an outcome measure. Apparently, in London the ratio is 2:3 whereas in the North the ratio is no more than one in four. Does this in any way relate to the geographic remoteness from the major financial market? One blip in this statistical argument appears to be the Emerald Isle where, albeit from a lower base, the ratio of exits to deals is one in two. Maybe it’s the Guinness that aids the deal making!

Is one way of breaking down these geographic barriers to utilise technology more? Connect has recently released a online portal, http://www.mydealmaker.co.uk/, designed to allow companies wherever they are to pitch their investment proposition whenever they want. The idea is that even if a VC can't find the time or the rail fare to come to our Investment Forum, they can at least take a looksee at the cream of the technology crop from across the region. Equally, entrepreneurs no longer have to wait for the next Forum to come around in the hope that they get a presentation slot. We look forward to our first online investment success and to improving our ratios!

Online Research Versus Legwork

There seems to be an increasing trend to research opportunities online before expending too much physical effort evaluating the options. Who last went looking around a new neighbourhood looking for houses, rather than first having a trawl of Rightmove? Tesco have just launch a new comparision website to compete with the likes of MoneySupermarket. So there must be money in them there hills. And with MyDealMaker debuting, even venture capitalists and angel investors can get in on the act and search for entreprenurs with big ideas looking for funding that meet their search criteria.

Where will it all end? In the lead, not supprisingly, is Formula One. Car design is apparently moving from using computer simulation to validate an hypothesis to ab initio models where nothing physical is made until the computer says yes. Drug design has similarly embraced the idea that sampling chemical space is best done virtually before that expensive step of synthesising anything is taken and anyone gets their hands dirty.

Who, thirty years ago, would have believed that computers would be used for screening potential dates/mates before 'pressing the flesh'! And if you had said we would all be texting like mad, rather than videoconferencing by now you would have been laughed out of the room. As the BT futureologist at a recent YSTN event commented, maybe we should be employing more phycologists to help design new products, rather than leaving this entirely to the technologists!

Join the Club

Reducing your carbon footprint has become a priority for many people in the UK and it seems investors are as keen to pump cash into all things green.

We noted that Whizzgo, the pay-as-you-go car hire business has been in the news again this week - this time with the launch of the scheme in Sheffield.

Whizzgo's concept is to provide cars to hire by the hour, at short notice, within a few minutes walking distance of a drivers home and workplace. By offering a car club service that is convenient giving up your car is now becoming a real alterative.

Managing director Charlotte Morton pitched for funding at the Connect Yorkshire Investment Forum in November 2005 and since then, Whizzgo has netted quarter of a million pounds worth of funding from Yorkshire venture capital group Viking Fund.

It seems other investors have recongised the potential of the car club phenomenon and we noticed that Streetcar the UK-based self-service car rental company, raised £6.4m (€9.5m) from Smedvig Capital this week.

VCT Downdraft

The Budget 2007 has put a size limit of 50 employees and a total investment of £2M for Venture Capital Trust investments, which maybe will drive dealflow into our area of activity. I don't have any stats, but I would guess previously very few VCTs would have invested in this sector and most AIM flotations will be above the VCT investment limit going forwards - a number of established AIM VCTs have already pulled their 2007/8 offerings.

How about someone creating a VCT targeted specifically at smaller technology companies with significant growth potential?

PwC Technology Round Table

Some interesting discussion, but mainly heated agreement on what the issues are surrounding early stage technology investment. Too few business plans are sufficiently un-sieve like, too much focus on the business plan and numbers rather than the idea and market opportunity. Too few corporate finance teams having the necessary technical appreciation to hone business plans. Lack of funding in the £500K to £1.5M range. Conservatism and fear of failure rather than embracing risk and accepting this as a necessary element of reward in the capital markets. When an investment is overwhelmingly obvious, its too late!

An interesting thought about trying to spot the next big thing might be to consider the psychology element and try to understand the needs and aspirations of people, rather than focusing on what the technology can do. Text messaging being a case in point - if anything this was a backward step in technology but everyone 'does' it and BT could have introduced it long before mobile phones appeared. Video phones have yet to hit that same sweet spot despite being infinitely neater technology...

Pareto's Law, Miller & Moore

Otherwise known as the 80/20 rule, Pareto's Law states that 80% of outputs comes from 20% of the inputs. For example, you are developing an investment portfolio of early stage companies. Given an appropriate filtering process you back five companies. Pareto's Law states only one in five will probably really fly. But which one? The managers among you want to eliminate the 80% and concentrate on the 20%, but which 80%? Pick the wrong 20% and you will be out of the money. So is it better to simply try to screen investments better and buy into Pareto's Law?

Bill Miller, an investment manager state side, has beaten the S&P 500 for the past 13 years. He has a stock screening system that flags up investment opportunities. He's bought into Pareto's Law and four out of five of his investments end up bombing, but the one in five that succeed pay him back in spades. He is a successful investor, but readily admits he has no idea which of the investments that get through his screen will be 'the one'.

Law's Moore is associated with the microchip speeds, but more generically says that in a competitive situation, the imperative to improve is constant. So maybe we should be seeking to improve our screening process (which is what Connect Yorkshire tries to do). Pareto's Law is omnipresent and we have to embrace it, but we can all raise our game as much as we can to load the dice in favour of being in the successful 20%

SBS report “ A mapping study of VC provision to SMEs in England”. The research was done Dec 04 - March 05. Its 94 pages long; in the following extracts I use the para numbers from the report. YH means Yorkshire and the Humber.

3.14 YH’s ratio of public to private funds is relatively low compared to the North West and Merseyside, the West Midlands and the South West.

8.14 YH has the lowest “estimated value of investment 2003-4”

8.15 YH has the lowest investment activity at the seed level (8%) whereas eg NE has 28% of all investments at the seed level

8.17 YH has the lowest percentage of investment in the IT and Healthcare, as opposed to services, manufacturing and other

Chart 56 commenting on the low level of seed investment in YH “ This reflects the fact that there are few seed focused funds in the region.”

InvestorQuest £1M Challenge

Fancy getting your hands on your share of the £1M earmarked by our sponsors, VIKING, YFM, EV and WYPOCF, for investment in early-stage companies seeking funds? Then check out the InvestorQuest page of our web site for more information. The whole Connect team has been at Kirkstall Abbey shooting some promotional pictures dressed as knights seeking the holy grail -which turned up in a trophy shop in York! Looking the part, we got into the Yorkshire Post on Saturday! Join the quest for the 'holy grail' a share of £1m business ...

Lack of Proof of Concept Funding

We need more people starting up knowledge-based businesses. We have to acknowledge success if far from certain. There will be failures: unless there are we, as a region, are being too conservative in our thinking. However, with the help of organisations like Connect we can load the dices in favour of success and avoid the mistakes of the past. Enterprise and innovation is not a one way street. We need good technology that matches to a market need. All too often an idea misses the mark; aligning the technology with an addressable market need is what innovation is all about. Connecting entrepreneurs with the resources they need to nurture their initial seed of an idea until it reaches sustainability is a key part of the equation.

A key part of this that is lacking in the Yorkshire region is Proof of Concept funding. If we look to our neighbours, the North East has a £10M fund, set up to stimulate the growth of new technology companies. The North West similarly has access to the Rising Stars fund that backs early stage companies. These funds typically put £25-60K into a company at inception, with the option to invest further if the idea is shown to have legs. What access do would-be entrepreneurs have to funding at this level in the Yorkshire region? The reality is very little, but this is a key part of the innovation landscape.

Some pump priming is needed if we expect the region to generate sustainable technology businesses further down stream. The reality is that 3 out of 4 of these investments may not generate a return, but the ones that do will make up for the others - or that is how it should be if we are finding the correct balance between risk and reward.

Promoting an Enterprise Culture

Creating a more enterprising culture is fundamental to the future of the regional economy. We need to applaud innovators and risk takers, celebrate their successes and help them avoid many of the potential pitfalls that stand in their way. That's where we come in: Connect Yorkshire helps young technology companies by linking them with the resources they need to succeed: investment, markets, management, partners, and support services. We are here to help businesses that need a boost to reach their 'escape velocity'.

Connect has been active in Yorkshire for nearly four years and has help over a hundred technology companies raise over £13M of investment. Every year numerous more technology companies attend Connect’s various programmes. The vast majority of these businesses are started by normal people who have seen a gap in the market or how to do something quicker, smarter or cheaper.

Starting a new technology business is not easy and its a long hard road, but the potential rewards are great - just ask James Dyson! Connect brings together like-minded people and together we all achieve more than we could ever alone. If you are thinking of starting a technology business or have a great idea but don't know how to progress it, come and talk to us. We are here to help.

Focusing on Selling

Most technology companies spend there 'youth' developing some IP and sometimes that's all they ever do. Their novel idea results in something that can be licenced to other companies that focus on exploiting this in the market. However, for many technology companies it is up to them to go out and sell their product or service. This requires a whole new skill set and focus that may not come naturally to the founders of the business. How you get past this growth stage is critical. The ability to demonstrate repeatable sales, significantly increases the chances of raising finance to fund expansion. All too many of the investment propositions we see have left it too late to start selling!

Indeed, many such innovators may believe all they need to do is make it! The reality is that only innovators in your market will seek it out. To really make the numbers stack up someone has got to go out and sell the dam thing to people that really could go either way! So you don't just need a good product, you need a good sales and marketing strategy -- and the people to execute. Get selling as soon as you can! If the objection is that your product needs another bell or whistle don't accept this. Someone, somewhere has to buy into your vision. This validation is key to raising investment. Go and get some ASAP!

The Enterprising Enterprise Show

For anyone thinking of starting up a business The Enterprise Shows are well worth a visit! I attended the Leeds event last Saturday and was extremely impressed with the amount of information immediately accessible to budding entrepreneurs.

Talk about time saving, in one place you can get instant advice on your business plan, talk to banks about financial issues, listen to real life experiences of business success, learn about funding, finding investment, insurance, patents, trading standards…………………. the list goes on. It certainly helps cut through the mass of support now available to new businesses and you can soon work out what’s relevant to you.

The HM Revenue and Customs team had a queue of people waiting to speak to them most of the day, who would have thought VAT was so interesting!

Mapping Start-ups

I was reading Electronics Weekly last week, as you do, and noticed their ‘start-up map’. Listing all the young electronic businesses across the UK, it was really interesting to look at their geographical spread.

I’m afraid the Yorkshire region doesn’t exactly look like a hot bed of emerging technology within this sub-sector of technology. In total 5 companies were based within the boundaries of Yorkshire. Although I didn’t find this particularly surprising what did astound me were the numbers of companies coming out of the South East. 24 businesses were listed under Cambridge alone. No wonder we have difficultly persuading VCs to travel ‘up north’ - they have exciting investment prospects on their doorstep, and plenty of them.

That said, I know that the majority of companies that access Connect Yorkshire’s services have an IT base. Yorkshire definitely has greater activity within other sub-sectors of the technology industry, particularly within the digital and creative areas. Looking at the number of start-ups in the electronics sector in isolation is therefore not a true reflection of Yorkshire’s high tech talent. Our last Investment Forum in November proved that high quality deals in a sizable number are there for the taking.

For me what the map highlights is the power of transcending traditional regional boundaries particularly when attracting big spenders from the south. The North East had 4 businesses listed whilst the Manchester area had 6. If this start-up activity were pooled with Yorkshire’s 5 businesses then the pulling power of the north would be greater. Perhaps then it would be easier to convince a VC the train journey was worth the time and expense!

Brains must earn a crust too

We produce some of the best research academics in the world, yet their knowledge is locked away within the hallowed halls of academia.

The UK economy would benefit hugely from the innovation and technology which universities produce, but despite noises from central government about business and academia working together, the vast majority of academic revenue remains untapped.

Yorkshire has 12 higher education establishments - some with world class research and teaching credentials. Almost 80 per cent of the departments at the University of York, for example, were given 5 or 5* ratings fro research, meaning research was of international importance. Three of our universities are within the top 30 in the UK.

Why then is the Yorkshire and Humber region languishing in 8th place for innovation in the UK? Only the North East, Northern Ireland and Wales fare worse.

The answer is that the mindset behind attributing and recognising academic excellence is wrong. Currently the Research Assessment Review is carried out every four to five years. The process involves a panel of 685 people reviewing almost a quarter of a million pieces of research from 56,000 academics.

On the back of this huge bureaucratic exercise approximately £1 billion of research funding is allocated to UK universities. Incredibly nowhere is a university’s contribution to business or the economy mentioned.

In 2002 the government’s Investing in Innovation report stated that: “In an increasingly knowledge-driven global economy invention and innovation are critical to Britain’s long-term competitiveness. This requires a virtuous circle of innovation: from the very best research in science, engineering and technology in universities and science labs to the successful exploitation of new ideas, new science and new technologies by businesses.”

Currently the allocation of research grants appears to miss half of this “virtuous circle”. Yes, it assesses the quality of research, but it takes no account of “successful exploitation”.

In common with other sectors, higher education is subjected to league tables which institutions desperately try to climb. Research ratings play an important part along with other factors such as teaching quality assessment and entry standards.

However if we look at how university’s are ranked by employers the results are strikingly different from the usual research/teaching quality league tables published in five of the national broadsheets – the Daily Telegraph, Financial Times, The Times, and the Sunday Times.

For example the University of York is ranked from second (in the Daily Telegraph) to eighth (in the Financial Times). However when surveyed by 200 firms which regularly recruit graduates York’s ranking slips to twenty-ninth.By contrast, Leeds University is ranked between twenty–second (in the Telegraph) and thirty-fifth (in the Times); when it comes employers Leeds is ranked ninth in the UK.

Of course within Yorkshire there have been significant, if not fundamental, steps towards improving the situation. Three of our university’s have organisations which carry out a commercialisation function. Leeds University works with Techtran and IP2IPO. Sheffield University has two organisations - SUEL (Sheffield University Enterprises Ltd) and Bio Fusion, which is tasked with commercialising the IP output from the Biology and Chemistry departments. York, which is relatively new to the technology transfer game, has employed business development officers to help with its commercialisation activity.

SUEL has spun out 40 companies and created 60 external jobs. Techtran has also had its share of success with high profile spinouts including Syntopix and Potopharmacia under its belt. In York the Science City partnership between the university and the city council has created 60 companies and 2,600 jobs in the wider science and technology sector.

Other organisations such as Connect Yorkshire are also playing their part in helping young technology companies grow and become successful businesses contributing to the regional and national economies.

There have been some spectacular successes. BioFusion, spun out of Sheffield University, floated on AIM and raised £8.2 million. Bradford Particle Design, started by Dr Gwyn Humphreys of Bradford University in 1995 was acquired by Inhale Therapeutic Systems for £137m. Molecular Skincare, founded by Dr Simon Ward of Sheffield University, was brought by York Pharma for around £5.5 million.

These are fantastic achievements, but they are achieved despite the pervading culture of academic institutions and not because of it. To fulfil our national and regional potential we need fundamental changes in how we evaluate our universities. We must not be squeamish - the rest of the UK runs on capitalist money making principals and we cannot afford for our top brains not to.