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!

Act Local, Think Global

David Parkin dropped in to the office to update us on his new venture http://www.thebusinessdesk.com/. Subscription is free (see my recent post on this subject) and his business model is based on paid-for advertisements. While online offers the potential for currency of news, I guess the other benefits to be exploited are new media based, such as what is the most popular story, ability to comment on articles, see what other articles readers of a story have read, multimedia content, content targetted adverts, automated links based on keywords in content, etc. The geographical focus is also a big selling point, but equally major players are looking at how to localise their offerings, such as ITVlocal. A company that presented at our recent Investment Forum (http://www.towntalk.co.uk/) is seeking to develop an online equivalent to the booklet advertising local services that comes through your letter box each month.

Whether you come from the local side up or the global side down, the bottom line is that you need to connect with a community in a meaningful way and offer them access to something they might want at reasonable cost in terms of time, money and effort. Then seek to replicate the model in as many sensible places as possible! Hopefully what works in one geographic location, hold water elsewhere. That is what equity investors are looking for: a proposition that is scalable!

Putting The Customer First

The process of gaining Customer First accreditation something we have embarked on recently. In a previous post I noted there is a fine balance between having satisfied and happy customers. The key thing is to make sure you are customer focused and there is a real need for the product or service you provide; only then will people be prepared to pay you for it!

The balance between process and performance is often a difficult one for small companies to juggle. A great process (from a quality perspective) is really focused on reproducability and cost. When you are doing something repetitively or seeking to lower the skill level of delivery then it's all about optimising the process in terms of cost and certainty of output. If you are trying to improved the output a methology or framework may facilitate, but you are still taking about a process that is very dependent on the skills and unique insights of the participants.

All young companies should strive to implement replicatable process at the appropriate point of their developement. A key point is where selling a company's product or service is replicatable and a salesperson can be employed effectively. Out FastInvest loan scheme is specifically designed to help companies make this transition. Now that is really what I would call putting the customer (i.e. sales) first!

Proving The Concept: Chicken or Egg

Listening to pitches from University projects at a recent Yorkshire Concept Fund meeting it is clear there are two schools of thought about what proof of concept means. To a scientist it's that the concept works technically; to an investor it's that there is market demand for a working system. Ideally, you would demonstrate market demand before embarking on a technical development (if commercial success is your primary goal). Equally, without something to show it's often hard for potential users to get excited about a lot of hot air and hand waving.

The most extreme of these I've seen is the search for synthetic blood where apparently the US military have a cheque with quite a few zeros on it waiting for someone that can come up with something that meets their spec (one of the Yorkshire Forward Bioscience Fellows projects). Hence the scientists have quite a clear specification of what would constitute success commercially and they can focus on the science in sure and certain knowledge that if they crack it they are onto a commercial winner. The other extreme is what we see occasionally at Connect where the technology is paper thin but (in theory at least) the brilliant insight or innovation will set the world alight. The only problem is then barriers to entry are equally low so IP protection becomes the name of the game.

In reality most propositions fall somewhere between those extremes and there has to be some give and take. The technologists have to get something operational to some degree in order to demonstrate the propotype (or Version 1!) to potential customers before the latter will be able to get their head around exactly how much it's going to benefit their lives. Nomatter how much we might like to get validation of market demand before spending money on development in most situations the egg does have to come before the chicken and technical feasibility has to be proved before serious commercialisation work can begin. However, getting the right balance between technical push and market pull is project specific.

Information Wants To Be Free

According to Wikipedia, this phrase was supposedly first pronounced by Stewart Brand in 1984, citing the fact that the cost of dissemination is getting lower and lower. However, the effort required to generate high-quality information ain't getting any cheaper.

But equally a lot of people view their information as free for dissemination as they make their money in other ways, like IKEA. You could say the likes of Google are parasitic and without information to search they wouldn't be able to sell advertising space, but I would argue it more of a symbiotic relationship. The concept of consolidating freely available information then selling easy access i.e. adding value is as old as the Bible.

With the trend towards Open Source the argument goes that enabling technology like operating systems and other basic building blocks that benefit everyone should be free so that, like Isaac Newton, you can reach greatness by 'standing on the shoulders of giants' rather than reinventing the wheel. I think there is a strong argument that if public money is spent on R&D then the IP should be made freely available. However, those who create valuable information (and whose business model requires payment) deserve to have their copyright and commercial integrity respected.

Convergence: Jack of All Trades or Master of One?

The whole TV/Broadband/Mobile/MP3 world sees to be heading for one point on the sunrise aimed at producing one appliance that is all things to all men: Whether its one box or one handset it has to do it all. This reminds me of the eternal battle ensuing in the software space between ERP systems (get you systems and processes right, then pore concrete on them) versus best-of-bread applications (malleable components linked together using open integration technologies allowing swap and change). It invariably boils down to whether you want something that is 90% good at doing lots of things or many things that are 100% good at doing just one.

In an earlier post, I talked about focus, focus, focus. Think of the last 10% being innovation and the 90% being the existing substance. For some markets the benefits of the innovation offset the complexity of having multiple vendors; for others simplicity and consistency is the name of the game. For most innovators, a market that has developed to this point of maturity is not a good place to be as you will face an uphill battle to see off the entrenched competition who will undoubtedly cover more bases than you do. So you need to find a peripheral market, which is undoubtedly smaller, where your value proposition can hold sway against the entrenched competition. When you are starting out, don't seek to be a jack of all trades, be master of one.

First Mover Disadvantage

One of the interesting themes discussed at TechTalk in association with our Investment Forum in Sheffield yesterday was that he who dares doesn't always win. Being first to market can mean you do all the R&D, validate the idea and educate potential users only to see the competition eat your carefully prepared lunch. Equally, being best technically doesn't necessarily equal success either.

As Lee Strafford emphasised as he spoke about his success story at Plusnet, route to market can be a real differentiator when it comes to execution. Stuart Green CEO of ZOO Digital warned that while you are evangelising about how beneficial your innovation will be to users, potential competitors will be readying themselves to shoot arrows in your back. And Steve Barnes, CEO of Infoserve reminded us that history is littered with those that tried first and failed or thought being (second) best equals success. Oracle didn't have the first relational database and VHS wasn't the best video technology, but each ended up the 800lb gorillas in their respective markets.

Being at the bleeding, rather than the leading, edge can leave you exposed if the market or infrastructure just ain't ready. Equally stealing a march on the competition is what innovation is all about, so this all has to be finely judged. Being first or best certainly isn't a prerequisite for commercial success.

There Be Dragons Ahead

At the Business North West event, Doug Richards of Dragon's Den fame gave a inspirational talk charting his ups and downs (yes even he has them!). Mainly anecdotal, but some of his take home messages that particularly resonated with me were:

1. Luck and serendipity plays its part in any successful venture; the path to greatness is not deterministic. Deal with it.


2. Don't only listen to those that have only tasted success; they are the exceptions not the rule. Also take council from people that have tasted failure as well. Inductive learning requires negatives as well as positives.


3. Yes, have a cunning well thought-out plan but be prepared to deviate from it as necessary (recognising this is not what funders necessarily want to hear): The reality is that you have to be flexible and opportunitistic (which is what the big boys aren't, so you have the advantage).


4. Cash and share price are not equivalent currency: Market Cap ain't worth anything until you have exited with money in the bank.
   
5. Leadership is about enpowerment. "Ask for my forgiveness not my permission". The founder/CEO should strive to be operationally redundant - he or she is generally not replicatable nor reliable. Surround yourself with people more able than you!

Pile It High...

At BarCamp Leeds last Saturday, Dean Saddler CIO at PlusNet evangelised about how you can build a web-based applications quickly and easily and one of the tricks was to repackage and reuse the same underlying technology in different market niches and applications.

His take on monetisation was that if you have been smart about development, you only have to charge sensibly and adopt a subscription model to take market share from bloatware providers charging perpetual licence fees (where have I heard that before?). He also emphasised that his development plan only extended as far as the next round of features that users had requested. Sounds like the whole concept of component reuse and evolutionary development has finally caught up with web designers!

Not sure I totally agree you can produce something of any substantial worth so cheaply - even if you outsource development to China - but the idea that you have to work smart, reuse components, adopt incremental development strategies that keep you close to the users and offer something significantly better and cheaper than what has gone before is undoubtedly true.

Yorkshire Means Business

Nice to see former Yorkshire Post Business Editor David Parkin's new venture hit the streets (OK its virtual equivalent!) this week. http://www.thebusinessdesk.com/ aims to bring news, information and events about and for the business community based in Yorkshire. Needless to say I have signed up for news alerts and it will be interesting to see how this venture progresses versus more traditional publications, not least the YP!

As with my previous post on monetising online communities, the key to such a venture will be how to produce content at reasonable cost and in the business model who pays for what, when. I am sure he has done his numbers -particularly as Colin Glass is his Finance Director!

The Second Bounce

Ronald Cohen of Apex fame argues in his new book that the everyone can see the first bounce of the ball; it's the second bounce that is uncertain. And it is only in situations of uncertainty that significant investment gains can be made. Well I beg to differ - until you bounce the ball once there is the highest degree of uncertainty - one can only guess at the outcome. Once you have seen a bounce, you have data to predict pretty well what the next bounce will do and even fix things that fall flat!

Releasing Version 1 of a product into a market is always the most uncertain stage. Once users have something to play with they can give you feedback and the whole market research process can be brought to bear on the problem. When all you have is ideas, hand waving and hopefully some passion and a committed team, most potential users will still just stare back blankly at you - they ain't good at looking at a blank canvas and saying what will make it a masterpiece.

That thought dovetails pretty nicely with a talk I caught on the first bounce at BarCamp Leeds on Saturday on the futility of trying to predict the future. Sure, it's hard but unless you can make an educated guess at where things are going how can you ever hope to align the technology idea you are working on with what the future holds. That said, the prevailing view was that the best way of predicting the future is to implement it!

Monetising Digital Communities

With the rise of Web 2.0 promoting participation, sharing and collaboration it still requires that someone pays for it all. Advertisers may now be able to target viewers by their individual profile and as pay per view gives way to pay per response the theory goes that communities means money. Subscriptions are another way of generating revenue and the great thing about online is that you can collect this little and often or integrate a smorgasbord of premium services at a price, while maintain the ethos of everything being free at the point of delivery. Taking a percentage requires an online transaction, but for some communities this may be part of the business model. How to gain users is always the first challenge, but how to turn users into revenue is always a bigger one!

The likes of YouTube, MySpace and Facebook (Microfoft paid about $500 per user for their stake) can put of the day they make a buck (although with the fikkle nature of consumers they might need to hurry it up) , but for others the balance between building a community and getting paid in something other than spirit is a little more pressing.

Shifting Sands

Project Sahara is a new initiative which I am sure Lee Strafford will be plugging when he speaks at our Techtalk 2007 event in Sheffield on the 28th November. He is seeking to create a community of Web 2.0 companies across the North of England and provide a support infrastructure to maximise the potential of their early stage ideas. This will potentially incorporate physical incubator space, mentoring and all the other things an early stage business needs. In addition, they are seeking to develop a set of online tools that members of the community can contribute to and ultimately benefit from.

Fear Of Failure

A recent survey by Orange reported no shortage of bright ideas, but cited the lack of confidence and a fear of failure as the main reasons for sitting on their hands. Orange said that budding entrepreneurs needed more encouragement to succeed. They called on help to be given to develop talented would-be entrepreneurs and to cultivate an appetite for rational risk in the education system.

A particular focus of Connect is to help innovators hone their ideas and share best practise through our Investor Readiness workshops and mentoring schemes. The role of Proof-of-Concept funding cannot be underestimated in helping these fledgling ideas gain momentum and we continue to lobby for improved business support in this area.