I reproduce below an invited keynote talk which I gave this morning at a seminar organised the Alimentary Pharmabiotic Centre in University College Cork, on the general topic of entrepreneurship and start-ups.
I subsequently also gave it to a group organised by the NUI Galway Technology Transfer Office, in November.
Exactly twenty years ago, American Airlines and Hewlett-Packard Corporation took an initiative in the global software industry to interconnect distributed software applications. The initiative rapidly gained momentum, with all major software suppliers – with the sole exception of Microsoft – quickly joining. Yet by 1996, a small company from Ireland, IONA Technologies, was a widely recognised world leading supplier of products to interconnect distributed software applications, ahead of such major vendors as IBM, Oracle, HP, Microsoft, Digital and Sun. As a result, IONA had major customer contracts with companies such as Motorola, Boeing, Goldman Sachs, Lufthansa and Hong Kong Telecom. How can a relatively small player punch way above its weight ?
Sean Baker, Annrai O’Toole and I co-founded IONA in early 1991, as a spin out from the TCD Computer Science Department. We had been working together on how best to interconnect distributed software applications for over a decade, in part using collaborative research funding through pan European R&D programmes made available by the European Community in Brussels.
In forming a company, I fervently believe that it is so important to share the inevitable stress that results with business partners whom you mutually trust. There are times when you become excited and enthusiastic, and others when you become anxious and overwhelmed by the challenges ahead. Simultaneously, you are trying to relax with your social partner and your family. Carrying all these excitements and burdens from your business can be massively stressful, and the responsibility which you personally feel to your staff whom you have recruited, enthused and motivated and led is onerous.
I strongly advise that you should consider having a close business partner with whom you can share your concerns and excitement, and who will share theirs with you. Between you both, or all, balance will be established and the company kept on an even keel. But equally, I strongly advise not to mix your business partners and social partners: the stress of building a business should not destroy your social life, and you have to somehow keep a balance. Your business is a long term challenge, and if you cannot manage your emotional commitments for the long term, your social life will become damaged.
We started in 1991. A fact we were forced to accept early on, and after some wasted effort, was that we were not going to get very much external funding. Ireland at the time was in a recession. The Irish stock market was low; an Irish technology company, Memory Ireland, had just failed; and Guinness Peat Aviation had just had its international IPO pulled by its founder Tony Ryan. There were few venture capitalists in Ireland, and they were not very interested at all in technology companies. There was the Business Expansion Scheme, but investors wanted bricks and mortar, such as hotel extensions, not technology companies. The banks were not lending to most people, least of all technology companies. Enterprise Ireland did not yet exist. The IDA was focussed on foreign direct investment, and we in IONA were memorably accused of “not playing at Croker”.
So, funding was not going to happen fast, if at all. Thus, based on our own initial personal investments of 1,000pounds each, we started our company. Our initial focus was consulting and contract work, doing anything profitable and manageable. We pushed the profits back into building our first innovative product, which we eventually launched over two years later in San Francisco, having grown by then to just under a dozen people based in Westland Row in central Dublin. We never had angel capital, nor venture capital.
Another fact which we accepted early in our project was that we would have to think global. The population of Ireland is just over 4 million people. The population of greater Birmingham in the UK is about the same. In my experience in the software industry, very few Irish organisations, least of all any of the numerous cogs and agencies of the Irish State sector, which in turn are so diligently overlooked by our Dail Public Accounts Committee, will buy anything at all unless it has first been absolutely proven elsewhere – well, preferably in the UK at least. The UK folks also do not buy anything very much nowadays unless there has been success elsewhere in Europe and with global brand name (usually as a result, US multinational) suppliers. In turn the EU, and Asia too, do not buy much without first talking to reference customers within the USA.
So, your first priority in the presence of little interest from potential customers in Ireland should, in general, be the USA. Since the US economy is so competitive, you can find early adopters there who will be prepared to purchase your products and services, precisely because if they do so, and if what you have is as good as you claim, then they will have a step advantage over their own competitors in their own market. You can find early adopters in the USA; in general in Ireland you can only find laggards after the mainstream has already adopted. The EU, to the extent that it is a common market at all, is a mainstream market, with relatively few early adopters.
So, in general to punch above your weight, you first need to have a few wins in the USA. Then the rest of the planet may believe you are a credible player.
An obvious consequence of thinking global is of course that your commercial offering must be sufficient competitive to play on a global stage. In larger markets than Ireland, such as the UK or France or Germany, some companies there have been able to build a strong domestic presence before, if indeed ever, considering international markets. This can be a dangerous strategy for a technology driven company: when you eventually “go over the top” you discover competitors elsewhere with similar products. Even worse, a foreign player with a similar offering may enter your own domestic “trench”.
A paradox resulting from the small and open Irish economy is that Irish technology driven start-ups have to think globally first, not later; paradoxically this is an advantage, rather than weakness, since your offering must be sufficiently competitive “when war is declared”. If it is not, you will quickly find out so and not waste further time, energy and investment, but instead revise your approach.
Timing is everything. If you are the first player in the market, the first to enter the ring, most people will you ignore you: you are puny, and they do no want to depend on a single small supplier. But if you are slow to enter the market, the winners in the market have already been established. You need to enter the market alongside other early entrants, but with an innovative offering, and catch and surf the wave as it builds.
And as you know, a leader is often last recognised at home. If you want to punch above your weight, you have to be seen at the same boxing venues as the big boys.
I distinguish between entrepreneurship, discovery, invention, and innovation. Scientists discover what already exists around us, and helps us understand how these things came to be.
Entrepreneurs create new businesses, often taking some personal financial risk to do so. But almost all entrepreneurs copy business models which others have already tried and tested elsewhere: there tends to be a “me-too” approach in which the entrepreneur realises an opportunity in a specific (usually local) market in which success from other similar markets can be duplicated. Rare are the entrepreneurs who bring entirely new offerings to the global marketplace.
Inventors devise new creations, but these may not necessarily be commercially attractive.
Innovators however start from a deep understanding of the current practices, business models, product offerings already in the marketplace, and then move on to consider how these could be challenged and improved. Innovation extends current systems in interesting new ways; but the starting point is always what is already in the market today.
Innovators spot gaps in the market. But, the critical question is then whether there is a market in the gap ? An insightful analysis results from asking whether practitioners and customers are dissatisfied with the current offerings on the market. Customer complaints are a wonderful source of market intelligence for innovators. A market will certainly exist in the gap in the market if existing customers can easily transition to a new offering. How easy will it be for the existing market to transition to your new innovation ? Can it be a natural transition, without requiring customers to extensively re-train ?
If you are going to punch way above your weight, make sure that the audience can adjust to your arrival on the scene.
One strategy to enter the global market is to consider whether you can exploit the international standards movement. In Europe, this approach has institutional support since the European Union is committed to harmonising the market as much as possible via common standards. You may as a result find support for your innovation from surprising quarters. Naturally you must conform to regulatory standards, but in most markets there are in addition industry standards, or de-facto ways of doing things. Furthermore, it is considerably easier to encourage the market to investigate your new offering if it already follows the usual norms of the market, rather than being a proprietary non standard approach. However doubters – a potential investor perhaps – will always be puzzled about how can you possibly introduce an innovative offering if it follows standards in the industry – surely standards inhibit innovation, and surely they prevent you from capturing your market through lock-in and a patented, protected approach ?
In my experience, market entry approaches which protect a new offering by making it proprietary hinder market adoption by customers. There is a potential tension: on the one hand barriers to entry, to prevent other suppliers competing with you; on the other, barriers to adoption, which slow down customer adoption. Are those barriers to entry which your potential investors are so keen about, also going to be barriers to adoption for your potential customers ? If so, re-think: ideally you need low barriers to adoption, and high barriers to entry (there is an obvious 2 by 2 graph here..).
Lowering barriers to adoption can of course support a strategy which disrupts the market. But the key point in a disruptive strategy is that you are disrupting the established suppliers and players in the marketplace, but not disrupting the customers. On the contrary, you want to ensure the transition to be as smooth as possible for the customers.
I used part of our story of IONA as a case study in strategic use of standards to build challenging barriers to entry and low barriers to adoption, at a seminar recently hosted by the National Standards Authority of Ireland.
If you are going to punch way above your weight, you probably should be seen to play by the rules of the game accepted by the audience (your customers), and not be a renegade threatening to break their system.
Apart from using standards, another strategy for market entry is what I call the BMW 1,3,5,7 approach. A new customer likes the look of BMWs, but can only afford a series 1. Later, she trades it in and buys a 3 series. As she becomes more senior, she buys a 5 series and maybe eventually even a 7 series. The series 1 is in some sense a trojan horse ultimately to a sale of a 7 series. As you reflect on your innovation, could it be tiered into an entry level edition, a mid range, and a top of range version ? These should all be compatible of course, with each subsequent edition adding value over the earlier ones.
Then, you should make the barrier to adoption for your entry level edition as low as possible, because you know you can afterwards “up-sell” some proportion of your customers to your more advanced offerings. In fact, get as many entry level editions out there as you possibly can, the more the better: each one of them is a qualified marketing lead for your more advanced offerings. It is noteworthy that some technology companies go as far as to in effect offer their entry level editions even for free: this is a strategy used by some software companies working with “open source” technology and who create up-selling opportunities as a result.
If you are going to punch way above your weight, distract your opposition with feints and light-weight plays, before hitting very hard with your heavy-weight blows.
So, you have considered barrier to adoption issues as you reflect on how your productise your innovation. But how can you, as a small team with an innovative new offering reach into and then lead the global market ? Even if you initially focus on the US market, how do you enter that market from a small country on the wrong side of the Atlantic Ocean, from the perspective of the USA, and almost certainly with limited financial resources ?
One approach is to license your innovation into established suppliers, exploiting their global channels and brand identity. You naturally may find yourself having to limit your licensing agreements to a small number of, or even just a single, established players since they may well not wish your innovation to end up in the hands of their competitors. You may well be able to play them off against each other, creating an auction situation: however in so doing, you are diminishing your value, since now all the established players will be aware of your new innovation. Thus if they are prevented from licensing it themselves and know a competitor is likely to have it, they will work to find a counter-offering to what you have created. I thus caution against being overly aggressive in orchestrating a bidding war.
If you have thought through a tiered bundling of your innovation – a BMW 1,3,5,7 approach – then in turn this creates the possibility of licensing just the entry level editions to your partners, reserving the higher valued editions to yourself. You can then use your partners as a profitable marketing engine, handing over to you highly qualified marketing leads who want to buy your more sophisticated offerings.
Alternatively, you may be able to structure your innovation as a chassis, and offer different derivative products based on the same platform. A Volkswagen Beetle, Golf and Audi TT share the same platform: from the manufacturing perspective, they are similar cars. Can you offer a derivative product to different players in the market ? Can you achieve economies of scale, as a small company, by extending your core offering with simple customisations and veneers of what underneath is actually the same technology ?
If you are going to punch way above your weight, in whose interests is it going to be for you to be successful ? How can you align your interests with theirs ?
In addition to, or as an alternative to, licensing to established players, you may consider entering the global market directly. It can be difficult to get established players to take your innovation seriously, and perhaps not worth their effort to license from you, bake into their product portfolio, globally brief their own sales and marketing teams, and educate the market about what you created. It can also take a considerable time, and considerable negotiation to get a licensing deal in place. It can also take considerable time to begin to see license revenues accruing back to you, unless you can perhaps negotiate a “pre-pay” agreement.
Even if your ultimate objective is to use licensing to third parties as your central “go to market” strategy, it may thus make sense to reach over established players and enter directly into the market yourself. Rather than “pushing” your innovation at the major players, you can instead “pump prime” the market for them and create “pull” from the market for what you are offering. In turn, the established players may become more interested in your innovation, and become interested in licensing from you.
The key is to reduce the barrier to adoption, and make it as easy as possible for customers to adopt your offering. A tiered offering makes sense, particularly if your entry level edition can easily be adopted by the market. It makes a lot of sense to offer trial evaluations of your product, allowing a potential customer to “kick the tyres” before fully committing.
It may even be possible to offer your entry level edition without having a physical sales presence: in IONA we sold from Dublin into the USA for some considerable time before we opened a permanent presence. With free phone numbers – 1800 numbers for example – email, skype, twitter and so on it becomes possible to serve a market without a physical presence, provided your price points are reasonable. It is important though to be always available to help customers and prospects: this means staffing your office to take account of the time zones.
It is important to ensure that your offering is sufficiently well productised that it will work well “out of the box”. This is of course critical for trial evaluations of your offering: your offering is being tried out, neither you nor your staff are physically on site with the potential customer, and your prospective customer will have limited time. If your product does not “wow” the prospective customer within the first ten minutes or so of it being taken out its box, you’ve probably lost the opportunity. Your offering must thus be very straight forward to use, and obvious in its advantages over to whatever the prospective customer is already accustomed.
If you are going to punch way above your weight, you can psyche out your opposition with absolutely awesome initial impressions.
So, you have managed to pump prime the market and sell some of your entry level editions, by a variety of strategies. You have a customer base, and word is spreading. Some customers want to buy more, and you need to scale your organisation. Some customers want to buy more, but their finance department and company executives are asking for details of your finances, particularly your balance sheet. If they are going to use your offering as part of their own important business initiatives, what confidence can you give them from your balance sheet that you will still be around in a few years time ?
You really do now need some external investment. You need to become a credible supplier, one that not only has great innovation, but is financially stable because it is well backed.
Of course, by now some of the venture capital firms may be waking up to the fact that you are beginning to be noticed by the industry. If you are lucky, perhaps the Irish state support agencies wake up too, and even though they have little enough money themselves, they are interested in investing in prospects with momentum. So, deals are there to be done.
However, before courting the VC community and the State agencies, there are other funding options. If you can find an industry partner to invest in your company, then you may end up with a better position. An industry partner may be one of your existing customers, who wants a stronger relationship with you. It may be a channel partner, a major reseller or distributor. Or it may be a major brand name multinational player in the global industry, who is already licensing, or is interested in licensing, aspects of your technology.
The advantage of an industry partner investing in your company is the instant credibility their brand name brings to you in the market place, and in my view ahead of VC funds or nurturing by the Irish State. An industry partner can also bring you further channel access, a deep knowledge of the global market and industry, and considerable strength to your Board of Directors. On the other hand, choosing an industry partner as an investor clearly aligns you strategically with that player, and makes it far harder to work and partner with their own competitors. There are therefore tradeoffs, but I would urge you to carefully consider whether the endorsement of an industry player may enable you to box further above your weight than investment from non-aligned investors such as VCs.
A further factor which you should consider is the timescales of, and likely exit events for, your investor. In general, a industry player who invests in a small company will do so for much more than just the pure financial return on investment motives of a VC, and will do so with a more flexible timescale than the typical 5 or 7 year terms of a VC fund. An industry player may therefore be a more benevolent investor, provided there is a clear understanding of the business relationship and expectation involved.
A trade investor need not necessarily limit your exit options. While clearly there is a possibility in due course of selling your entire company to your industry investor, other exits may be possible, particularly if these are negotiated in principle at the time of the investment by your trade player. In the case of IONA, Sun Microsystems invested 600KUS$ in December 1993. In February 1997, they sold their investment at our IPO, for over 60MUS$.
If you are going to punch way above your weight, then think beyond the obvious promoters: how can you add to the strategy of an established champion ?
The biggest challenge in punching above your weight will inevitably not be analysing and deciding on your business strategy and various tactics, but in building and growing your team. I have already stated that I feel it critical to share the responsibility of leadership with one or two close business partners. However in addition, as your organisation grows from a dozen people, to fifty people, and to a hundred and more, how is it to be structured and operated ? As you build your operations not only to be in Ireland, but open overseas front office and indeed back offices, what is the reporting structure to be ? As you move from employing people in Ireland, to a multi-cultural multi-lingual multi-location team, how do you ensure everyone knows what they are supposed to do ? It was not too bad managing one or two enquiries a day when you were small – will your company be as professionally responsive to its customers and prospects once you have over 200 people in several locations ? How do you preserve your company values and culture ? How do you ensure that you are no longer reliant on one or two heroes and “goalkeepers” in the company to handle exceptional events, and are no longer vulnerable to any specific individual leaving your organisation to work elsewhere, or even for the competition ?
Working and defining your strategy is fun. But putting it into practice can be difficult, although it should also be fun. The key, I believe, is ensuring that everyone knows the part they play and the importance which you place on them specifically in the organisation as a whole.
As I implied at the outset, the most fundamental challenge you face in building your company is finding and retaining the right people. Your business partners and your staff are the foundation for punching way above your weight, and executing the strategy which you devise.