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Qi3 Accelerator Insight

Leave those NDAs alone!

Some people seem to miss the touchy-feely part of engagement between entrepreneur and investor. They insert the dark menace of a Non-Disclosure Agreement (NDA) in the space between the first handshake and a cup of coffee.  Just when you want to attract an investor, you raise his hackles.

From the entrepreneur’s perspective, it’s important to protect yourself from the risks of disclosing the ‘crown jewels’ of your technology.  This particularly applies where you meet people who are previously unknown to you.  Disclosure to people other than lawyers and patent attorneys unless within the terms of an NDA may also prevent you from later securing a patent.

Some people have an overdeveloped view of what constitutes confidential information and thus come across as overly secretive and even shifty when asked simple questions.  It’s not a healthy start to a relationship. By putting an NDA in front of a potential investor, you are asking for a legal commitment at a very early stage and risk scaring him off.

Now think about it from an investor’s perspective.  We really don’t want a drawer full of NDAs, especially as we are scouting in a pool of technology investment prospects that may overlap. So we (a) follow a written ethical code, (b) follow professional practices and (c) generally only sign NDAs at Stage 3 (technology and market due diligence) in our investment process.  We really don’t want to know anything secret at these early stages. We’re primarily interested in what makes you stand out from the crowd – the commercial impacts of your whizzy technology rather than the essence of your invention.

So what’s the resolution?  Spend a few minutes considering our evaluation process, and considering what public domain information you can release. This may then be included in the marketing information and business plan.  Confidential information available on exchange of an NDA can be listed in the business plan and released for the purposes of due diligence at a later stage.

This all has a practical effect.  In the past year, I have refused to bring four businesses into our evaluation process simply because the founders wouldn’t provide sufficient detail for a Stage 1 evaluation.

Advice for Entrepreneurs: Part Six – Market Size and Growth Rate

In this sixth article in my series ‘advice for entrepreneurs’ I address my favourite subject – the importance of understanding the market for your technology, product or service and representing it to investors.

It’s hardly surprising that three of our five key investment criteria relate to market issues; the others being the credibility of the team and the business model through which value is extracted from the business.  Let’s look at the issues of market size and growth rate as a start:

Global Markets

Think about the investors you are approaching and the markets in which they wish to invest.  In the case of Qi3 Accelerator, we are keen to participate in businesses that utilise technology to underpin advances in global growth sectors such as environmental sustainability / cleantech, healthcare, security, communications and high value manufacture.

Addressable Market not Total Market Size

Don’t mix up ‘market size’ and ‘addressable market’.  The ‘market size’ is the total amount of money spent in your sector (for example, the world demand for electricity).  The ‘addressable market’ is the total sales that your business could gain if you had no competitors (for example the market for wind turbines producing under 25kW peak power).

If you use the total market size as the measure in your business plan, you are generally overstating the opportunity and losing credibility with potential investors. Quoting broad ‘telephone numbers’ as market sizes just makes your business look like a tiny speck on the industrial landscape, rather than an important player within a defined market.

The addressable market is a sensible measure to start with.  It has the further advantages of showing investors that you have carefully considered the needs of your potential customers and the alternatives that they might buy.  It furthermore indicates that you have understood who your competitors are.  Growing your market share to a realistic but high number is also important and this means a realistic sales projection within a meaningful addressable market.

Concentrated and Fragmented Markets

It’s important to understand and represent fairly the nature of the market into which you are selling.  We describe concentrated markets as those dominated by a few players, where the actions of any of the key companies affect the market itself.  Fragmented markets are those in which no single company has sufficient market share to be able to influence the market as a whole.

Your marketing strategy will be very different according to the type of market in which you operate.  In a concentrated market, you will need to displace incumbents and will naturally see them as opportunities for future partnership or exit.  In a fragmented market, you need to demonstrate to your investors how you will become noticed and thus gain substantial sales.  My first suggestion is to subdivide the addressable market further and gain market share in a subdivision (e.g. small wind turbines in Europe or residential installations).

Market Growth

It’s far easier to develop a business in a large and expanding market.  Let’s say you’re in a £500m addressable market that’s growing at 20% for each of the next five years.  You can grow at a high rate without eating into your competitors.  But if the market was growing at only 2%, every step you take will provoke reaction from established players.  Simply put, there is more room for experimentation and mistakes in fast growing markets, especially if you are also generating sufficient gross margin to reinvest in product and market advances.

In the next article, I’ll move on to market disruption and sustainable competitive advantage.

Successful startups for the over-35’s

There’s hope for us baby-boomers yet, according to a survey by the Global Entrepreneurship Monitor reported in Business Insider. According to the study, people over 35 made up 80 per cent of the total entrepreneurship activity in 2009.

A 2009 Kauffman Foundation survey of 549 startups operating in “high-growth” industries – including aerospace, defence, health care, IT and electronics – and found that people over 55 are nearly twice as likely to launch startups in these sectors.

So it’s not just about youthful energy.  The lessons seem to be:

  • Utilise your experience of how to succeed, compete effectively in the marketplace and learn from past failures
  • Use your broad networks built up over the years – build a team with people whose strengths you know
  • Use your (hopefully) greater financial stability and acumen to raise finance and manage the business effectively

In my world of engineering and instrumentation, there are vast stores of knowledge and practical experience built by people who have ‘been there, done that’.  Engineering is part learning and part experiential.  It’s an important lesson in a rapidly changing economy that we can use this experience to increase our own chances of business success in a new venture.

Product Passion

A nice article from Silicon Valley Product Group

If you’re trying to create major new sources of revenue for your company, you need to have a vision that is compelling to people not just for a few months but for several years.  You need to show your team, your execs and your stakeholders that you have a longer-term vision, and you must demonstrate the passion required to get the rest of your company excited.

That’s why I’ve pursued a life in product / service marketing – it’s that bite point where a great technology hits the sweet spot in a growing market that makes me tingle.

My own methodology is described in an earlier Accelerator Insight post.

Now do it.

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