Qi3 – Quality, Insight, Integrity & Innovation - UNITING TECHNOLOGY & MARKETING

Tag: business plan

Why we’re passionate about High Value Manufacturing

After this week’s announcement of the Qi3 Accelerator Bootcamp, friends are asking me why we’re doing it.  Are we mad? How will we make money? And, above all, why High Value Manufacturing (HVM)?

The simple answer is that we’re doing it because we see the need!  After reviewing nearly 400 prospects, we see a common set of areas in which businesses need to improve if they wish to attract investment.  Let’s be clear here, I’m not just talking about seed stage ideas.  I’m expecting that the bootcamp will be most attractive to young established businesses looking for early or expansion stage capital.  We’ll be helping on all aspects of engineering businesses, from managing technology and product development, go to market strategy, finances and Intellectual Property.

When I attended the NESTA Startup Factories conference  last summer, it became obvious to me that, whilst Accelerator Programmes were flourishing in the software and Internet space, few people had tried them in ‘harder tech’.  When we set up the partnership with Cambridge’s ideaSpace, it seemed natural to run a bootcamp as a one-off pilot to test our evaluation process and the concept of such a programme.  We aim to support 8 businesses with tough love through an intensive 3-day process, and we’ve attracted a range of top notch coaches and mentors to get the best out of this short, sharp shock.

But above all, it’s about having fun working with ambitious people in the field I love.  I grew up at Oxford Instruments, a mid-sized engineering company where the customer was king and the love of technology and manufacturing was deeply ingrained.  I’ve spent my life selling and marketing other people’s technical inventions around the world.  For me, HVM means making real engineered products, be they destined for environmental sustainability, healthcare, industry or defence.  My pleasure as an investor is seeing engineering and commercial jobs created here in the UK, and products exported across the globe.

We’ve been fortunate to attract partnership from ideaSpace, sponsorship from Harrison Clark, Williams Powell, Synergy Energy and Wren Capital, and support from NESTA and the Technology Strategy Board.  Bootcamp participants will have to contribute a token amount towards their accommodation in Cambridge’s lovely Madingley Hall, and we’ll make up the balance of the costs ourselves.  We are not seeking equity stakes in the companies that participate, although we’ll naturally be keen to see if they are attractive investments at the end of the process.

So are we just do-gooders?  Well perhaps.  I see it as a superb experiment, an opportunity to help some great businesses, committed entrepreneurs, and work with experienced mentors whilst having great fun.

To join the bootcamp apply here.  It’s a one-off; entries close on 4th May and the bootcamp will be held on 23rd – 25th July.

My next posting will be the one about the aubergine…

Advice for Entrepreneurs: Part Eight – Due Diligence Process

I’ve been asked to join the panel at a London Business Angels investor club night this week.  The event will focus on the topic of due diligence.  To get the juices flowing, I’ll focus here on some key aspects:

Staged due diligence is vital

The amount of time and effort put into gathering information needs to be staged to be fair to you and to the prospective investee.  In stage 1 we simply evaluate the business plan, presentation or other initial interaction.  In stage 2 we ask more questions but take the answers at face value.  At stage 3 we seek to reach a detailed conclusion as to whether we would like to invest in the company.  This is the main stage at which we take the technology, product/service and market apart and seek to understand them thoroughly.  Finally at stage 4, we seek to ensure that the legal and financial terms are fully acceptable.  Our experience is that the decision to pass from one stage to the next should be taken seriously and with regard to the time and implied commitment involved.

Decide how much to do before agreeing terms

We’ve varied in our approach to the amount of due diligence we do before agreeing investment terms. On one hand a greater degree of upfront research will indicate areas for further discussion and investigation.  It will also uncover issues that change our views on valuation or our interest in investing.  On the other hand, an early term sheet shows commitment and gains exclusivity.

The company seeking investment should provide the information

When I started investing, I would spend a lot of time undertaking my own research into the market prospects for potential investments.  Whilst we still do this on occasion, it’s far more valuable to understand what the company knows.  Our approach now is to provide the company with a set of headings for the main due diligence, and expect them to populate a dropbox folder with their information.  This has the twin advantages of helping us to understand the depth of the company’s own understanding and providing the basis for the warranty disclosure letter at the end of the process.

Talk to customers

An invaluable part of the diligence process is a series of calls to current and prospective customers.  Are they happy with their interactions with the company?  Does the product perform? Do their projected orders correspond with the company’s sales projections?  A few structured calls undertaken by a market research professional can be illuminating.

Don’t overdo it

It’s possible to overanalyse a prospective investment.  This can result in wasted time and thus deflate the return on investment.  With early stage technology businesses, especially those that are pre-revenue, some questions cannot be rigorously answered and the decision will come down to your personal judgement.  I always ask myself the questions “will this piece of research contribute directly to my investment decision” and “do I think that the management team will find the answers post investment”.

Undertaking a structured due diligence process is a super way of learning about the business and its management team.  Executed properly it leaves me with the confidence to entrust the company with my investment, or to walk away from the deal safe in the knowledge that ‘this one’s not for me’.

Advice for Entrepreneurs: Part Seven – Sustainable Competitive Advantage

In this seventh part of my occasional series ‘Advice for Entrepreneurs’ I discuss how you can show potential investors that you are able to take advantage of the market which you are addressing.

Creating Sustainable Competitive Advantage

The core objective is to create an obvious and sustainable rationale for customers to buy from you rather than your competitors. Achievement of this in investors’ minds looks different for first movers and market followers:

For first movers: you will need to educate the market and build barriers behind you to stop new entrants catching up. Invariably people will have been spending their money on something else, so you will need to change their mind-set.  Is your product truly novel in customers’ minds, and can you lead the race from the front? Investors love technical novelty, but will people really validate your heroism, buy your product and laud you with market dominance?

For market followers: earlier entrants have demonstrated that there is a market, but are you a conquering upstart or a me-too supplicant? Why should potential customers switch allegiance? Can you build barriers behind you to dissuade further entrants and in front of you to undermine existing competitors?

Market Disruption and the Infamous USP

I like to understand how a company will disrupt its target market. For me this requires some key steps:

  • Rigorous definition and justification of the selected target market: Who do you intend to sell to, how many target customers are there and why have you selected this target market?
  • Target market share: What proportion of the target market do you intend to capture and over what time period?
  • Market entry strategy: How will you achieve this goal in practice? Once the product / service works, how will you scale up?

The concept of Unique Selling Proposition (USP) is much bandied about and generally misused. To be effective a USP should contain three things: uniqueness, a sales trigger and a specific proposition.  It is not just a list of nice ideas – and I suggest that 1 to 3 USPs are sufficient. You also must be able to live up to the claim, such as famously that made by FedEx: “When your package absolutely, positively has to get there overnight”.

And finally…

A three legged stool is more comfortable to sit upon than the pointy end of a stick. So I’m all for ensuring that I have three strong arguments against each competitor in the target market. And none of these three should be price. My rationale for this is twofold: established competitors can always reduce their prices to knock you out of the game, and price competition generally undermines technology-based brands.

The result of this strategy should be a set of clearly articulated statements that position your offering unambiguously in the mind of the customer, making the market your own.

 

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.

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