On the surface the investment outlook for technology start ups has never been better. VCs invested $48.3Bn (Money Tree Report) in US start ups last year, a whopping 60% increase year on year. Most of this torrent of cash went into software and biotech companies. Start up investment has become one of the hottest business trends across the world with Governments and commercial bodies vying to establish incubators, accelerators and other schemes.
Seed funding is actually falling
A couple of recent reports have highlighted a trend underlying this growth which gives cause for concern. Mattermark (@mattermark) published an analysis of all funding rounds in the US over the past 10 years which shows the number of seed rounds falling from a peak in Q1 of 2013 back to 2010 levels. CrunchBase (@crunchbase) has taken this further and looked at data from the next 7 largest countries by number of Internet users. Both the number and value of seed rounds have dropped significantly in 2014. Investment is shifting from seed rounds to large Series A or later financing.
What is happening?
I don’t believe there is any shortage of innovative ideas and new entrepreneurs entering the market. If anything I expect that statistics on new business starts will show tremendous growth once again in 2014. Many of these start ups will share the ambition and commitment of their recent predecessors. This is one of the roots of the trend towards larger, later financing. Building a world leading company takes time and money so investors are in a longer cycle.
Investing larger amounts for longer cycles also puts a strain on investment capacity. Start ups have attracted funds in recent years because other investment classes have offered very poor returns. As traditional investment options start to recover in at least some large countries, especially the US and UK, this inflow of new funds may slow. Anecdotally, I know of a number of Angel syndicates and VCs who are mainly preoccupied by follow on rounds.
Follow on investment may also be going to quite well established businesses with a proven and profitable business model. Such companies just need working capital to fuel growth. This role has traditionally been filled by bank lending but at least in the UK there is little sign of this tap being turned back on. As a result, more funding from private sources is occupied with companies at this stage of maturity.
It would be very interesting to see data on the level of exits. Larger investments with longer payback cycles will ultimately lead to a shortage of liquidity which will put further strain on the front end of the investment chain.
Why is this a problem?
The risk is that a funding gap emerges. Founders will continue to bootstrap and incubators will provide enough resources to allow all sorts of people to get companies started. VCs and other private investors will continue to show interest in companies that have a viable product and some traction. Bridging the gap between early stage accelerators and product launch/ validation could become a real problem.
Tech EU is currently running an excellent series on companies that have grown large without any recourse to external funding. You can see the latest instalment about Cleverbridge here. Are we entering a phase where managing without investment will become a key business skill? I would love to know. Are you seeing the same trends in start up investment that these reports highlight?
The model for sales in a Start Up
We now have a great model for the building and growing the sales, marketing and business development of start ups. Focus on finding and validating customers and the whole cycle of testing, learning, iterating and necessary executing a pivot. When we combine the thinking of Steve Blank and Eric Ries with the lifecycle model proposed by Geoffrey Moore in Crossing the Chasm we also have a method for taking the next step and creating a large company.
Like software, hardware and user experience, business thinking has experienced great innovation in recent years. Like the technology many start ups use, these thinkers also believe that the start up movement will eventually disrupt and transform virtually every business sector. This change will also rewrite the rules for business organisation, business processes and business strategy.
B2B Sales are Ripe for Disruption
One specific area which is ripe for disruption is the B2B sales process. The key to unlocking a new approach to sales is the advent of everything as a service, most especially software as a service. Many B2B enterprises including the large established technology players have grown on a product based sales model. Shifting to selling services is more than just relabelling. It requires a whole new approach to generating value from customer relationships
Living in a Virtual World
Selling services to businesses is a complex world and often appears slow moving and obstructive. To understand why, you first need to grasp that services are not sold to businesses (or companies or corporations or whatever). Never. Services are bought by people. Not sold, bought. Not by organisations, by people. Those people are real, normal people with normal motivation and behaviours. However, they live in a virtual, unmapped world called a company. This world has its own customs and laws. if we don’t know these its occupants may appear irrational and unpredictable but they are not.
Making it easy to buy
The key to success in these virtual worlds is making it easy for your customers to buy. The traditional product model is based on creating features and benefits which make the product easy to sell. Services don’t work like this. The differences can be quite subtle but they are fundamental.
Let me illustrate by looking at some of the elements of the sales funnel:
My thanks to my good friend Carl Erickson from Beacon Worldwide for the thinking behind this model which has been proven in thousands of service sales.
A different customer experience
Some of these differences may seem quite subtle but the results are a very different experience for both seller and buyer. Notice that this affects everything right through to contracting and accounting. Start ups that are aiming to sell to the enterprise need to understand the model on the right and adopt a different business model as a result
Top 3 things to do differently
There are three clear steps to the right model:
1. Hire different people. Traditional product sales people often struggle to sell services. Look for a background in consulting, systems integration or IT services.
2. Build different incentives. This is one of the most common mistakes even in large services companies. Sales targets that are based on the signed contract value positively encourage the wrong behavior and bad business practice.
3. Rethink your CRM. Most CRM systems are actually product sales funnel based. You will need something that genuinely manages customer relationships.
Following these steps will help but it will not be enough. SaaS for the enterprise needs to resolve the conflict between simple, standard software and customer expectations of service.
The Anatomy of a Conflict
The economic model of SaaS is designed to scale by low cost, online delivery of high quality easy to use software. Enterprises are used to buying software which is highly configured, complex to install and delivered by large teams of systems integrators and consultants. The latter model is expensive and painful but it is a service tailored to business needs just as described in the right hand side of the table.
How to rock Enterprise Sales
Great SaaS brings huge benefits but these will only be realized if the business which buys changes to take advantage of the opportunity. This is the final key to successful enterprise sales. The SaaS start up must help its customer deliver business change. This means wrapping the product in an ecosystem of training, support, change management and benefits realisation – what Geoffrey Moore describes in Crossing the Chasm as “the whole product” philosophy.
Start ups don’t necessarily need to deliver these services themselves. Partners, alliances and third party software providers may well be better placed. A strategy to build a place in an ecosystem which can deliver end to end business change is essential.
Winning enterprise business needs a different approach to sales for SaaS start ups. This implies making different choices about your business model. To learn more about the tools and techniques needed to implement these choices effectively come and talk to me.
Many years ago, on a beautiful sunny afternoon, my wife was lounging on our patio quietly working her way through the crossword in the newspaper. The lovely lady who worked for us at the time looked over her shoulder and asked her what she was doing. “Just solving this little grid of problems” my wife replied. Anna then asked the killer question “Aren’t there enough problems in the world for you to solve?"
Start a business to solve a problem
I always think of this little memory when considering Number 1 in my list of tough questions that you must answer if you are starting your own business - “What problem does your business solve?” Wherever you are and whatever your expertise and experience, there is no shortage of problems to solve. The challenge for any entrepreneur is how to find and choose a problem that provides the foundation for a great business.
Problem is a very wide playing field
You first need to understand that problem in this context has the widest possible definition.
Problems can include:
Choices, choices, choices
Once you think like this, the list of problems becomes endless. How to start your own business? becomes How do you choose the right problem for your business to tackle? The best way to structure your thinking is to answer another bunch of hard questions (sorry!):
Be careful - a problem does not guarantee a market
Assuming a market exists just because you have found a problem is one of the most common mistakes I see with start ups. Even very big problems may not lead to a clear and addressable market. To start your own business your solution needs to be simple enough and cheap enough to persuade people to solve a problem they have lived with all their lives.
B2B companies often define their market by the measurable benefits their product delivers. The logic is undeniable but unfortunately logic and buying decisions have only a tenuous relationship. Many solutions which guarantee reduced costs or faster time to market or similar never find a market because the business owner has assumed people will buy on the basis of clear benefits. Well defined benefits are great to have but they are not enough to guarantee success.
“In preparing for battle I have always found that plans are useless but planning is indispensable."
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.