By Jonathan Harris
“Build a better mousetrap, and the world will beat a path to your door” – a paraphrase of an observation by nineteenth-century American essayist Ralph Waldo Emerson – is often taken as a truism.
So it comes as a surprise to many inventors, researchers, and other would-be entrepreneurs, that having a brilliant idea or new discovery is in itself by no means a guarantee of commercial success. Early stage investors – business angels, and some specialist venture capital firms – are all too familiar with the boast from company founders pitching for funds that “we have no competition”. The belief is that if a product is sufficiently new and different, it will make an immediate impression on the market, and buyers will hurry down the path to your door.
Know your market
This is mistaken – for a start, many investors will feel that if a product has no competition, that could be because there is no market for it. A good starting point for entrepreneurs looking to build a successful company is to have a very clear picture of their competitive positioning.
Once the prototype has been thoroughly tested, production has commenced, marketing campaigns started and a sales operation put in place, what impression will the product make in contrast to its competitors? What benefits does it provide that others can’t, and what value for money does it offer? How entrenched are the competitors, and how hard will it be for a newcomer to win market share from them? In most industries there is an infrastructure in place – either physical in terms of equipment or machinery, or virtual, as for example existing supply chains – and clients are reluctant to incur both the cost and the uncertainty of making changes unless there are very compelling reasons.
The importance of being disruptive
As a result, investors often claim that they like to back “disruptive technologies”. This concept is not always clearly spelt out. In some cases a technological disruption is obvious – think slide rules and pocket calculators, or more recently hard disk drives and the cloud – but the biggest disruptions of late have come from business models. AirBnB, Uber, even Scotland’s own Skyscanner, are providing services which are very familiar, but doing so in a way that changes how people can access and use them. They are all developing technology without which they could not maintain their level of service, but the technology is not the prime disruptive factor in their success.
It all ‘comes down to people’
For investors, everything ultimately comes down to people. They like to back companies in which the founders have a strong sense of purpose (or “passion”), often because they have direct personal knowledge of an industry and the opportunities it offers for making improvements. They also like to see a team in place that can cover all the bases for implementing the business proposition, rather than depend upon a single individual. The team will at a minimum need to cover sales (with at least one team member with intimate knowledge of the target market sector), operations, and finance.
A recent investment by angel group Equity Gap in Spoonfed, a Livingston-based company that provides management software for the catering sector, illustrated many of the points above. Jock Millican, of Equity Gap commented: “It was clear the founders of Spoonfed had spotted a clear gap in the market and have developed a product that is already proving popular worldwide. The founders’ experience in the industry has led to a product that directly resolves a need, and their relentless work to iron out any kinks has produced a business that is financially in good shape within a very short period of time.”
Jonathan Harris is editor of Young Company Finance Scotland.