So we have seen how the key to building a valuable business is to build a profitable business. We have also seen how the key to building a profitable business is to choose the right market. Now we will turn our minds towards how we can choose the right market. As this is the single most important decision that will affect our financial success, as we build our business over the next few years, we will tackle it in two parts looking firstly at people and secondly at strategy.
Most founders of hi-tech businesses come from a technical background. They typically see a problem and build a solution that they then try and sell to others.
This is a logical and very occasionally financially successful process. The companies I have observed that are more successful have often started with an analysis of a market (rather than a problem) and from that analysis have set out to develop a product the market would want.
Remember those pesky qualifications of a market, capacity and willingness to pay. Many a time a product has been developed that solves a problem, but whether that in turn leads to a profitable company is another thing altogether.
So if you are reading this and have a technical background, you may want to think about the other skills required to build a business and company rather than a product. There are three key disciplines in building a successful company and those that have been able to build a team of people covering all three skills have a far higher chance of success than those that do not.
The first skill set is a capability to make sales and this is by far the most important skill. If you have a technical background pause to reflect here; and if you find that at all counter intuitive then read the following section very, very carefully.
Nothing happens in business until someone buys something. A new business can create the illusion of progress while it consumes capital, often for a surprisingly long period of time depending on the patience and naivety of its investors. But until sales are made, there is no real validation that a market exists for any new product.
Opinions and beliefs about which product is best are completely irrelevant. The market will anoint those companies that are perceived as the best. Read this carefully; companies not products.
We will expand further on this point in a later article, but for now if you don’t accept the preceding three paragraphs as fact for the sake of your financial future do not read further until you have convinced yourself that these statements are true. Talk to peers, search the internet but do not ask your mother (she loves you and is not an objective reference) and do not proceed until you are convinced.
Okay, making sales is tough work. As any good technical person knows hi-tech sales people rate at the lower levels of the food chain. But here’s another rub.
You need to have as part of your startup team someone with the proven experience to make sales to your market. Remember at the outset we said your chances of surviving the startup process were much worse than surviving cancer. Lets think about who we would turn to if we were diagnosed with cancer. Would it be our accountant, lawyer, or perhaps an oncologist with a proven track record in successfully treating patients with the same type of cancer. I’d go with the third option and I’d recommend you use the same amount of rigour in selecting the person to join you that will be responsible for making sales.
Next you need a bean counter. Slightly higher up the food chain, but you really need someone who will manage the business and keep the wheels on. You need licence agreements, bank accounts, GST returns and pricing policies and the devil is in the detail. You don’t want to find in five years time that the business is worthless because of a mistake made at the outset. Trust me on this.
Having a founding team of people with these skills is a key predictor of future success and an key enabler of raising funds and winning customers.
A team without a product is absolutely more valuable and investible than a product without a team.
Finally you need some grey hair around your venture. A board of directors, an advisory board, a few mentors; whatever you call them you need people with proven experience of building hi-tech companies along with people who have proven experience within your chosen market. A retired customer from your target market is often very useful.
Nothing guarantees success as hi-tech start ups are always risky businesses. But a complete founding team (technical, sales and business skills) along with an experienced and committed board is the gold standard for a successful hi-tech startup.
— O’Hara is chairman of Clarity Commerce a publicly listed software company based in England. He is also an independent director of Tait Electronics in Christchurch and Tekron International in Wellington. Contact him at www.johnohara.co.nz