Start-up: A Practical Guide to Starting and Running a New Business

Start-up

Tom Harris

Start-up A Practical Guide to Starting and Running a New Business With 24 Figures and 19 Tables

123

Dr. Tom Harris www.hi-consulting.com

There are no warranties, expressed or implied, on any of the methods or approaches described in this book. You must use them at your own risk and seek legal and professional advice as appropriate. They do however represent my best endeavors to convey good practice in creating a successful start-up company. This book contains reference to proprietary trade names and trademarks. The following names are protected by the firm or institution concerned; Amazon; Apple; Betamax; Blackberry; CocaCola; eBay; Excel; iPod; iTunes; Lotus; Microsoft; RIM; and VHS. NewCo is fictitious and any resemblance to any real company is unintended and entirely coincidental.

ISBN-10 3-540-32981-1 Springer Berlin Heidelberg New York ISBN-13 978-3-540-32981-7 Springer Berlin Heidelberg New York Library of Congress Control Number: 2006931357 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer-Verlag. Violations are liable for prosecution under the German Copyright Law. Springer is a part of Springer Science+Business Media © Springer-Verlag Berlin Heidelberg 2006 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Production: LE-TEX Jelonek, Schmidt & Vöckler GbR, Leipzig Cover-design: WMX Design GmbH, Heidelberg SPIN 11687979

42/3100YL – 5 4 3 2 1 0

Printed on acid-free paper

ȱ

Acknowledgements

Thereȱ areȱ manyȱ peopleȱ andȱ organisationsȱ thatȱ deserveȱ myȱ thanksȱ forȱ theȱ inspirationȱ andȱ creationȱ ofȱ thisȱ book.ȱ Theȱ ideas,ȱ methodsȱ andȱ approachesȱ haveȱ beenȱ developedȱ throughȱ aȱ combinationȱ ofȱ personalȱ experienceȱ andȱ theȱ adaptationȱ ofȱ theȱ teachingsȱ ofȱ thoseȱ thatȱ haveȱ traveledȱ thisȱ roadȱ beforeȱ me.ȱ Inȱ thisȱ respect,ȱ Iȱ amȱ particularlyȱgratefulȱforȱtheȱworkȱofȱGeoffreyȱMoore,ȱJohnȱMullins,ȱ MikeȱSouthon,ȱChrisȱWestȱandȱMichaelȱPorter.ȱ Iȱ wouldȱ alsoȱ likeȱ toȱ thanksȱ thoseȱ thatȱ haveȱ helpedȱ inȱ theȱ manyȱ Enterpriseȱ Programmesȱ andȱ seminarsȱ thatȱ Iȱ haveȱ beenȱ involvedȱ with.ȱ Theseȱ organisationsȱ includeȱ theȱ Universitiesȱ ofȱ Reading,ȱ Portsmouth,ȱWarwickȱandȱSunderland,ȱHarrisonȱGoddardȱ&ȱFoote,ȱ DickinsonȱDees,ȱBoultȱWadeȱTennant,ȱBoyesȱTurner,ȱCoffinȱMewȱ&ȱ Clover,ȱandȱBeresfordsȱ&ȱCo.ȱ Last,ȱbutȱbyȱnoȱmeansȱleast,ȱIȱthankȱmyȱwonderfulȱwife,ȱandȱnotȱjustȱ forȱdoingȱallȱtheȱdiagrams.ȱȱ ȱ

Contents

Introductionȱ

1ȱ

1ȱHowȱgoodȱisȱyourȱidea?ȱ ȱȱȱȱ1.1ȱAȱstableȱplatformȱ ȱȱȱȱ1.2ȱIndustriesȱandȱmarketsȱ ȱȱȱȱ1.3ȱAnalysingȱtheȱmarketȱ ȱȱȱȱ1.4ȱAnalysingȱtheȱindustryȱ ȱȱȱȱ1.5ȱSo,ȱdoȱyouȱhaveȱaȱbusiness?ȱ

3ȱ 4ȱ 4ȱ 5ȱ 22ȱ 29ȱ

2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱ ȱȱȱȱ2.1ȱLooseȱtalkȱcostsȱlives!ȱ ȱȱȱȱ2.2ȱTypesȱofȱintellectualȱpropertyȱ ȱȱȱȱ2.3ȱPatentsȱ ȱȱȱȱ2.4ȱRegisteredȱdesignsȱ ȱȱȱȱ2.5ȱTradeȱmarksȱ ȱȱȱȱ2.6ȱCopyrightȱ ȱȱȱȱ2.7ȱWorkingȱwithȱpatentȱagentsȱandȱIPȱlawyersȱ

31ȱ 32ȱ 32ȱ 34ȱ 47ȱ 48ȱ 50ȱ 51ȱ

3ȱWhatȱisȱaȱcompany?ȱ ȱȱȱȱ3.1ȱTheȱcompanyȱasȱaȱlegalȱentityȱ ȱȱȱȱ3.2ȱRoleȱandȱrightsȱofȱshareholdersȱ ȱȱȱȱ3.3ȱCompanyȱownershipȱandȱtypesȱofȱsharesȱ ȱȱȱȱ3.4ȱShareholdersȱagreementsȱ ȱȱȱȱ3.5ȱRolesȱandȱdutiesȱofȱdirectorsȱ

53ȱ 54ȱ 58ȱ 59ȱ 63ȱ 64ȱ

4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱ ȱȱȱȱ4.1ȱMarketingȱandȱsellingȱ ȱȱȱȱ4.2ȱTheȱproductȱadoptionȱlifecycleȱ ȱȱȱȱ4.3ȱMovingȱfromȱoneȱgroupȱtoȱtheȱnextȱ

69ȱ 69ȱ 71ȱ 75ȱ

viiiȱȱȱȱȱȱȱContentsȱ

ȱȱȱȱ4.4ȱCriticalȱsuccessȱfactorsȱ ȱȱȱȱ4.5ȱWhatȱshouldȱbeȱinȱyourȱmarketingȱplan?ȱ

80ȱ 86ȱ

5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱ ȱȱȱȱ5.1ȱCashȱflowȱ ȱȱȱȱ5.2ȱSourcesȱofȱfinanceȱ ȱȱȱȱ5.3ȱHowȱdoesȱventureȱcapitalȱwork?ȱ

89ȱ 89ȱ 93ȱ 101ȱ

6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱ ȱȱȱȱ6.1ȱTheȱbasicȱstructureȱ ȱȱȱȱ6.2ȱBusinessȱplanningȱtoolsȱ ȱȱȱȱ6.3ȱBuildingȱtheȱmodelȱ

113ȱ 114ȱ 117ȱ 119ȱ

7ȱHowȱdoȱyouȱwriteȱaȱbusinessȱplan?ȱ ȱȱȱȱ7.1ȱWhatȱshouldȱyourȱbusinessȱplanȱcontain?ȱ ȱȱȱȱ7.2ȱHowȱshouldȱtheȱplanȱbeȱpresented?ȱ

139ȱ 141ȱ 146ȱ

8ȱYourȱroleȱandȱyourȱteamȱ ȱȱȱȱ8.1ȱWhatȱdoȱyouȱwantȱtoȱachieve?ȱ ȱȱȱȱ8.2ȱSatisfyingȱtheȱcriticalȱsuccessȱfactorsȱ ȱȱȱȱ8.3ȱHowȱimportantȱisȱexperience?ȱ ȱȱȱȱ8.4ȱNetworkingȱ

151ȱ 152ȱ 153ȱ 155ȱ 156ȱ

9ȱClosingȱremarksȱ

159ȱ

Referencesȱandȱfurtherȱreadingȱ

161ȱ

Indexȱ

163ȱ

ȱ ȱ

Introduction

Startingȱandȱrunningȱyourȱownȱbusinessȱisȱoneȱofȱtheȱmostȱcommonȱ dreamsȱ thatȱ peopleȱ share.ȱ Theȱ prospectȱ ofȱ beingȱ yourȱ ownȱ boss,ȱ reapingȱtheȱfullȱrewardsȱofȱyourȱhardȱworkȱorȱbuildingȱsomethingȱ meaningful,ȱ allȱ driveȱ thousandsȱ ofȱ peopleȱ toȱ takeȱ theȱ plungeȱ eachȱ year.ȱUnfortunatelyȱinvestorsȱreportȱthatȱtheyȱonlyȱinvestȱinȱoneȱinȱ everyȱ hundredȱ ofȱ theȱ plansȱ theyȱ see,ȱ andȱ ofȱ them,ȱ oneȱ inȱ fiveȱ areȱ successful.ȱEvenȱincludingȱbusinessesȱthatȱdon’tȱrequireȱinvestment,ȱ aȱthirdȱofȱStartȬupsȱdoȱnotȱlastȱtwoȱyears.ȱ Theȱreasonsȱforȱthisȱtragicȱfailureȱrateȱareȱvariedȱbutȱaȱgreatȱdealȱofȱ responsibilityȱ liesȱ inȱ poorȱ appreciationȱ ofȱ whatȱ isȱ involvedȱ inȱ startingȱ aȱ business,ȱ poorȱ planningȱ andȱ aȱ poorȱ understandingȱ ofȱ whatȱ customersȱ reallyȱ wantȱ andȱ need.ȱ Yourȱ startȬupȱ businessȱ isȱ aȱ sophisticatedȱ andȱ complexȱ thing.ȱ Thereȱ isȱ noȱ shortageȱ ofȱ adviceȱ availableȱ toȱ helpȱ you,ȱ butȱ tooȱ oftenȱ theȱ individualȱ subjectsȱ areȱ treatedȱ inȱ isolationȱ withoutȱ aȱ meansȱ ofȱ drawingȱ theȱ wholeȱ pictureȱ together.ȱ Thisȱ bookȱ hasȱ beenȱ writtenȱ toȱ provideȱ youȱ withȱ aȱ userȱ guideȱ forȱ yourȱ newȱ business.ȱ Weȱ willȱ startȱ rightȱ atȱ theȱ beginningȱ byȱ analysingȱyourȱbusinessȱopportunityȱtoȱmakeȱsureȱthatȱitȱisȱbuiltȱonȱ solidȱ foundations.ȱ Weȱ willȱ thenȱ lookȱ atȱ theȱ legalȱ aspectsȱ ofȱ proȬ tectingȱ yourȱ ideas,ȱ incorporatingȱ yourȱ companyȱ andȱ theȱ responȬ sibilitiesȱ thatȱ goȱ withȱ it.ȱ Weȱ willȱ lookȱ atȱ financing,ȱ cashȱ flowȱ andȱ whatȱ investorsȱ lookȱ forȱ inȱ aȱ business.ȱ Weȱ willȱ buildȱ financialȱ modelsȱandȱbusinessȱplansȱandȱfinallyȱlookȱatȱdevelopingȱtheȱteamȱ thatȱwillȱhelpȱyouȱachieveȱyourȱgoals.ȱȱ

2ȱȱȱȱȱȱIntroductionȱ

Thisȱbookȱwillȱhelpȱanyoneȱwhoȱhasȱstartedȱorȱwantsȱtoȱstartȱtheirȱ ownȱ business.ȱ Itȱ willȱ beȱ particularlyȱ usefulȱ forȱ researchersȱ andȱ inventorsȱthatȱhaveȱdevelopedȱaȱtechnologyȱthatȱtheyȱcanȱbuildȱintoȱ aȱproductȱorȱservice.ȱȱ Myȱownȱcareerȱstartedȱasȱaȱuniversityȱresearcherȱdevelopingȱnovelȱ computingȱsystemsȱforȱanalysingȱcomplexȱdata.ȱIȱwasȱalwaysȱmoreȱ interestedȱ inȱ theȱ applicationsȱ ofȱ theȱ technologyȱ ratherȱ thanȱ theȱ technologyȱ itselfȱ andȱ soȱ theȱ researchȱ groupȱ Iȱ builtȱ focussedȱ exclusivelyȱonȱdevelopingȱcommercialȱapplicationsȱandȱexploitableȱ opportunitiesȱ forȱ theȱ research.ȱ Oneȱ suchȱ projectȱ wasȱ excitingȱ enoughȱ toȱ formȱ aȱ startȬupȱ company.ȱ Withȱ theȱ invaluableȱ helpȱ ofȱ twoȱ businessȱ angels,ȱ theȱ companyȱ wasȱ formed,ȱ raisedȱ significantȱ financeȱandȱwentȱonȱtoȱdevelopȱanȱawardȱwinningȱproduct.ȱWeȱgotȱ aȱ lotȱ ofȱ thingsȱ right,ȱ butȱ weȱ alsoȱ madeȱ aȱ lotȱ ofȱ mistakesȱ alongȱ theȱ way,ȱbothȱofȱwhichȱwereȱtremendousȱlearningȱactivities.ȱȱ Onȱ leavingȱ theȱ company,ȱ Iȱ startedȱ aȱ managementȱ consultancyȱ toȱ helpȱ otherȱ startȬups,ȱ particularlyȱ technologyȱ businesses,ȱ makeȱ theȱ mostȱ ofȱ theirȱ opportunities.ȱ Hiȱ Consultingȱ hasȱ workedȱ withȱ manyȱ entrepreneursȱ toȱ analyseȱ theirȱ opportunityȱ andȱ buildȱ theirȱ foundȬ ations.ȱ Partȱ ofȱ thisȱ workȱ hasȱ beenȱ theȱ developmentȱ ofȱ aȱ highlyȱ successfulȱ courseȱ forȱ researchers,ȱ entrepreneursȱ andȱ inventorsȱ toȱ gainȱanȱappreciationȱofȱtheȱbusinessȱworldȱandȱwhatȱisȱinvolvedȱinȱ creatingȱaȱStartȬup.ȱThisȱbookȱhasȱgrownȱfromȱtheȱcourseȱbutȱisȱnotȱ intendedȱasȱaȱtextȱbook;ȱitȱisȱintendedȱtoȱhelpȱyouȱactuallyȱdoȱit,ȱnotȱ justȱpassȱanȱexamȱinȱit.ȱ ȱ Soȱlet’sȱgetȱdownȱtoȱbusiness.ȱ ȱ

1 How good is your idea?

Thisȱ bookȱ hasȱ beenȱ writtenȱ toȱ helpȱ youȱ startȱ andȱ runȱ yourȱ ownȱ business.ȱ Thereȱ areȱ lotsȱ ofȱ issuesȱ thatȱ needȱ toȱ beȱ discussedȱ includingȱ raisingȱ finance,ȱ cashȱ flow,ȱ protectingȱ yourȱ ideasȱ andȱ marketing,ȱ butȱ theȱ mostȱ importantȱ thingȱ toȱ lookȱ atȱ firstȱ isȱ theȱ qualityȱ ofȱ yourȱ ideaȱ andȱ whetherȱ itȱ hasȱ theȱ legsȱ toȱ deliverȱ everythingȱyouȱwantȱtoȱachieve.ȱ Obviouslyȱyouȱthinkȱyourȱideaȱisȱgreat,ȱyouȱwouldȱnotȱbeȱthinkingȱ ofȱ investingȱ yourȱ timeȱ andȱ resourcesȱ onȱ itȱ ifȱ youȱ wereȱ notȱ convinced.ȱSometimes,ȱhoweverȱweȱcanȱbeȱtooȱcloseȱtoȱsomethingȱtoȱ seeȱtheȱproblemsȱwithȱit.ȱWeȱcanȱallȱthinkȱofȱexamplesȱofȱshopsȱthatȱ haveȱ openedȱ inȱ theȱ localȱ highȱ streetȱ whereȱ youȱ lookȱ atȱ it,ȱ scratchȱ yourȱ headȱ andȱ thinkȱ ‘whyȱ wouldȱ someoneȱ openȱ aȱ shopȱ likeȱ thatȱ here?’ȱSureȱenough,ȱsixȱmonthsȱlaterȱtheȱ‘ToȱLet’ȱsignȱisȱbackȱagain.ȱ Ifȱyouȱknewȱthatȱtheȱideaȱwasȱflawed,ȱwhyȱdidn’tȱthey,ȱwhyȱdidn’tȱ theirȱ friends,ȱ theirȱ bankȱ managerȱ orȱ theirȱ familyȱ seeȱ whatȱ wasȱ wrongȱandȱwarnȱthem?ȱȱ Thisȱ firstȱ chapterȱ isȱ intendedȱ toȱ helpȱ youȱ properlyȱ analyseȱ yourȱ businessȱ idea.ȱ Weȱ areȱ goingȱ toȱ lookȱ atȱ whoȱ andȱ whereȱ yourȱ customersȱ areȱ andȱ whatȱ theyȱ wantȱ fromȱ you.ȱ Thenȱ whoȱ theȱ competitionȱ isȱ andȱ howȱ youȱ areȱ goingȱ toȱ competeȱ withȱ them.ȱ Theȱ analysisȱ willȱ requireȱ youȱ doingȱ someȱ homeworkȱ andȱ someȱ thinking,ȱ soȱ grabȱ someȱ paperȱ andȱ pens,ȱ probablyȱ someȱ coffeeȱ too,ȱ andȱweȱwillȱgetȱstarted.ȱ

4ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

1.1 A stable platform Sinceȱ weȱ areȱ talkingȱ aboutȱ theȱ foundationsȱ ofȱ yourȱ businessȱ weȱ needȱtoȱmakeȱsureȱthatȱitȱisȱbuiltȱonȱaȱsolidȱplatform.ȱThereȱareȱthreeȱ basicȱ pillarsȱ thatȱ areȱ goingȱ toȱ supportȱ thisȱ platform;ȱ theseȱ areȱ theȱ market,ȱtheȱindustryȱandȱyourȱteam!ȱ Ifȱanyȱoneȱofȱtheseȱpillarsȱisȱweak,ȱtheȱbusinessȱisȱlikelyȱtoȱsufferȱasȱ aȱ consequenceȱ andȱ mayȱ evenȱ failȱ completely.ȱ Weȱ willȱ lookȱ atȱ theȱ needsȱofȱyourȱteamȱlaterȱinȱtheȱbook.ȱIȱamȱsureȱyouȱrealiseȱtheȱhardȱ workȱandȱdedicationȱrunningȱyourȱbusinessȱwillȱtake.ȱForȱnowȱlet’sȱ startȱ byȱ analysingȱ theȱ otherȱ twoȱ pillars;ȱ yourȱ marketȱ andȱ yourȱ industry.ȱ

1.2 Industries and markets Soȱwhatȱisȱtheȱdifferenceȱbetweenȱanȱindustryȱandȱaȱmarketȱandȱisȱitȱ important?ȱ Aȱ simpleȱ definitionȱ isȱ thatȱ aȱ marketȱ consistsȱ ofȱ custȬ omersȱ whereasȱ anȱ industryȱ consistsȱ ofȱ sellers,ȱ andȱ theȱ distinctionȱ canȱbeȱcruciallyȱimportant.ȱ Considerȱ organicȱ foodȱ production.ȱ Theȱ marketȱ sizeȱ inȱ theȱ UKȱ isȱ overȱ $1.2bnȱ andȱ itȱ isȱ growingȱ atȱ 10%ȱ perȱ annum.ȱ Thereȱ areȱ governmentȱ initiativesȱ toȱ persuadeȱ peopleȱ toȱ eatȱ moreȱ freshȱ vegetablesȱandȱthereȱisȱanȱincreasingȱpopulation,ȱallȱdrivingȱupȱtheȱ demandȱwithinȱtheȱmarketplace.ȱTheȱmarketȱattractivenessȱisȱgood.ȱ Nowȱconsiderȱtheȱindustry:ȱtheȱvastȱmajorityȱofȱorganicȱfoodȱsalesȱ areȱ throughȱ aȱ handȱ fullȱ ofȱ supermarketȱ chainsȱ thatȱ haveȱ tremȬ endousȱbuyingȱpowerȱandȱimposeȱveryȱslimȱmarginsȱonȱproducers.ȱ Addȱtoȱthatȱtheȱpropensityȱofȱtheseȱbuyersȱtoȱimportȱfoodȱfromȱallȱ overȱ theȱ worldȱ (50%ȱ ofȱ organicȱ foodȱ soldȱ inȱ theȱ UKȱ isȱ imported)ȱ creatingȱintenseȱcompetitionȱandȱyouȱendȱupȱwithȱanȱindustryȱthatȱ isȱ veryȱ toughȱ toȱ surviveȱ in.ȱ Theȱ industryȱ attractivenessȱ isȱ poor.ȱ Ifȱ youȱ wereȱ planningȱ onȱ enteringȱ thisȱ sectorȱ youȱ wouldȱ haveȱ toȱ balanceȱtheȱtwoȱveryȱcarefully.ȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ5ȱȱ

Itȱ isȱ thereforeȱ importantȱ toȱ separateȱ ourȱ analysisȱ ofȱ yourȱ businessȱ ideaȱintoȱaȱmarketȱanalysis,ȱlookingȱatȱtheȱneedsȱofȱyourȱcustomersȱ andȱ anȱ industryȱ analysis,ȱ lookingȱ atȱ theȱ natureȱ ofȱ theȱ competitiveȱ environmentȱyouȱwillȱhaveȱtoȱworkȱin.ȱ

1.3 Analysing the market Theȱ marketȱ analysisȱ isȱ theȱ moreȱ complexȱ toȱ carryȱ out,ȱ butȱ itȱ isȱ arguablyȱ theȱ moreȱ important.ȱ Withoutȱ customersȱ youȱ willȱ getȱ absolutelyȱ nowhere.ȱ Don’tȱ worryȱ though,ȱ theȱ followingȱ stepsȱ willȱ takeȱyouȱthroughȱtheȱwholeȱprocess.ȱWhatȱweȱareȱgoingȱtoȱdoȱisȱaskȱ aȱseriesȱofȱquestionsȱaboutȱyourȱidea.ȱOnȱtheȱfirstȱreadȱthrough,ȱyouȱ canȱ quicklyȱ thinkȱ aboutȱ theȱ answersȱ butȱ youȱ willȱ thenȱ needȱ toȱ reȬ visitȱ eachȱ oneȱ carefullyȱ andȱ writeȱ downȱ aȱ consideredȱ answer.ȱ Inȱ manyȱcasesȱyouȱwillȱneedȱtoȱdoȱsomeȱresearchȱtoȱfindȱtheȱanswers.ȱ Thisȱisȱallȱveryȱworthȱwhileȱasȱwhatȱyouȱareȱinȱfactȱdoingȱisȱstartingȱ toȱunderstandȱyourȱbusiness.ȱȱ Theȱ firstȱ setȱ ofȱ questionsȱ addressesȱ theȱ marketȱ needȱ forȱ yourȱ product.ȱThisȱisȱaȱdetailedȱlookȱatȱwhoȱyourȱcustomersȱareȱandȱwhatȱ theyȱwantȱfromȱyou:ȱ What problem are you going to solve? Whateverȱ businessȱ youȱ areȱ goingȱ toȱ start,ȱ itȱ willȱ relyȱ onȱ yourȱ customersȱ givingȱ youȱ theirȱ moneyȱ inȱ returnȱ forȱ someȱ productȱ orȱ serviceȱ youȱ areȱ goingȱ toȱ provideȱ forȱ them.ȱ Toȱ makeȱ themȱ doȱ this,ȱ youȱareȱgoingȱtoȱhaveȱtoȱsatisfyȱaȱneedȱforȱthemȱandȱoneȱofȱtheȱbestȱ waysȱofȱunderstandingȱthisȱneedȱisȱbyȱdescribingȱtheȱproblemȱyouȱ areȱgoingȱtoȱsolveȱforȱthem.ȱȱ Thisȱworksȱforȱanyȱtypeȱofȱproduct.ȱEvenȱwhenȱyouȱbuyȱaȱsandwichȱ fromȱaȱpetrolȱstation,ȱitȱisȱbecauseȱyouȱhaveȱaȱproblemȱthatȱyouȱareȱ hungry,ȱyouȱdidn’tȱbringȱanythingȱfromȱhomeȱandȱyouȱdon’tȱhaveȱ

6ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

timeȱtoȱstopȱforȱaȱproperȱmeal.ȱTheȱgarageȱsolvesȱyourȱproblemȱandȱ youȱhandȱoverȱsomeȱofȱyourȱhardȱearnedȱcash.ȱ Itȱalsoȱworksȱforȱservicesȱ–ȱyouȱmightȱuseȱanȱaccountantȱtoȱdoȱyourȱ taxȱ returnȱ becauseȱ itȱ solvesȱ theȱ problemȱ ofȱ notȱ knowingȱ exactlyȱ howȱ toȱ fillȱ theȱ formsȱ inȱ andȱ whereȱ toȱ putȱ thatȱ amountȱ ofȱ pensionȱ contributionȱ youȱ thinkȱ youȱ shouldȱ getȱ someȱ rebateȱ for.ȱ Evenȱ fashionȱitemsȱsolveȱtheȱproblemȱofȱneedingȱtoȱconform,ȱstandȱoutȱorȱ lookȱsmart,ȱdependingȱonȱtheȱtrend.ȱ Nowȱ thinkȱ aboutȱ yourȱ businessȱ idea:ȱ Whatȱ problemȱ doȱ youȱ solveȱ forȱyourȱ customer?ȱTheȱ firstȱthingȱ youȱneedȱtoȱ doȱisȱdescribeȱwhoȱ theȱcustomerȱis.ȱIfȱthereȱisȱmoreȱthanȱoneȱtypeȱofȱcustomer,ȱareȱyouȱ solvingȱ theȱ sameȱ problemȱ forȱ allȱ ofȱ themȱ orȱ slightlyȱ differentȱ problemsȱforȱeachȱone?ȱForȱeachȱofȱyourȱcustomers,ȱwriteȱdownȱtheȱ problemȱyouȱsolveȱforȱthem.ȱ Nowȱforȱeachȱofȱtheȱproblemsȱthatȱyouȱareȱsolving,ȱyouȱwillȱneedȱtoȱ findȱ outȱ howȱ bigȱ aȱ problemȱ itȱ isȱ forȱ yourȱ customer.ȱ Thisȱ isȱ anȱ importantȱ qualifierȱ becauseȱ ifȱ theȱ answerȱ isȱ ‘wellȱ it’sȱ aȱ bitȱ ofȱ aȱ nuisance,ȱ butȱ weȱ canȱ cope’,ȱ theyȱ areȱ muchȱ lessȱ likelyȱ toȱ partȱ withȱ theirȱmoneyȱthanȱifȱtheyȱsayȱ‘it’sȱaȱnightmare,ȱweȱneedȱtoȱsolveȱitȱtoȱ keepȱgoing’.ȱ Inȱ someȱ casesȱ youȱ willȱ beȱ ableȱ toȱ getȱ awayȱ withȱ usingȱ someȱ empathyȱ toȱ judgeȱ howȱ seriousȱ theȱ problemȱ is,ȱ butȱ beȱ veryȱ carefulȱ thatȱ youȱ areȱ notȱ usingȱ tooȱ muchȱ wishfulȱ thinkingȱ orȱ lettingȱ yourȱ enthusiasmȱforȱyourȱideaȱcloudȱyourȱjudgement.ȱTheȱonlyȱsureȱwayȱ isȱ toȱ talkȱ toȱ theȱ potentialȱ customersȱ andȱ findȱ outȱ firstȱ handȱ whatȱ theyȱ think.ȱ Thisȱ isȱ notȱ asȱ difficultȱ asȱ itȱ sounds.ȱ Youȱ areȱ goingȱ toȱ haveȱ toȱ talkȱ toȱ customersȱ soonerȱ orȱ laterȱ soȱ whyȱ notȱ now,ȱ beforeȱ youȱinvestȱtooȱmuchȱinȱtheȱidea.ȱȱ Theȱlastȱpartȱofȱthisȱquestionȱinvolvesȱyourȱsolutionȱtoȱtheȱproblem.ȱ Doesȱ yourȱ intendedȱ offeringȱ solveȱ theȱ problemȱ entirelyȱ orȱ doȱ youȱ onlyȱofferȱpartȱofȱtheȱsolution.ȱObviouslyȱtheȱfirstȱanswerȱisȱbetter,ȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ7ȱȱ

butȱ ifȱ itȱ isȱ theȱ latter,ȱ thinkȱ veryȱ carefullyȱ aboutȱ howȱ youȱ couldȱ extendȱ yourȱ ideaȱ toȱ becomeȱ theȱ wholeȱ solutionȱ toȱ theȱ problem.ȱ Ifȱ yourȱ customersȱareȱgoingȱ toȱhaveȱtoȱbuyȱpartȱ ofȱtheȱsolutionȱfromȱ youȱandȱanotherȱpartȱfromȱsomeoneȱelse,ȱthenȱtheȱproblemȱneedsȱtoȱ beȱ severeȱ toȱ leadȱ themȱ toȱ goȱ toȱ soȱ muchȱ trouble.ȱ It’sȱ goingȱ toȱ beȱ muchȱ easierȱ toȱ sellȱ toȱ themȱ ifȱ youȱ canȱ offerȱ themȱ everythingȱ theyȱ need.ȱ Youȱ mayȱ evenȱ needȱ toȱ thinkȱ aboutȱ licensingȱ theȱ restȱ ofȱ theȱ solutionȱfromȱtheȱotherȱsupplier.ȱ Talkingȱtoȱcustomersȱ Theȱ prospectȱ ofȱ talkingȱ toȱ potentialȱ customersȱ canȱ beȱ aȱ littleȱ scary,ȱ especiallyȱ ifȱ youȱ areȱ comingȱ fromȱ aȱ technicalȱ orȱ academicȱ background.ȱ Thereȱ isȱ however,ȱ noȱ alternative.ȱ Talkingȱ toȱ peopleȱ isȱ byȱ farȱ theȱ bestȱ wayȱ ofȱ understandingȱ theirȱ exactȱ needsȱ andȱ therefore,ȱ howȱ youȱ canȱ developȱ yourȱ solutionȱtoȱfitȱthemȱexactly.ȱȱ Inȱ mostȱ cases,ȱ peopleȱ respondȱ veryȱ wellȱ toȱ beingȱ askedȱ forȱ advice,ȱ putȱ simplyȱ itȱ flattersȱ themȱ aȱ littleȱ thatȱ youȱ findȱ theirȱ opinionsȱ valuable.ȱ Inȱ mostȱ casesȱ theyȱ willȱ beȱ extremelyȱ helpfulȱ andȱ willȱ oftenȱ askȱ toȱ beȱ keptȱ informedȱ withȱ yourȱ progress,ȱevenȱofferȱtoȱtryȱoutȱearlyȱversionsȱofȱyourȱproduct.ȱ Rememberȱ thatȱ thisȱ isȱ aȱ winȬwinȱ situation,ȱ theyȱ haveȱ aȱ problemȱ thatȱ youȱ couldȱ potentiallyȱ solveȱ forȱ themȱ andȱ theyȱ areȱ aȱ valuableȱ sourceȱ ofȱ informationȱ forȱ you.ȱ Keepȱ theseȱ peopleȱcloseȱtoȱyou.ȱȱ Inȱ manyȱ areasȱ thereȱ willȱ beȱ individualsȱ whoȱ actȱ asȱ keyȱ opinionȱ leadersȱ forȱ theȱ sector.ȱ Theseȱ areȱ theȱ guysȱ whoȱ regularlyȱ writeȱ forȱ theȱ tradeȱ associationȱ papers,ȱ whoȱ runȱ specialȱ interestȱ groupsȱ andȱ whoȱ areȱ wellȱ knownȱ inȱ theirȱ industry.ȱByȱapproachingȱtheseȱindividualsȱforȱadviceȱyouȱareȱ likelyȱtoȱdoȱevenȱbetterȱasȱtheyȱwillȱknowȱwhatȱelseȱisȱgoingȱ onȱ andȱ beȱ ableȱ toȱ suggestȱ otherȱ peopleȱ toȱ talkȱ to.ȱ Ifȱ youȱ canȱ keepȱinȱtouchȱwithȱtheseȱpeopleȱandȱlaterȱgetȱthemȱtoȱtryȱyourȱ product,ȱtheyȱareȱlikelyȱtoȱwriteȱaboutȱitȱandȱtellȱpeopleȱaboutȱ

8ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

it.ȱ Thisȱ canȱ createȱ aȱ greatȱ boostȱ toȱ yourȱ earlyȱ marketingȱ efforts.ȱ Dependingȱ onȱ yourȱ businessȱ itȱ mayȱ beȱ worthȱ startingȱ anȱ advisoryȱgroupȱorȱaȱuserȱgroup.ȱInȱreturnȱforȱ aȱbuffetȱlunch,ȱ youȱcanȱfillȱaȱroomȱwithȱpotentialȱcustomersȱallȱtalkingȱaboutȱ yourȱ productȱ andȱ howȱ theyȱ wouldȱ useȱ it.ȱ Theȱ feedbackȱ youȱ canȱgatherȱfromȱsomethingȱlikeȱthisȱisȱincrediblyȱvaluableȱandȱ atȱ theȱ sameȱ timeȱ youȱ showȱ yourȱ customersȱ thatȱ youȱ careȱ aboutȱtheirȱneedsȱandȱwants.ȱ Oneȱofȱtheȱthingsȱthatȱpeopleȱworryȱaboutȱwhenȱtalkingȱaboutȱ theirȱ ideasȱ isȱ theȱ riskȱ thatȱ theirȱ ideaȱ willȱ beȱ stolen.ȱ Weȱ willȱ talkȱ inȱ theȱ nextȱ chapterȱ aboutȱ legallyȱ protectingȱ yourȱ ideas,ȱ butȱ atȱ someȱ stageȱ youȱ areȱ goingȱ toȱ haveȱ toȱ takeȱ theȱ plungeȱ andȱgetȱoutȱthere.ȱInȱmostȱcasesȱthisȱfearȱisȱlargelyȱunfoundedȱ asȱ yourȱ customersȱ areȱ notȱ goingȱ toȱ beȱ inȱ aȱ positionȱ toȱ copyȱ yourȱ ideas,ȱ mainlyȱ becauseȱ theyȱ doȱ notȱ haveȱ yourȱ particularȱ expertiseȱorȱtheȱdesireȱtoȱcompeteȱwithȱyou.ȱYouȱshouldȱstillȱ however,ȱ considerȱ protectingȱ yourȱ discussionsȱ withȱ aȱ nonȬ disclosureȱ agreement,ȱ especiallyȱ whereȱ newȱ technologyȱ isȱ involved,ȱmoreȱonȱthisȱinȱtheȱnextȱchapter.ȱ

Why will they buy from you? Hopefullyȱbyȱnowȱweȱunderstandȱtheȱnatureȱofȱtheȱproblemȱwhichȱ yourȱ ideaȱ isȱ goingȱ toȱ solveȱ forȱ yourȱ customers.ȱ Thisȱ nextȱ questionȱ looksȱ aȱ littleȱ deeperȱ intoȱ theȱ motivationȱ ofȱ yourȱ customersȱ toȱ notȱ onlyȱbuyȱaȱsolution,ȱbutȱmoreȱimportantlyȱbuyȱaȱsolutionȱfromȱyou.ȱ Theȱwayȱtoȱanswerȱthisȱquestionȱisȱtoȱlookȱatȱtheȱcompetition.ȱ Pleaseȱdon’tȱimmediatelyȱanswerȱthatȱyourȱideaȱisȱuniqueȱandȱthatȱ thereȱ isȱ noȱ competition,ȱ becauseȱ youȱ areȱ wrong.ȱ Thereȱ isȱ alwaysȱ competition.ȱ Youȱ mayȱ haveȱ aȱ totallyȱ uniqueȱ solution,ȱ butȱ moneyȱ willȱnotȱmagicallyȱappearȱinȱyourȱcustomers’ȱpocketsȱtoȱspendȱwithȱ you.ȱThereȱwillȱalwaysȱbeȱsomethingȱthatȱtheyȱcanȱnoȱlongerȱaffordȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ9ȱȱ

ifȱtheyȱspendȱtheirȱmoneyȱwithȱyou.ȱȱThereȱwillȱoftenȱbeȱalternativeȱ solutionsȱ thatȱ youȱ areȱ notȱ considering.ȱ Forȱ example,ȱ thereȱ mayȱ beȱ onlyȱ oneȱ trainȱ serviceȱ betweenȱ twoȱ cities,ȱ butȱ theȱ railȱ companyȱ competesȱ withȱ theȱ airlinesȱ andȱ busesȱ forȱ theȱ sameȱ business.ȱ Theȱ trickȱ isȱ toȱ makeȱ yourȱ offeringȱ moreȱ attractiveȱ toȱ themȱ thanȱ theȱ alternative.ȱȱ Theȱfirstȱthingȱtoȱdoȱisȱtoȱmakeȱaȱlistȱofȱallȱtheȱcompetingȱsolutionsȱ toȱtheirȱproblemȱthatȱyouȱcanȱfind.ȱPutȱyourselfȱinȱyourȱcustomer’sȱ positionȱ andȱ imagineȱ allȱ theȱ waysȱ ofȱ solvingȱ itȱ andȱ allȱ theȱ thingsȱ youȱ couldȱ do,ȱ useȱ orȱ buyȱ toȱ helpȱ (includingȱ theȱ ‘doȱ nothing’ȱ option).ȱ Nowȱ forȱ eachȱ one,ȱ findȱ outȱ asȱ muchȱ asȱ youȱ possiblyȱ canȱ aboutȱ them.ȱ Theseȱ daysȱ theȱ internetȱ isȱ anȱ invaluableȱ sourceȱ ofȱ information,ȱ notȱ justȱ aboutȱ otherȱ people’sȱ exactȱ productȱ specȬ ifications,ȱ butȱ alsoȱ theȱ strengthȱ ofȱ theȱ supplierȱ company,ȱ whatȱ theȱ usersȱhaveȱtoȱsayȱaboutȱitȱandȱwhatȱtheyȱwouldȱlikeȱtoȱchange.ȱStartȱ aȱ fileȱ onȱ eachȱ ofȱ yourȱ competitors,ȱ printȱ outȱ copiesȱ ofȱ theirȱ brochures,ȱ priceȱ listsȱ andȱ takeȱ carefulȱ noteȱ ofȱ promotionsȱ theyȱ areȱ running.ȱStartȱtoȱthinkȱhowȱyouȱareȱgoingȱtoȱcompareȱnextȱtoȱthem,ȱ howȱyouȱareȱgoingȱtoȱwinȱbusinessȱawayȱfromȱthemȱandȱhowȱyouȱ thinkȱtheyȱmightȱrespond.ȱ Ifȱ youȱ getȱ toȱ thisȱ pointȱ andȱ youȱ reallyȱ can’tȱ findȱ anythingȱ onȱ theȱ marketȱ thatȱ offersȱ somethingȱ similarȱ toȱ you,ȱ itȱ isȱ worthȱ askingȱ yourselfȱwhy.ȱIsȱthereȱreallyȱaȱproblemȱoutȱthereȱtoȱbeȱsolved?ȱFindȱ outȱifȱothersȱhaveȱtriedȱtoȱsolveȱtheȱproblemȱinȱtheȱpastȱandȱfailed.ȱIfȱ so,ȱwhatȱwentȱwrong,ȱ whyȱdidȱtheyȱnotȱsucceedȱandȱhowȱareȱyouȱ goingȱtoȱhaveȱaȱdifferentȱresult?ȱ Nowȱdescribeȱexactlyȱhowȱyourȱofferingȱisȱbetterȱthanȱtheȱrest.ȱHereȱ weȱ areȱ lookingȱ forȱ yourȱ Uniqueȱ Sellingȱ Pointsȱ (USPs).ȱ Goȱ backȱ toȱ theȱ customersȱ youȱ haveȱ spokenȱ toȱ andȱ checkȱ thatȱ yourȱ USPsȱ areȱ valid.ȱ Thisȱ mayȱ beȱ anȱ iterativeȱ processȱ whileȱ youȱ fineȱ tuneȱ yourȱ ideasȱtoȱexactlyȱmatchȱtheȱmarketȱneeds.ȱ

10ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

Thereȱ isȱ aȱ secondȱ partȱ toȱ theȱ questionȱ ofȱ whetherȱ customersȱ willȱ buyȱ fromȱ you.ȱ Theirȱ buyingȱ decisionȱ mayȱ beȱ basedȱ asȱ muchȱ onȱ theirȱ feelingsȱ aboutȱ yourȱ companyȱ asȱ onȱ theirȱ feelingsȱ aboutȱ yourȱ product.ȱ Hereȱ weȱ areȱ talkingȱ aboutȱ trust.ȱ Youȱ mayȱ lookȱ goodȱ onȱ paperȱ butȱ theyȱ willȱ alsoȱ needȱ toȱ trustȱ youȱ beforeȱ givingȱ youȱ theirȱ money.ȱThisȱcanȱbeȱveryȱdifficultȱforȱaȱnewȱbusinessȱwithoutȱaȱtrackȱ recordȱorȱreputation.ȱYouȱareȱgoingȱtoȱhaveȱtoȱmakeȱupȱforȱthisȱwithȱ theȱpersonalȱtouch.ȱWeȱwillȱtalkȱaboutȱthisȱmoreȱinȱtheȱlaterȱchapterȱ onȱMarketingȱbutȱforȱnowȱitȱisȱaboutȱdevelopingȱaȱcompleteȱunderȬ standingȱofȱyourȱcustomers’ȱproblemȱandȱyourȱabsoluteȱdedicationȱ toȱsolvingȱitȱforȱthem.ȱItȱwillȱdependȱonȱtheȱrelationshipȱyouȱbuildȱ upȱthroughȱactuallyȱtalkingȱtoȱthemȱandȱconvincingȱthemȱthatȱyouȱ areȱ onȱ theirȱ sideȱ andȱ thatȱ youȱ understandȱ theirȱ needs.ȱ Onceȱ youȱ haveȱ oneȱ satisfiedȱ customerȱ theyȱ canȱ beȱ usedȱ toȱ convinceȱ theȱ nextȱ andȱsoȱon.ȱ How will the customer’s behaviour change? Thisȱ isȱ aȱ veryȱ importantȱ questionȱ andȱ oneȱ whichȱ needsȱ toȱ beȱ explainedȱcarefullyȱ becauseȱchangingȱ customer’sȱbehaviourȱisȱnorȬ mallyȱaȱbadȱthing.ȱ Whatȱweȱareȱlookingȱforȱhereȱisȱanȱunderstandingȱofȱtheȱimpactȱthatȱ yourȱ solutionȱ isȱ goingȱ toȱ haveȱ onȱ yourȱ customer.ȱ Theȱ widerȱ theȱ impact,ȱtheȱmoreȱchangesȱareȱrequiredȱtoȱaccommodateȱit,ȱtheȱmoreȱ resistanceȱ thereȱ willȱ beȱ toȱ acceptȱ it.ȱ Putȱ simplyȱ –ȱ noȱ oneȱ likesȱ change.ȱTheȱmoreȱchangesȱyourȱofferingȱrequiresȱonȱtheȱpartȱofȱtheȱ customers,ȱtheȱbiggerȱtheȱbenefitsȱhaveȱtoȱbeȱtoȱoutweighȱthem.ȱ Takeȱ theȱ exampleȱ ofȱ television.ȱ Whenȱ colourȱ televisionȱ wasȱ introduced,ȱ theȱ designersȱ wereȱ veryȱ carefulȱ toȱ introduceȱ aȱ techȬ nologyȱthatȱdidȱnotȱdisruptȱexistingȱcustomersȱwithȱblackȱandȱwhiteȱ receiversȱ andȱ providedȱ aȱ smoothȱ transitionȱ asȱ peopleȱ boughtȱ intoȱ theȱnewȱtechnology.ȱTheyȱofferedȱaȱsystemȱforȱnewȱcolourȱreceiversȱ withȱ virtuallyȱ noȱ changeȱ inȱ customerȱ behaviourȱ atȱ all.ȱ Theȱ newȱ receiversȱtookȱupȱtheȱsameȱspaceȱinȱtheȱhome,ȱusedȱtheȱsameȱpowerȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ11ȱȱ

supply,ȱtheȱsameȱaerialȱandȱgaveȱaccessȱtoȱtheȱsameȱprogramming.ȱ Theȱcustomersȱadoptedȱtheȱnewȱtechnologyȱwithoutȱmuchȱfuss.ȱȱ Satelliteȱ televisionȱ wasȱ aȱ differentȱproposition,ȱ toȱ benefitȱ fromȱ thisȱ innovationȱyouȱneededȱanȱextraȱbox,ȱmoreȱcontrols,ȱaȱdifferentȱ(andȱ ugly)ȱ aerial,ȱ youȱ evenȱ hadȱ toȱ payȱ forȱ theȱ channelsȱ inȱ aȱ differentȱ way.ȱ Initiallyȱ takeȱ upȱ wasȱ slowȱ andȱ evenȱ nowȱ theȱ industryȱ hasȱ toȱ offerȱmoreȱandȱmoreȱchannelsȱandȱservicesȱtoȱtemptȱnewȱcustomers.ȱ Theȱbenefitsȱhaveȱtoȱbeȱlargeȱtoȱovercomeȱtheȱdisruptionȱandȱcosts.ȱ Howȱdifficultȱdoȱyouȱthinkȱitȱwillȱbeȱtoȱconvinceȱusȱallȱtoȱbuyȱhighȱ definitionȱtelevisionȱservicesȱandȱwhatȱbenefitsȱwillȱtheyȱbeȱableȱtoȱ offerȱtoȱconvinceȱus?ȱȱ So,ȱwhatȱchangesȱinȱbehaviourȱwillȱyourȱcustomersȱneedȱtoȱmakeȱinȱ orderȱ toȱ makeȱ useȱ ofȱ yourȱ productsȱ andȱ services?ȱ Writeȱ themȱ allȱ downȱandȱaskȱyourself:ȱDoȱtheȱbenefitsȱmakeȱallȱthisȱworthwhile?ȱ Itȱmayȱbeȱthatȱyouȱneedȱtoȱbringȱthemȱoverȱgradually,ȱperhapsȱofferȱ anȱintermediateȱstepȱfirst,ȱoneȱthatȱprovidesȱsomeȱofȱtheȱbenefitsȱbutȱ withoutȱ someȱ ofȱ theȱ disruption.ȱ Thenȱ whenȱ theyȱ areȱ happyȱ withȱ that,ȱ offerȱ themȱ theȱ nextȱ stepȱ andȱ soȱ on.ȱ Thisȱ approachȱ isȱ wellȱ knownȱinȱtheȱcomputerȱsoftwareȱsectorȱwhereȱfeaturesȱareȱreleasedȱ graduallyȱsoȱasȱnotȱtoȱalienateȱexistingȱusersȱwhilstȱattractingȱnewȱ ones.ȱ Inȱ factȱ completelyȱ newȱ packagesȱ areȱ oftenȱ releasedȱ asȱ cutȱ downȱ versionsȱ atȱ veryȱ lowȱ orȱ noȱ cost.ȱ Onceȱ aȱ customerȱ baseȱ hasȱ beenȱestablishedȱandȱusersȱhaveȱadoptedȱtheȱnewȱmethods,ȱtheȱProȱ editionȱisȱreleasedȱandȱchargedȱforȱatȱtheȱgoingȱmarketȱrates.ȱȱ Nowȱ compareȱ theȱ listȱ ofȱ benefitsȱ youȱ madeȱ earlierȱ toȱ theȱ listȱ ofȱ behaviourȱchanges.ȱDoȱtheyȱoccurȱinȱtheȱsameȱplace?ȱForȱexampleȱifȱ yourȱproductȱisȱsoldȱtoȱanȱorganisation,ȱdoȱtheȱbenefitsȱaccrueȱtoȱtheȱ sameȱindividualȱorȱdepartmentȱasȱwillȱneedȱtoȱmakeȱtheȱnecessaryȱ changesȱtoȱaccommodateȱit?ȱIfȱnot,ȱyouȱcouldȱbeȱinȱbigȱtrouble.ȱToȱ findȱ outȱ weȱ needȱ toȱ lookȱ atȱ allȱ theȱ stakeholdersȱ inȱ theȱ buyingȱ decision.ȱ

12ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

Aȱstakeholderȱisȱanyoneȱthatȱisȱaffectedȱbyȱtheȱpurchaseȱandȱuseȱofȱ yourȱproduct.ȱLet’sȱtakeȱtheȱexampleȱofȱaȱnewȱmedicalȱdeviceȱthatȱ willȱ allowȱ aȱ familyȱ doctor’sȱ practiceȱ toȱ carryȱ outȱ aȱ testȱ normallyȱ carriedȱ outȱ inȱ aȱ hospital.ȱ Theȱ immediateȱ stakeholdersȱ areȱ goingȱ toȱ beȱtheȱfamilyȱdoctor,ȱandȱtheȱpatients.ȱAtȱfirstȱglanceȱthisȱcanȱonlyȱ beȱaȱgoodȱidea,ȱtheȱpatientȱdoesn’tȱneedȱtoȱvisitȱtheȱhospitalȱtoȱgetȱ theȱ testȱ doneȱ andȱ theȱ doctorȱ isȱ ableȱ toȱ provideȱ betterȱ careȱ forȱ theȱ patient.ȱ Butȱ ifȱ weȱ lookȱ atȱ theȱ changesȱ inȱ behaviourȱ aȱ littleȱ moreȱ carefullyȱ weȱ findȱ thatȱ theȱ doctorȱ isȱ actuallyȱ takingȱ onȱ quiteȱ aȱ lotȱ moreȱ responsibility.ȱ Ratherȱ thanȱ simplyȱ referringȱ theȱ patientȱ toȱ aȱ specialist,ȱ theyȱ willȱ beȱ makingȱ theȱ diagnosisȱ andȱ potentiallyȱ treatmentȱ decisionsȱ themselves.ȱ Willȱ theȱ benefitsȱ ofȱ providingȱ betterȱpatientȱcareȱoutweighȱthisȱincreasedȱresponsibility?ȱȱ Perhapsȱ usingȱ theȱ deviceȱ alsoȱ requiresȱ someȱ attentionȱ fromȱ theȱ practiceȱ nurse,ȱ willȱ theyȱ needȱ training,ȱ andȱ doȱ theyȱ haveȱ time?ȱ Isȱ thereȱanȱadditionalȱadministrativeȱburdenȱonȱtheȱpractice?ȱWhatȱdoȱ theȱ localȱ hospitalȱ feelȱ aboutȱ suchȱ anȱ innovation,ȱ willȱ theyȱ offerȱ adviceȱaboutȱtheȱresults,ȱwillȱtheyȱstillȱwantȱtoȱcarryȱoutȱtheirȱownȱ testsȱ ifȱ theȱ resultsȱ areȱ positive?ȱ Whatȱ doȱ theȱ healthcareȱ authoritiesȱ think,ȱ willȱ theyȱ divertȱ fundingȱ fromȱ theȱ hospitalȱ toȱ theȱ familyȱ practiceȱ toȱ payȱ forȱ theȱ equipmentȱ orȱ itsȱ runningȱ costs?ȱ Beforeȱ weȱ knowȱ whereȱ weȱ are,ȱ weȱ nowȱ haveȱ aȱ listȱ ofȱ stakeholdersȱ thatȱ includesȱtheȱpatient,ȱtheȱfamilyȱdoctor,ȱtheȱnurse,ȱtheȱadministrator,ȱ theȱ healthcareȱ authority,ȱ theȱ hospitalȱ consultant,ȱ theȱ hospitalȱ administrators,ȱ patientȱ supportȱ groups,ȱ charities,ȱ efficacyȱ bodiesȱ evenȱ theȱ insuranceȱ companies.ȱ Imagineȱ themȱ allȱ sittingȱ roundȱ aȱ tableȱ discussingȱ whetherȱ toȱ buyȱ theȱ deviceȱ forȱ theȱ localȱ practice.ȱ Whoȱwillȱbeȱforȱitȱandȱwhoȱwillȱbeȱagainstȱit,ȱandȱwhy?ȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ13ȱȱ

ȱ Fig.ȱ1.1.ȱStakeholderȱanalysisȱ

Thisȱisȱaȱcomplexȱexample,ȱbutȱitȱdoesȱillustrateȱtheȱpointȱthatȱveryȱ oftenȱ aȱ buyingȱ decisionȱ isȱ aȱ complexȱ matter,ȱ soȱ howȱ canȱ youȱ analyseȱitȱallȱproperly?ȱFirstȱdrawȱoutȱaȱdiagramȱlikeȱtheȱoneȱbelowȱ thatȱ showsȱ everyȱ linkȱ inȱ theȱ chainȱ betweenȱ theȱ stakeholders.ȱ Forȱ eachȱone,ȱwriteȱdownȱwhatȱyouȱthinkȱtheirȱreactionȱtoȱtheȱpurchaseȱ willȱbeȱandȱwhyȱandȱtryȱtoȱthinkȱhowȱyouȱcouldȱconvinceȱthemȱthatȱ itȱisȱaȱgoodȱthingȱforȱthemȱthatȱtheȱpurchaseȱtakesȱplace.ȱAreȱanyȱofȱ themȱ likelyȱ toȱ haveȱ aȱ vetoȱ orȱ raiseȱ anȱ argumentȱ thatȱ willȱ stopȱ theȱ purchase?ȱIfȱsoȱtheirȱconcernsȱbecomeȱyourȱhighestȱpriority.ȱItȱmayȱ beȱthatȱinȱorderȱtoȱsatisfyȱeverybodyȱyouȱhaveȱtoȱchangeȱorȱexpandȱ yourȱ product.ȱ Thisȱ willȱ beȱ veryȱ worthwhileȱ ifȱ youȱ canȱ achieveȱ aȱ situationȱwhereȱasȱmanyȱstakeholdersȱasȱpossibleȱareȱsupportiveȱofȱ theȱbuyingȱdecision.ȱ Asȱalwaysȱitȱisȱbestȱtoȱtestȱyourȱassumptionsȱonȱrealȱpeople.ȱInȱtheȱ exampleȱ above,ȱ itȱ wouldȱ beȱ veryȱ worthwhileȱ visitingȱ aȱ numberȱ ofȱ hospitalȱ specialists,ȱ healthcareȱ authoritiesȱ andȱ soȱ on.ȱ Rememberȱ youȱ canȱ neverȱ understandȱ tooȱ muchȱ aboutȱ theȱ problemȱ youȱ areȱ

14ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

tryingȱ toȱ solve.ȱ Collectingȱ theȱ viewsȱ ofȱ allȱ yourȱ stakeholdersȱ isȱ aȱ veryȱimportantȱpartȱofȱthisȱprocess.ȱȱ Inȱthisȱexampleȱitȱshouldȱbeȱpossibleȱtoȱdesignȱtheȱdeviceȱinȱsuchȱaȱ wayȱthatȱallȱtheȱstakeholdersȱareȱhappy.ȱThisȱisȱnotȱalwaysȱtheȱcaseȱ however.ȱLet’sȱlookȱatȱanȱexampleȱwhereȱ theȱbenefitsȱdoȱnotȱalignȱ withȱ theȱ costs.ȱ Imagineȱ aȱ serviceȱ whereȱ busesȱ collectȱ airȱ pollutionȱ dataȱ andȱ thatȱ thisȱ dataȱ wasȱ reportedȱ liveȱ atȱ busȱ stopsȱ andȱ onȱ theȱ busȱcompanyȱwebsite.ȱThisȱwouldȱallowȱpassengersȱtoȱcheckȱonȱtheȱ pollutionȱ levelsȱ inȱ townȱ beforeȱ decidingȱ toȱ makeȱ theirȱ journey.ȱ Atȱ firstȱglanceȱthisȱseemsȱlikeȱaȱgoodȱidea,ȱtheȱpassengersȱareȱprovidedȱ withȱhealthȱinformationȱandȱtheȱbusȱcompanyȱimproveȱtheȱserviceȱ theyȱ offerȱ theirȱ customers.ȱ Butȱ wait,ȱ inȱ providingȱ thisȱ informationȱ theȱ busȱ companyȱ isȱ providingȱ informationȱ thatȱ willȱ deterȱ passengersȱfromȱusingȱtheirȱservice.ȱHowȱlikelyȱareȱtheyȱgoingȱtoȱbeȱ toȱbuyȱandȱinstallȱthisȱtechnology?ȱ Quick recap Atȱthisȱpointȱitȱisȱworthȱtakingȱstockȱandȱaskingȱifȱyouȱstillȱbelieveȱ inȱ theȱ idea.ȱ Toȱ recap,ȱ youȱ needȱ toȱ beȱ convincedȱ thatȱ theȱ problemȱ youȱ areȱ goingȱ toȱ solveȱ forȱ yourȱ customersȱ isȱ realȱ andȱ serious,ȱ seriousȱ enoughȱ forȱ themȱ toȱ spendȱ moneyȱ onȱ yourȱ solution.ȱ Youȱ needȱtoȱbelieveȱthatȱtheyȱwillȱbuyȱfromȱyouȱandȱthatȱyourȱproductsȱ andȱ servicesȱ willȱ bringȱ themȱ benefitȱ andȱ valueȱ forȱ money.ȱ Finallyȱ youȱneedȱtoȱbeȱsureȱthatȱtheȱdisruptionȱyourȱsolutionȱwillȱcauseȱwillȱ beȱwellȱreceivedȱbyȱallȱtheȱstakeholdersȱthatȱwillȱbeȱaffected.ȱȱ Yourȱ answersȱ toȱ theȱ lastȱ threeȱ questionsȱ areȱ vitallyȱ importantȱ toȱ yourȱchancesȱofȱsuccess.ȱIfȱyouȱhaveȱconcernsȱthenȱtheyȱneedȱtoȱbeȱ addressedȱbeforeȱweȱmoveȱon.ȱȱ Theȱnextȱsetȱofȱquestionsȱaddressȱtheȱmarketȱpotentialȱforȱyourȱidea,ȱ essentiallyȱweȱareȱgoingȱtoȱstartȱtoȱgetȱintoȱtheȱnumbers.ȱHowȱbigȱaȱ marketȱ doȱ youȱ haveȱ andȱ howȱ muchȱ moneyȱ canȱ youȱ makeȱ fromȱ them.ȱȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ15ȱȱ

What sort of business do you want? Thisȱmayȱseemȱanȱoddȱquestionȱbutȱtheȱtypeȱofȱbusinessȱyouȱwantȱ toȱ developȱ willȱ determineȱ theȱ importanceȱ ofȱ theȱ followingȱ fewȱ questions.ȱȱ Businessesȱ rangeȱ fromȱ oneȬmanȬbandsȱ toȱ globalȱ corporations,ȱ allȱ areȱ validȱ andȱ allȱ canȱ satisfyȱ theirȱ owners’ȱ demands.ȱ Theȱ questionȱ reallyȱ comesȱ downȱ toȱ whatȱ youȱ wantȱ theȱ businessȱ toȱ doȱ forȱ youȱ personally.ȱȱ Doȱ youȱ wantȱ whatȱ isȱ knownȱ asȱ aȱ lifeȬstyleȱ businessȱ thatȱ willȱ provideȱ youȱ withȱ aȱ goodȱ levelȱ ofȱ incomeȱ untilȱ youȱ retire?ȱ Typicalȱ examplesȱ ofȱ theseȱ businessesȱ areȱ smallȱ consultanciesȱ orȱ serviceȱ providersȱ suchȱ asȱ websiteȱ designers,ȱ managementȱ consultants,ȱ photographers,ȱ technicalȱ consultantsȱ andȱ soȱ on.ȱ Theseȱ businessesȱ areȱ capableȱ ofȱ providingȱ theirȱ ownersȱ withȱ veryȱ comfortableȱ incomes,ȱgoodȱjobȱsatisfactionȱandȱflexibilityȱbutȱnoȱequity.ȱInȱotherȱ wordsȱ theȱ ownersȱ areȱ theȱ businessȱ andȱ thereȱ isȱ normallyȱ noȱ potentialȱ toȱ sellȱ theȱ businessȱ onȱ orȱ raiseȱ financeȱ fromȱ investors.ȱ Ifȱ financeȱ isȱ requiredȱ forȱ anyȱ formȱ ofȱ expansionȱ itȱ isȱ normallyȱ acquiredȱ againstȱ personalȱ guaranteesȱ fromȱ theȱ ownerȱ (whoȱ reȬ mortgagesȱtheȱfamilyȱhomeȱforȱexample).ȱ Doȱyouȱwantȱaȱbusinessȱthatȱyouȱcanȱbuildȱoverȱaȱlongȱperiodȱthenȱ sellȱonȱwhenȱyouȱretireȱorȱhandȱoverȱtoȱyourȱchildren?ȱExamplesȱofȱ theseȱbusinessesȱincludeȱshops,ȱspecialistȱmanufacturingȱorȱserviceȱ companiesȱ andȱ specialistȱ suppliersȱ orȱ distributors.ȱ Theyȱ areȱ typicallyȱlargerȱthanȱtheȱlifeȬstyleȱbusinessesȱandȱtheyȱtendȱtoȱhaveȱ anȱ equityȱ valueȱ thatȱ canȱ beȱ soldȱ orȱ traded.ȱ Thisȱ typeȱ ofȱ businessȱ rarelyȱ attractsȱ interestȱ fromȱ investors,ȱ butȱ itȱ doesȱ tendȱ toȱ developȱ assetsȱagainstȱwhichȱfinanceȱcanȱbeȱsecuredȱforȱexpansion.ȱTypicallyȱ howeverȱ growthȱ isȱ organic,ȱ meaningȱ itȱ isȱ providedȱ byȱ investingȱ profitsȱratherȱthanȱincurringȱdebts.ȱ Doȱyouȱwantȱaȱbusinessȱthatȱyouȱcanȱbuildȱrapidlyȱforȱ5ȱyearsȱorȱsoȱ andȱ thenȱ sellȱ forȱ aȱ significantȱ return?ȱ Thisȱ isȱ aȱ veryȱ differentȱ

16ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

propositionȱ andȱ examplesȱ canȱ beȱ foundȱ inȱ theȱ highȱ technology,ȱ biomedicalȱ andȱ otherȱ highȱ growthȱ areasȱ ofȱ theȱ economy.ȱ Theseȱ businessesȱ requireȱ highȱ growthȱ marketsȱ toȱ giveȱ themȱ theȱ spaceȱ toȱ growȱ andȱ tendȱ toȱ requireȱ largeȱ capitalȱ investmentsȱ toȱ makeȱ themȱ work.ȱ Theyȱ alsoȱ requireȱ somethingȱ novelȱ andȱ excitingȱ thatȱ canȱ beȱ protectedȱrigorously.ȱȱ Theȱ importanceȱ ofȱ theȱ nextȱ fewȱ questionsȱ growsȱ dramaticallyȱ dependingȱ onȱ yourȱ choiceȱ ofȱ business:ȱ Forȱ theȱ lifeȬstyleȱ businessȱ youȱ willȱ needȱ toȱ knowȱ thatȱ thereȱ areȱ sufficientȱ customersȱ withinȱ yourȱrangeȱtoȱkeepȱyouȱbusy.ȱWhereasȱaȱlarger,ȱlongȱtermȱbusinessȱ mayȱneedȱtoȱknowȱthatȱthereȱareȱsufficientȱcustomersȱregionallyȱorȱ potentiallyȱ nationwideȱ andȱ willȱ alsoȱ needȱ toȱ examineȱ exportȱ potential.ȱ Theȱ highȱ growthȱ companyȱ willȱ needȱ toȱ knowȱ theȱ globalȱ opportunity,ȱifȱnotȱforȱtheȱimmediateȱambitionsȱbutȱcertainlyȱtoȱaddȱ valueȱ forȱ theȱ saleȱ byȱ pointingȱ toȱ theȱ globalȱ opportunitiesȱ forȱ theȱ technology.ȱ Where are your customers and how many are there? Soȱ farȱweȱunderstandȱyourȱ aspirationsȱforȱtheȱbusiness,ȱweȱhaveȱaȱ listȱ ofȱ yourȱ potentialȱ customerȱ typesȱ andȱ weȱ knowȱ whatȱ youȱ areȱ goingȱ toȱ haveȱ toȱ doȱ toȱ satisfyȱ theirȱ demandȱ forȱ aȱ solutionȱ toȱ theirȱ problem.ȱNowȱweȱneedȱtoȱknowȱhowȱmanyȱofȱthemȱthereȱareȱandȱ whereȱtheyȱare.ȱAtȱthisȱstageȱweȱareȱlookingȱforȱtheȱtotalȱpotentialȱ marketȱsize.ȱWeȱwillȱlookȱatȱhowȱtoȱestimateȱyourȱpotentialȱshareȱofȱ theȱmarketȱlaterȱon.ȱ Dependingȱ onȱ yourȱ businessȱ type,ȱ youȱ willȱ needȱ toȱ findȱ outȱ theseȱ numbersȱ forȱ theȱ town,ȱ region,ȱ country,ȱ tradingȱ blockȱ orȱ evenȱ globally.ȱ Obviouslyȱ ifȱ yourȱ ideaȱ isȱ forȱ aȱ localȱ service,ȱ knowingȱ theȱ nationalȱdemandȱisȱnotȱgoingȱtoȱbeȱveryȱhelpful,ȱalthoughȱitȱmightȱ giveȱ youȱ confidenceȱ thatȱ thereȱ isȱ scopeȱ forȱ expansion.ȱ Ifȱ youȱ areȱ goingȱtoȱdevelopȱaȱproductȱwithȱpotentialȱglobalȱdemand,ȱyouȱwillȱ needȱtoȱknowȱ theȱmarketȱsizesȱinȱeachȱofȱtheȱmajorȱterritoriesȱthatȱ couldȱbeȱofȱinterestȱtoȱyouȱandȱyourȱinvestors.ȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ17ȱȱ

Forȱeachȱofȱtheȱcustomerȱgroupsȱyouȱhaveȱidentified,ȱfindȱoutȱhowȱ manyȱpotentialȱcustomersȱthereȱareȱwithinȱyourȱrange.ȱIfȱweȱuseȱtheȱ earlierȱ medicalȱ deviceȱ example,ȱ weȱ willȱ needȱ toȱ knowȱ howȱ manyȱ familyȱ doctors’ȱ surgeriesȱ thereȱ areȱ inȱ theȱ country.ȱ Weȱ wouldȱ alsoȱ needȱtoȱknowȱhowȱmanyȱhospitalȱdepartmentsȱweȱwillȱbeȱaffectingȱ andȱhowȱmanyȱhealthȱauthoritiesȱthereȱare.ȱȱ Mostȱ ofȱ theȱ informationȱ canȱ beȱ gleanedȱ fromȱ theȱ internet.ȱ Informationȱ onȱ theȱ generalȱ publicȱ canȱ beȱ foundȱ onȱ localȱ governȬ mentȱ websites.ȱ Inȱ theȱ UK,ȱ theȱ Officeȱ ofȱ Nationalȱ Statisticsȱ (ONS)ȱ websiteȱ hasȱ aȱ wealthȱ ofȱ demographicȱ andȱ socioȬeconomicȱ data.ȱ Variousȱotherȱgovernmentȱpublicationsȱandȱwebsitesȱcontainȱusefulȱ information,ȱ especiallyȱ theȱ Departmentȱ ofȱ Tradeȱ andȱ Industryȱ andȱ inȱtheȱcaseȱofȱourȱmedicalȱexample,ȱtheȱDepartmentȱofȱHealthȱandȱ NationalȱHealthȱServicesȱwebsites.ȱTradeȱassociationsȱoftenȱpublishȱ detailedȱ statisticsȱ andȱ reportsȱ onȱ theȱ stateȱ ofȱ theirȱ sectors.ȱ Professionalȱ institutionsȱ suchȱ asȱ theȱ Instituteȱ ofȱ Marketingȱ andȱ InstituteȱofȱDirectorsȱhaveȱexcellentȱlibrariesȱthatȱcontainȱupȱtoȱdateȱ reportsȱandȱmarketȱdata.ȱȱ Helpȱ canȱ alsoȱ beȱ soughtȱ fromȱ localȱ andȱ regionalȱ governmentȱ servicesȱ suchȱ asȱ regionalȱ developmentȱ agenciesȱ thatȱ offerȱ advice,ȱ localȱ marketȱ intelligenceȱ andȱ maintainȱ listsȱ ofȱ servicesȱ andȱ specialists.ȱInȱmanyȱcasesȱregionalȱgovernmentȱalsoȱprovideȱgrantsȱ toȱ assistȱ startȬupȱ companiesȱ toȱ getȱ established.ȱ Grantsȱ areȱ oftenȱ availableȱtoȱpayȱforȱmarketȱresearchȱreportsȱandȱstudies.ȱ Thisȱ canȱ beȱ quiteȱ aȱ laboriousȱ processȱ butȱ itȱ isȱ veryȱ worthwhile.ȱ Don’tȱ forget,ȱ weȱ areȱ buildingȱ theȱ foundationsȱ ofȱ yourȱ business,ȱ thereȱareȱnoȱshortȱcuts.ȱ How is the market size changing? Whenȱ youȱ areȱ lookingȱ forȱ marketȱ sizeȱ data,ȱ tryȱ toȱ getȱ asȱ muchȱ informationȱaboutȱhowȱtheȱmarketȱhasȱchangedȱoverȱtheȱlastȱ5ȱyearsȱ orȱsoȱandȱifȱpossibleȱcollectȱpredictionsȱaboutȱhowȱitȱwillȱchangeȱinȱ

18ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

theȱ future.ȱ Thisȱ marketȱ dynamicȱ informationȱ willȱ beȱ aȱ veryȱ usefulȱ indicatorȱ asȱ toȱ theȱ healthȱ ofȱ theȱ marketȱ andȱ possiblyȱ dictateȱ theȱ interestȱofȱanyȱinvestorsȱyouȱwantȱtoȱworkȱwith.ȱ Theȱ reasonȱ whyȱ marketȱ dynamicsȱ isȱ soȱ importantȱ toȱ theȱ futureȱ ofȱ yourȱbusinessȱisȱbestȱindicatedȱwithȱaȱsetȱofȱgraphs.ȱInȱtheȱfollowingȱ figugraphȱ1,ȱtheȱshadedȱareaȱrepresentsȱtheȱamountȱofȱrevenueȱyouȱ wantȱtoȱgetȱfromȱyourȱ market.ȱItȱstartsȱsmallȱandȱgrowsȱwithȱtimeȱ asȱyouȱexpandȱyourȱbusiness.ȱInȱgraphȱ2,ȱweȱoverlapȱthisȱareaȱwithȱ theȱ totalȱ availableȱ market,ȱ assumingȱ thatȱ theȱ overallȱ sizeȱ ofȱ theȱ marketȱstaysȱtheȱsame.ȱInȱthisȱcase,ȱtheȱshareȱofȱtheȱmarketȱavailableȱ toȱ allȱ yourȱ competitionȱ dropsȱ withȱ timeȱ asȱ youȱ stealȱ marketȱ shareȱ fromȱ them.ȱ Thisȱ isȱ goingȱ toȱ beȱ toughȱ andȱ youȱ areȱ veryȱ likelyȱ toȱ invokeȱsomeȱformȱofȱdefensiveȱactionȱfromȱtheȱexistingȱsellers.ȱȱ

ȱ Fig.ȱ1.2.ȱEffectsȱofȱmarketȱperformanceȱ

Inȱgraphȱ3,ȱtheȱmarketȱisȱgrowingȱrapidlyȱandȱsoȱthereȱisȱspaceȱforȱ youȱ toȱ achieveȱ yourȱ ambitions,ȱ atȱ theȱ sameȱ timeȱ allowingȱ theȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ19ȱȱ

existingȱ sellersȱ toȱ maintainȱ orȱ evenȱ improveȱ theirȱ marketȱ shares.ȱ Thisȱ isȱ theȱ bestȱ scenarioȱ toȱ beȱ inȱ andȱ oneȱ whichȱ ventureȱ capitalȱ investorsȱinȱparticularȱlookȱforȱwhenȱmakingȱanȱinvestment.ȱȱ Forȱ completeness,ȱ graphȱ 4ȱ showsȱ theȱ situationȱ inȱ aȱ decliningȱ market.ȱ Hereȱ theȱ existingȱ sellersȱ areȱ squeezedȱ evenȱ furtherȱ andȱ inȱ theȱlongȱturnȱyourȱbusinessȱcanȱonlyȱdeclineȱtoo.ȱIfȱtheȱmarketȱdataȱ youȱ collectȱ suggestsȱ aȱ decliningȱ market,ȱ theȱ onlyȱ sensibleȱ thingȱ toȱ doȱisȱlookȱforȱaȱdifferentȱmarketȱ–ȱthereȱisȱnoȱfutureȱinȱthisȱone.ȱTheȱ onlyȱexceptionsȱtoȱthisȱruleȱwouldȱbeȱifȱtheȱmarketȱisȱstillȱveryȱlargeȱ andȱ youȱ canȱ identifyȱ aȱ strongȱ demand,ȱ orȱ healthyȱ nicheȱ forȱ yourȱ product.ȱBeȱextremelyȱcarefulȱthough!ȱ Howȱvalidȱisȱyourȱdata?ȱ Oneȱ ofȱ theȱ risksȱ ofȱ collectingȱ marketȱ dataȱ fromȱ publications,ȱ especiallyȱ onesȱ youȱ findȱ onȱ theȱ internet,ȱ isȱ knowingȱ exactlyȱ whoȱ generatedȱ it,ȱ forȱ whatȱ purposeȱ andȱ whetherȱ itȱ canȱ beȱ trusted.ȱȱ Oneȱ ofȱ theȱ firstȱ thingsȱ toȱ lookȱ atȱ isȱ whenȱ theȱ dataȱ wasȱ published.ȱ Generallyȱ youȱ shouldȱ beȱ veryȱ suspiciousȱ ofȱ anyȱ predictionȱdataȱthatȱisȱmoreȱthanȱaȱfewȱyearsȱoldȱandȱcertainlyȱ anythingȱmoreȱthanȱ5ȱyearsȱoldȱshouldȱbeȱtreatedȱwithȱaȱlotȱofȱ caution.ȱȱ Theȱauthorsȱofȱtheȱreportȱorȱdataȱareȱalsoȱaȱkeyȱindicatorȱasȱtoȱ theirȱvalidity.ȱYouȱcanȱgenerallyȱtrustȱreportsȱfromȱanyȱofȱtheȱ bigȱ accountancyȱ firms,ȱ governmentȱ departmentsȱ andȱ largeȱ consultancyȱcompanies.ȱ TreatȱunȬreferencedȱquotesȱonȱpeoplesȇȱwebsitesȱwithȱaȱgreatȱ dealȱofȱcautionȱandȱwhereȱpossibleȱifȱaȱstatisticȱisȱreferenced,ȱ trackȱ downȱ theȱ originalȱ publicationȱ toȱ makeȱ sureȱ thatȱ theȱ numbersȱareȱinȱtheȱrightȱcontext.ȱȱ

20ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

What trends are likely to affect your business? Theȱworldȱisȱnotȱaȱstaticȱplaceȱandȱmanyȱofȱtheȱchangingȱtrendsȱthatȱ existȱmayȱaffectȱyourȱbusiness,ȱsomeȱofȱthemȱpositively.ȱȱ Oneȱofȱtheȱbiggestȱeconomicȱchangesȱaffectingȱusȱoverȱtheȱnextȱfewȱ yearsȱ willȱ beȱ theȱ agingȱ population.ȱ Theȱ proportionȱ ofȱ theȱ popȬ ulationȱthatȱareȱretiredȱisȱtheȱlargestȱitȱhasȱeverȱbeenȱandȱtheȱtrendȱisȱ setȱ toȱ increaseȱ dramaticallyȱ overȱ theȱ nextȱ decade.ȱ Ifȱ yourȱ businessȱ sellsȱ servicesȱ orȱ productsȱ relatedȱ toȱ thisȱ groupȱ thenȱ yourȱ marketȱ sizeȱ isȱ goingȱ toȱ expandȱ dramatically.ȱ Thisȱ changeȱ willȱ haveȱ implicationsȱforȱhealthcare,ȱentertainment,ȱhousingȱandȱmanyȱotherȱ sectors.ȱ Howȱ willȱ itȱ affectȱ yourȱ business?ȱ Collectȱ dataȱ fromȱ theȱ OfficeȱofȱNationalȱStatisticsȱtoȱhelpȱpredictȱtheȱscaleȱofȱtheȱchangeȱtoȱ theȱmarketȱdataȱyouȱhaveȱcollectedȱalready.ȱ Thereȱ areȱ otherȱ trendsȱ suchȱ asȱ climateȱ changeȱ whichȱ willȱ haveȱ anȱ effectȱonȱmanyȱbusinessȱsectors.ȱMilderȱwintersȱandȱdryerȱsummersȱ willȱ affectȱ energyȱ use,ȱ sportsȱ andȱ recreation,ȱ agricultureȱ andȱ retailȱ demand.ȱ Technologicalȱ developmentsȱ alsoȱ actȱ asȱ trends,ȱ theȱ proliferationȱ ofȱ mobileȱ dataȱ communications,ȱ universalȱ broadbandȱ internetȱ access,ȱ andȱtheȱreducedȱsizeȱandȱpowerȱrequirementsȱofȱelectronicȱdevicesȱ areȱtrendsȱthatȱmayȱwellȱhaveȱanȱeffectȱonȱyourȱbusiness.ȱ Regulatoryȱ changesȱ haveȱ dramaticȱ effectsȱ onȱ markets.ȱ Theȱ introductionȱ ofȱ requirementsȱ forȱ wasteȱ managementȱ andȱ sustainȬ abilityȱ hasȱ drivenȱ aȱ wholeȱ newȱ industryȱ inȱ mobileȱ telephoneȱ recycling.ȱ Whatȱ isȱ theȱ regulatoryȱ environmentȱ likeȱ forȱ yourȱ sectorȱ andȱhowȱisȱitȱlikelyȱtoȱchangeȱinȱtheȱfuture?ȱȱ What other sectors could be exploited? Thisȱquestionȱpointsȱtoȱwhetherȱthereȱisȱlongȱtermȱgrowthȱpotentialȱ forȱ yourȱ businessȱ thatȱ couldȱ beȱ achievedȱ byȱ takingȱ yourȱ ideaȱ andȱ applyingȱ itȱ toȱ differentȱcommercialȱ sectors.ȱ Ifȱ weȱ takeȱ ourȱ medicalȱ

1.3ȱAnalysingȱtheȱmarketȱȱȱȱ21ȱȱ

deviceȱ exampleȱ oneȱ moreȱ time,ȱ areȱ thereȱ otherȱ testsȱ thatȱ couldȱ beȱ developedȱ onceȱ theȱ medicalȱ professionalsȱ haveȱ gainedȱ confidenceȱ inȱourȱtechnology,ȱorȱareȱthereȱdomesticȱproductsȱthatȱcouldȱbeȱsoldȱ directlyȱtoȱpatientsȱtoȱhelpȱthemȱmanageȱtheirȱownȱcondition?ȱ Aȱgoodȱwayȱtoȱthinkȱaboutȱthisȱquestionȱisȱtoȱstripȱyourȱideaȱdownȱ toȱ itsȱ constituentȱ parts:ȱ Whatȱ areȱ theȱ fundamentalȱ buildingȱ blocksȱ ofȱwhatȱyouȱofferȱandȱwhatȱelseȱcouldȱtheyȱbeȱusedȱfor?ȱMakeȱaȱlistȱ ofȱ theȱ otherȱ problemsȱ youȱ couldȱ solveȱ forȱ bothȱ theȱ sameȱ andȱ newȱ customers.ȱ Ifȱ anyȱ ofȱ themȱ soundȱ particularlyȱ excitingȱ itȱ mayȱ beȱ worthȱ goingȱ backȱ aȱ fewȱ stepsȱ toȱ findȱ outȱ moreȱ aboutȱ theseȱ opportunitiesȱtoȱmakeȱsureȱthatȱyouȱareȱfocussingȱonȱtheȱbestȱinitialȱ opportunity.ȱ Weȱ willȱ lookȱ atȱ segmentingȱ marketsȱ andȱ planningȱ productȱrollȬoutȱlaterȱinȱtheȱbook.ȱȱ Obviouslyȱ thisȱ questionȱ isȱ veryȱ importantȱ forȱ highȱ growthȱ companiesȱ asȱ goodȱ futureȱ marketȱ expansionȱ potentialȱ willȱ helpȱ toȱ secureȱ investment.ȱ Itȱ shouldȱ alsoȱ addȱ confidenceȱ andȱ breadthȱ toȱ evenȱ theȱ smallestȱ businessesȱ toȱ knowȱ thatȱ thereȱ areȱ otherȱ opportȬ unitiesȱthatȱcouldȱbeȱexploitedȱinȱtheȱfuture.ȱ Do you have a market? Let’sȱ takeȱ stockȱ again.ȱ Inȱ orderȱ toȱ proceedȱ youȱ nowȱ needȱ toȱ beȱ convincedȱ thatȱ thereȱ areȱ enoughȱ potentialȱ customersȱ withinȱ yourȱ reachȱ toȱ achieveȱ yourȱ ambitions,ȱ thatȱ theȱ marketȱ isȱ growingȱ sufficientlyȱ toȱ allowȱ youȱ toȱ growȱ andȱ provideȱ futureȱ stabilityȱ andȱ thatȱ anyȱ trendsȱ thatȱ youȱ haveȱ identifiedȱ willȱ supportȱ theȱ marketȱ andȱnotȱthreatenȱyourȱhardȱwork.ȱWeȱalsoȱknowȱwhatȱotherȱmarketȱ sectorsȱ couldȱ beȱ exploitedȱ inȱ theȱ futureȱ toȱ supportȱ theȱ growthȱ theȱ business.ȱIfȱtheȱanswersȱtoȱdateȱareȱpositive,ȱisȱtheȱcaseȱthenȱthatȱisȱ veryȱ goodȱ news.ȱ Itȱ isȱ nowȱ timeȱ toȱ takeȱ aȱ lookȱ atȱ theȱ Industryȱ youȱ willȱbeȱworkingȱin.ȱ

22ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

1.4 Analysing the industry Industriesȱconsistȱofȱsellersȱandȱwhatȱweȱneedȱtoȱlookȱatȱnextȱisȱtheȱ sellingȱenvironment.ȱThisȱincludesȱallȱtheȱaspectsȱofȱdoingȱbusinessȱ thatȱ affectȱ yourȱ abilityȱ toȱ deliverȱ yourȱ productȱ orȱ serviceȱ toȱ yourȱ customers.ȱ Overȱ thirtyȱ yearsȱ ago,ȱ Michaelȱ Porterȱ identifiedȱ fiveȱ forcesȱ thatȱ affectȱ theȱ profitabilityȱ ofȱ anȱ industryȱ andȱ theȱ basicȱ principlesȱstillȱholdȱtrueȱinȱtoday’sȱeconomy.ȱTheȱfiveȱforcesȱare:ȱ x EaseȱofȱEntryȱ x SupplierȱPowerȱ x BuyerȱPowerȱ x Threatȱofȱsubstitutesȱ x Competitiveȱrivalryȱ How easy will it be to enter the market? Thisȱisȱaȱcomplexȱquestionȱandȱoneȱthatȱbreaksȱdownȱtoȱaȱnumberȱ ofȱ elements.ȱ Itȱ hasȱ toȱ doȱ withȱ theȱ conservativenessȱ ofȱ theȱ marketȱ andȱwhetherȱbrandȱloyaltyȱisȱstrong.ȱItȱhasȱtoȱdoȱwithȱtheȱpositionȱ ofȱtheȱexistingȱsellersȱandȱifȱthereȱisȱaȱdominantȱmonopolyȱinȱplace.ȱ Itȱ hasȱ toȱ doȱ withȱ theȱ regulatoryȱ environmentȱ ofȱ theȱ industry,ȱ whetherȱ thereȱ areȱ standardsȱ andȱ accreditationsȱ toȱ beȱ achievedȱ beforeȱyouȱcanȱofferȱyourȱproductȱandȱitȱhasȱtoȱdoȱwithȱtheȱuseȱofȱ intellectualȱproperty.ȱȱ Let’sȱ takeȱ eachȱ aspectȱ oneȱ atȱ aȱ time.ȱ Marketȱ conservatismȱ isȱ somethingȱ youȱ willȱ haveȱ toȱ judgeȱ fromȱ yourȱ conversationsȱ withȱ potentialȱ customers.ȱ Tryȱ toȱ findȱ outȱ whoȱ theyȱ buyȱ fromȱ currentlyȱ andȱhowȱlongȱtheyȱhaveȱdoneȱso.ȱAskȱthemȱwhatȱitȱwouldȱtakeȱforȱ themȱ toȱ switchȱ supplier.ȱ Hopefullyȱ theȱ answersȱ willȱ haveȱ toȱ doȱ withȱ quality,ȱ reliability,ȱ convenienceȱ andȱ theȱ superiorityȱ ofȱ yourȱ solutionȱ toȱ theirȱ problem.ȱ Ifȱ soȱ thenȱ youȱ areȱ likelyȱ toȱ haveȱ aȱ goodȱ competitiveȱadvantage.ȱIfȱtheȱanswersȱareȱallȱtoȱdoȱwithȱprice,ȱthenȱ itȱmayȱbeȱmoreȱdifficultȱforȱyou.ȱAsȱweȱshallȱseeȱshortly,ȱcompetingȱ onȱpriceȱaloneȱisȱveryȱhardȱtoȱachieve.ȱ

1.4ȱAnalysingȱtheȱindustryȱȱȱȱ23ȱȱ

Brandȱloyaltyȱcanȱbeȱveryȱimportantȱinȱsomeȱindustries.ȱCustomersȱ haveȱbuiltȱupȱaȱlevelȱofȱtrustȱwithȱtheirȱsuppliersȱandȱmovingȱthemȱ away,ȱ especiallyȱ toȱ aȱ newȱ unknownȱ brandȱ canȱ beȱ veryȱ difficult.ȱ Itȱ mayȱ evenȱ beȱ thatȱ youȱ wouldȱ standȱ aȱ betterȱ chanceȱ licensingȱ yourȱ newȱideaȱtoȱanȱexistingȱsupplierȱinsteadȱofȱdirectlyȱcompetingȱwithȱ them.ȱ Weȱ willȱ lookȱ atȱ licensingȱ inȱ theȱ nextȱ chapterȱ asȱ partȱ ofȱ theȱ discussionȱonȱexploitingȱintellectualȱproperty.ȱ Industriesȱ thatȱ areȱ inhabitedȱ byȱ aȱ dominantȱ monopolyȱ areȱ exceedinglyȱ difficultȱ toȱ penetrate.ȱ Theȱ monopolyȱ isȱ likelyȱ toȱ strenȬ uouslyȱresistȱnewcomersȱandȱtheyȱwillȱhaveȱtheȱpowerȱtoȱbeatȱyouȱ onȱ priceȱ andȱ promotionalȱ activityȱ toȱ suchȱ anȱ extentȱ thatȱ evenȱ reachingȱpotentialȱcustomersȱcouldȱbeȱdifficult.ȱImagineȱhowȱhardȱitȱ wouldȱ beȱ toȱ launchȱ aȱ completelyȱ newȱ supermarketȱ chainȱ atȱ theȱ moment.ȱȱ Mostȱ industriesȱ areȱ regulatedȱ inȱ someȱ way.ȱ Theȱ vastȱ majorityȱ ofȱ productsȱ requireȱ safetyȱ andȱ conformityȱ certificationȱ andȱ liabilityȱ insurances.ȱ Manyȱ servicesȱ areȱ alsoȱ regulatedȱ withȱ theȱ serviceȱ providerȱ beingȱ requiredȱ toȱ belongȱ toȱ professionalȱ associationsȱ whichȱ accreditȱ theȱ qualityȱ andȱ standardsȱ ofȱ theȱ service.ȱ Youȱ willȱ needȱtoȱunderstandȱandȱconformȱtoȱtheseȱrequirementsȱbeforeȱyouȱ canȱsellȱyourȱfirstȱproductȱorȱserviceȱandȱinȱmanyȱcasesȱyouȱwillȱbeȱ requiredȱ toȱ haveȱ someȱ qualityȱ systemsȱ inȱ placeȱ evenȱ duringȱ theȱ designȱ andȱ developmentȱ process.ȱ Theȱ Internationalȱ Organisationȱ forȱ Standardisationȱ (ISO)ȱ isȱ aȱ goodȱ placeȱ toȱ startȱ yourȱ searchȱ ofȱ relevantȱstandardsȱthatȱmightȱapplyȱtoȱyou.ȱ Finallyȱ inȱ thisȱ sectionȱ youȱ needȱ toȱ beȱ sureȱ thatȱ youȱ areȱ entitledȱ toȱ provideȱyourȱproductȱorȱserviceȱwithoutȱinfringingȱsomeoneȱelse’sȱ intellectualȱpropertyȱrights.ȱWeȱwillȱcoverȱthisȱinȱaȱlotȱmoreȱdetailȱinȱ theȱnextȱchapterȱbutȱputȱsimply,ȱifȱyourȱproductȱorȱserviceȱreliesȱonȱ usingȱ somethingȱ forȱ whichȱ someoneȱ elseȱ ownsȱ theȱ copyrightȱ orȱ patent,ȱyouȱwillȱneedȱtheirȱpermissionȱandȱinȱmostȱcasesȱpayȱthemȱaȱ royaltyȱforȱusingȱitȱwithinȱyourȱbusiness.ȱȱ

24ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

Industryȱ sectorsȱ withȱ highȱ barriersȱ toȱ entryȱ areȱ notȱ entirelyȱ badȱ however,ȱ becauseȱ ifȱ youȱ haveȱ aȱ particularȱ innovationȱ thatȱ allowsȱ youȱ toȱ enter,ȱ itȱ doesȱ atȱ leastȱ protectȱ youȱ fromȱ otherȱ newȱ entrantsȱ thatȱmightȱwantȱtoȱfollowȱyou.ȱȱ What power do your suppliers have over you? Toȱanswerȱthisȱquestionȱweȱneedȱtoȱlookȱatȱallȱtheȱplayersȱthatȱareȱ involvedȱ betweenȱ yourȱ takingȱ anȱ orderȱ fromȱ aȱ customerȱ andȱ completingȱ delivery.ȱ Thisȱ couldȱ includeȱ suppliersȱ ofȱ partsȱ orȱ components,ȱ deliveryȱ companies,ȱ otherȱ serviceȱ providers,ȱ subȬ contractors,ȱ anybodyȱ thatȱ youȱ relyȱ onȱ inȱ theȱ processȱ ofȱ satisfyingȱ yourȱcustomer.ȱMakeȱaȱlistȱofȱthemȱall.ȱ Nowȱforȱeachȱone,ȱwriteȱdownȱwhetherȱwhatȱtheyȱsupplyȱyouȱwithȱ isȱuniqueȱorȱifȱyouȱcouldȱgetȱanȱequivalent.ȱAnyȱthatȱareȱuniqueȱareȱ aȱconcernȱtoȱyourȱbusinessȱ–ȱwhatȱwouldȱyouȱ doȱifȱtheyȱsuddenlyȱ increasedȱ theirȱ prices,ȱ demandedȱ moreȱ cashȱ upȱ frontȱ orȱ toldȱ youȱ theyȱ couldȱ notȱ satisfyȱ yourȱ demand?ȱ Thinkȱ howȱ youȱ canȱ multiȬ sourceȱ asȱ manyȱ ofȱ yourȱ suppliesȱ asȱ possible.ȱ Youȱ mayȱ neverȱ needȱ to,ȱbutȱitȱwillȱhelpȱtoȱkeepȱyourȱsuppliersȱhonestȱandȱmayȱsaveȱtheȱ lifeȱofȱyourȱbusinessȱoneȱday.ȱ Tryȱtoȱgetȱtheȱbestȱpossibleȱdealȱwithȱyourȱsuppliers.ȱTheȱlaterȱyouȱ canȱpayȱyourȱsuppliersȱtheȱhealthierȱtheȱbusinessȱwillȱbe.ȱInȱanȱidealȱ worldȱ youȱ willȱ collectȱ paymentȱ fromȱ yourȱ customersȱ beforeȱ youȱ haveȱ toȱ payȱ yourȱ suppliers.ȱ Ifȱ however,ȱ youȱ areȱ forcedȱ toȱ payȱ suppliersȱ first,ȱ thenȱ youȱ mayȱ needȱ toȱ borrowȱ moneyȱ toȱ tideȱ youȱ over.ȱWeȱwillȱlookȱatȱcashȬflowȱinȱdetailȱlaterȱinȱtheȱbook.ȱ What power do your customers have over you? Thisȱisȱcloselyȱrelatedȱtoȱtheȱpreviousȱquestionȱbutȱthisȱtimeȱweȱareȱ lookingȱatȱwhoȱsetsȱtheȱtermsȱofȱsale,ȱyouȱorȱyourȱcustomer.ȱInȱsomeȱ cases,ȱyouȱwillȱbeȱableȱtoȱgetȱcustomersȱtoȱpayȱatȱtheȱtimeȱofȱorderȱ orȱ atȱ theȱ pointȱ ofȱ delivery,ȱ butȱ inȱ manyȱ businessȱ toȱ businessȱ

1.4ȱAnalysingȱtheȱindustryȱȱȱȱ25ȱȱ

transactionsȱyouȱwillȱhaveȱtoȱinvoiceȱandȱhopeȱforȱpaymentȱwithinȱ 30ȱ daysȱ orȱ so.ȱ Againȱ tryȱ toȱ structureȱ yourȱ termsȱ toȱ yourȱ bestȱ advantage.ȱȱ Anotherȱ aspectȱ ofȱ thisȱ questionȱ isȱ theȱ extentȱ toȱ whichȱ yourȱ customersȱareȱsensitiveȱtoȱprice.ȱObviouslyȱnoȱoneȱlikesȱtoȱpayȱmoreȱ thanȱnecessaryȱbutȱforȱ exampleȱifȱyouȱwereȱtoȱsetȱyourȱ pricesȱ10%ȱ higher,ȱwhatȱeffectȱwouldȱthatȱhaveȱonȱyourȱcustomersȱdecisionȱtoȱ buyȱ fromȱ you?ȱ Let’sȱ lookȱ atȱ aȱ quickȱ exampleȱ toȱ seeȱ whatȱ aȱ differenceȱthisȱcanȱmake.ȱ Imagineȱthatȱyouȱmakeȱaȱwidgetȱforȱ$7ȱandȱsellȱitȱforȱ$10ȱandȱyouȱ sellȱ100ȱofȱtheseȱwidgetsȱaȱweek.ȱYourȱincomeȱisȱ$1,000,ȱyourȱcostsȱ areȱ$700ȱsoȱyouȱmakeȱaȱprofitȱofȱ$300.ȱNowȱlet’sȱimagineȱthatȱyouȱ increaseȱ yourȱ priceȱ byȱ 10%ȱ toȱ $11.ȱ Itȱ stillȱ costsȱ youȱ $7ȱ toȱ makeȱ soȱ nowȱ youȱ haveȱ aȱ choice,ȱ eitherȱ youȱ couldȱ retainȱ yourȱ existingȱ weeklyȱ profitȱ butȱ onlyȱ needȱ toȱ sellȱ 75ȱ widgetsȱ (25%ȱ less)ȱ orȱ youȱ couldȱstillȱsellȱ100ȱunitsȱbutȱnowȱmakeȱaȱprofitȱofȱ$400ȱ(33%ȱmore!).ȱ Let’sȱtakeȱthisȱexampleȱtheȱotherȱwayȱtoȱseeȱhowȱimportantȱitȱisȱnotȱ toȱhaveȱtoȱcompeteȱonȱprice.ȱSupposeȱyouȱreduceȱyourȱpriceȱbyȱ10%ȱ toȱ$9.ȱUnfortunatelyȱitȱstillȱcostsȱyouȱ$7ȱtoȱmakeȱsoȱnowȱifȱyouȱsellȱ 100ȱ units,ȱ youȱ onlyȱ makeȱ $200ȱ profitȱ (33%ȱ less),ȱ alternativelyȱ inȱ orderȱ toȱ keepȱ theȱ profitȱ atȱ $300ȱ youȱ areȱ goingȱ toȱ haveȱ toȱ sellȱ 150ȱ unitsȱ aȱ weekȱ (50%ȱ more!).ȱ Incidentally,ȱ reducingȱ yourȱ costsȱ inȱ makingȱtheȱwidgetȱalsoȱhasȱveryȱpositiveȱresults.ȱȱ Oneȱfinalȱelementȱtoȱthisȱquestionȱisȱtoȱfindȱoutȱhowȱwellȱinformedȱ yourȱcustomersȱareȱtoȱtheȱalternativesȱandȱtoȱtheȱmarketȱasȱaȱwhole.ȱ Doȱtheyȱcontinuallyȱcompareȱdifferentȱsuppliersȱorȱareȱtheyȱcontentȱ toȱplaceȱlongȱstandingȱordersȱwithȱyou?ȱThisȱwillȱhaveȱanȱeffectȱonȱ theirȱcontrolȱoverȱyourȱbusiness.ȱ

26ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

How strong is the threat of people copying your idea? Thisȱquestionȱrelatesȱtoȱhowȱyouȱareȱableȱtoȱprotectȱyourȱideas.ȱWeȱ willȱ coverȱ intellectualȱ propertyȱ protectionȱ suchȱ asȱ patentingȱ inȱ detailȱinȱtheȱnextȱchapterȱandȱthatȱcouldȱbeȱaȱlargeȱpartȱofȱhowȱyouȱ protectȱyourȱcompetitiveȱposition.ȱYouȱwillȱalsoȱneedȱtoȱthinkȱaboutȱ howȱ elseȱ theȱ competitionȱ couldȱ solveȱ theȱ customer’sȱ problem.ȱ Putȱ yourselfȱ inȱ theirȱ position,ȱ howȱ wouldȱ youȱ reactȱ toȱ yourȱ newȱ ideaȱ andȱhowȱwouldȱyouȱcompeteȱwithȱit?ȱ What is the competitive environment like within the industry? Thisȱisȱaȱdifficultȱquestionȱtoȱgaugeȱfromȱtheȱoutsideȱbutȱthereȱ areȱ someȱcluesȱthatȱyouȱcanȱlookȱfor.ȱFirstlyȱhowȱmanyȱcompaniesȱareȱ inȱtheȱsector?ȱIfȱtheȱanswerȱisȱlotsȱthenȱitȱisȱlikelyȱthatȱtheyȱhaveȱtoȱ competeȱstronglyȱwithȱeachȱotherȱforȱbusiness.ȱ Howȱfastȱisȱtheȱindustryȱsectorȱgrowing?ȱAsȱweȱhaveȱseenȱalready,ȱ ifȱ theȱ sectorȱ isȱ growingȱwell,ȱ rivalryȱ willȱ beȱ reducedȱ asȱ companiesȱ willȱ beȱ ableȱ toȱ growȱ withoutȱ stealingȱ marketȱ shareȱ fromȱ theȱ competition.ȱ Howȱmuchȱdifferentiationȱisȱthereȱbetweenȱtheȱexistingȱplayersȱandȱ betweenȱ theirȱ plansȱ andȱ yours?ȱ Theȱ higherȱ theȱ differentiationȱ theȱ moreȱlikelyȱitȱisȱthatȱeverybodyȱisȱtargetingȱslightlyȱdifferentȱnichesȱ andȱ thatȱ competitionȱ willȱ beȱ onȱ specification,ȱ performanceȱ andȱ qualityȱratherȱthanȱprice.ȱ Howȱeasyȱisȱitȱforȱcustomersȱtoȱswitchȱsuppliers?ȱTheȱeasierȱitȱisȱforȱ customersȱ toȱ change,ȱ theȱ moreȱ rivalryȱ thereȱ willȱ beȱ betweenȱ theȱ suppliers.ȱ Anotherȱindicatorȱofȱrivalryȱisȱhowȱmuch,ȱifȱany,ȱcollaborativeȱworkȱ goesȱ onȱ betweenȱ theȱ differentȱ companiesȱ inȱ theȱ sector.ȱ Doȱ theyȱ collaborateȱ inȱ theȱ settingȱ ofȱ standardsȱ forȱ theȱ industry,ȱ isȱ thereȱ aȱ vibrantȱtradeȱassociationȱthatȱsharesȱbestȱpracticeȱandȱareȱthereȱanyȱ collaborativeȱ researchȱ andȱ developmentȱ programmesȱ thatȱ areȱ

1.4ȱAnalysingȱtheȱindustryȱȱȱȱ27ȱȱ

extendingȱ theȱ technologyȱ usedȱ inȱ theȱ sector?ȱ Ifȱ soȱ theȱ rivalryȱ isȱ probablyȱ relativelyȱ lowȱ andȱ ifȱ youȱ areȱ enteringȱ theȱ sectorȱ withȱ aȱ newȱ advance,ȱ youȱ couldȱ findȱ thatȱ thereȱ areȱ licenseȱ opportunities,ȱ evenȱ investmentȱ interestȱ fromȱ theȱ largerȱ players,ȱ inȱ additionȱ toȱ directȱsalesȱwithinȱtheȱmarket.ȱ Soȱwhatȱdoȱyouȱthinkȱofȱtheȱindustryȱyouȱareȱgoingȱtoȱhaveȱtoȱworkȱ in?ȱWillȱitȱletȱyouȱcompeteȱonȱtheȱbasisȱofȱtheȱbrillianceȱandȱnoveltyȱ ofȱyourȱideaȱorȱisȱitȱgoingȱtoȱbeȱbattleȱtoȱsurvive,ȱdrivenȱentirelyȱbyȱ price?ȱYourȱresponseȱhereȱisȱjustȱasȱimportantȱasȱtheȱearlierȱanalysisȱ ofȱtheȱmarketȱneedȱforȱyourȱproduct.ȱIfȱtheȱanswersȱareȱworrying,ȱitȱ isȱveryȱworthȱwhileȱlookingȱforȱalternativeȱapplicationsȱofȱyourȱideaȱ inȱ industriesȱ thatȱ areȱ likelyȱ toȱ beȱ moreȱ receptive.ȱ Youȱ canȱ alwaysȱ comeȱbackȱforȱthisȱoneȱlaterȱwhenȱyouȱhaveȱmoreȱstrength.ȱ Nearly there! Upȱ toȱ thisȱ pointȱ inȱ theȱ industryȱ analysisȱ weȱ haveȱ concentratedȱ onȱ howȱyouȱareȱgoingȱtoȱbeȱableȱtoȱenterȱtheȱsector.ȱBeforeȱweȱfinish,ȱitȱ isȱ worthȱ lookingȱ atȱ how,ȱ onceȱ in,ȱ youȱ canȱ sustainȱ andȱ growȱ yourȱ position.ȱ Toȱ doȱ thisȱ weȱ needȱ toȱ lookȱ atȱ someȱ elementsȱ thatȱ willȱ determineȱhowȱsuccessfulȱyouȱareȱlikelyȱtoȱbeȱinȱtheȱindustryȱinȱtheȱ longȱterm.ȱ How are you going to stay ahead? Partȱofȱtheȱanswerȱtoȱthisȱquestionȱisȱinȱhowȱyouȱprotectȱyourȱideas.ȱ Weȱ haveȱ mentionedȱ thisȱ already,ȱ butȱ itȱ alsoȱ relatesȱ toȱ whatȱ yourȱ approachȱ toȱ continuedȱ researchȱ andȱ developmentȱ isȱ goingȱ toȱ be.ȱ Areȱ youȱ aȱ oneȱ hitȱ wonderȱ orȱ doȱ youȱ haveȱ aȱ pipelineȱ ofȱ newȱ productsȱorȱservicesȱthatȱyouȱcanȱroleȱout?ȱ Doȱ youȱ haveȱ accessȱ toȱ superiorȱ processesȱ thatȱ willȱ allowȱ youȱ toȱ compete?ȱ Theseȱ couldȱ beȱ managementȱ processes,ȱ manufacturingȱ processesȱ orȱ evenȱ secretȱ recipes.ȱ Itȱ couldȱ beȱ yourȱ staffȱ retentionȱ methods;ȱyouȱcouldȱattractȱandȱkeepȱtheȱbestȱpeopleȱinȱtheȱindustryȱ

28ȱȱȱȱȱȱ1ȱHowȱgoodȱisȱyourȱidea?ȱȱ

byȱ offeringȱ theȱ veryȱ bestȱ workingȱ environment.ȱ Youȱ couldȱ goȱ theȱ extraȱmileȱinȱprovidingȱexcellentȱcustomerȱcare.ȱȱ What is likely to slow you down? Atȱthisȱpointȱweȱneedȱtoȱgetȱaȱlittleȱcriticalȱandȱaȱlittleȱnegative,ȱweȱ needȱtoȱthinkȱofȱthingsȱthatȱwouldȱstopȱusȱfromȱprogressingȱquiteȱasȱ wellȱ andȱ quicklyȱ asȱ weȱ wouldȱ like.ȱ Thereȱ areȱ manyȱ possibilities,ȱ hereȱaȱfewȱtoȱgetȱyouȱthinkingȱalongȱtheȱrightȱlines.ȱȱ x

Lackȱ ofȱ adequatelyȱ skilledȱ staffȱ –ȱ ifȱ yourȱ businessȱ isȱ techȬ nicalȱorȱreliesȱonȱskilledȱworkers,ȱareȱyouȱgoingȱtoȱbeȱableȱtoȱ findȱ andȱ retainȱ themȱ andȱ howȱ longȱ willȱ theyȱ takeȱ toȱ train?ȱ Thisȱwillȱbeȱparticularlyȱimportantȱinȱtechnologyȱcompaniesȱ andȱuniversityȱspinȬoutsȱwhereȱtheȱskillȱsetsȱmayȱbeȱlimitedȱ toȱaȱhandfulȱofȱindividualsȱnationally.ȱ

x

Longȱ customerȱ decisionȱ cyclesȱ –ȱ neverȱ underestimateȱ theȱ timeȱ thatȱ someȱ customersȱ canȱ takeȱ toȱ makeȱ aȱ buyingȱ decision,ȱ noȱ matterȱ howȱ compellingȱ theȱ proposition.ȱ Thisȱ willȱ beȱ particularlyȱ trueȱ ifȱ yourȱ customerȱ isȱ aȱ publicȱ sectorȱ bodyȱ orȱ aȱ largeȱ organisationȱ withȱ layersȱ ofȱ bureaucracy.ȱ Thinkingȱ backȱ toȱ theȱ stakeholderȱ analysisȱ weȱ discussedȱ forȱ theȱ medicalȱ device,ȱ howȱ longȱ isȱ itȱ likelyȱ toȱ takeȱ toȱ getȱ thatȱ groupȱtoȱgoȱahead?ȱ

x

Regulatoryȱ approvalsȱ–ȱweȱmentionedȱtheȱneedȱforȱ variousȱ accreditationsȱ inȱ manyȱ marketȱ sectors,ȱ someȱ ofȱ whichȱ canȱ takeȱseveralȱmonthsȱtoȱbeȱachieved.ȱIfȱyourȱproductȱrequiresȱ aȱ CEȱ marking,ȱ theȱ laboratoryȱ testsȱcouldȱ takeȱ someȱ timeȱ toȱ arrangeȱ andȱ pass.ȱ Ifȱ youȱ needȱ toȱ beȱ anȱ ISO9000ȱ approvedȱ companyȱthisȱwillȱalsoȱtakeȱseveralȱmonthsȱtoȱputȱintoȱplaceȱ andȱbeȱaccepted.ȱRememberȱalsoȱthatȱasȱyouȱexpandȱtoȱenterȱ overseasȱmarkets,ȱlocalȱstandardsȱandȱaccreditationsȱmayȱbeȱ necessaryȱandȱthisȱwillȱinevitablyȱtakeȱtimeȱtoȱsecureȱasȱwellȱ asȱuseȱupȱvaluableȱresources.ȱ

1.5ȱSo,ȱdoȱyouȱhaveȱaȱbusiness?ȱȱȱȱ29ȱȱ

Writeȱ aȱ listȱ ofȱ allȱ theȱ growthȱ inhibitorsȱ youȱ canȱ imagineȱ forȱ yourȱ business.ȱEachȱoneȱofȱtheseȱrepresentsȱaȱriskȱtoȱyourȱfutureȱgrowthȱ andȱ survival.ȱ Describeȱ whatȱ stepsȱ youȱ canȱ takeȱ toȱ mitigateȱ theseȱ risks.ȱ

1.5 So, do you have a business? Hopefullyȱ youȱ areȱ nowȱ evenȱ moreȱ enthusiasticȱ aboutȱ yourȱ ideasȱ thanȱyouȱwereȱwhenȱyouȱstartedȱthisȱchapter.ȱIfȱtheȱanswersȱtoȱtheȱ questionsȱ haveȱ beenȱ positive,ȱ thenȱ youȱ haveȱ everyȱ rightȱ toȱ be.ȱ Ifȱ however,ȱ theȱ answersȱ haveȱ shownȱ upȱ someȱ flawsȱ thenȱ youȱ mustȱ addressȱthem.ȱWhatȱweȱhaveȱbeenȱlookingȱatȱareȱtheȱfoundationsȱofȱ yourȱ business,ȱ ifȱ theyȱ areȱ notȱ strong,ȱ itȱ willȱ takeȱ moreȱ thanȱ determinationȱandȱhardȱworkȱtoȱmakeȱtheȱbusinessȱsuccessful.ȱȱ

2 How can you protect your ideas?

Havingȱ establishedȱ thatȱ thereȱ isȱ aȱ realȱ marketȱ needȱ forȱ yourȱ product,ȱ weȱ nowȱ needȱ toȱ lookȱ atȱ howȱ youȱ canȱ protectȱ itȱ fromȱ potentialȱ competition.ȱ Theȱ topicȱ ofȱ intellectualȱ propertyȱ rightsȱ isȱ aȱ specialistȱ areaȱ ofȱ expertise.ȱ Asȱ weȱ willȱ see,ȱ youȱ wouldȱ beȱ wellȱ advisedȱ toȱ seekȱ theȱ servicesȱ ofȱ professionals.ȱ Howeverȱ itȱ isȱ importantȱ forȱ youȱ toȱ understandȱ theȱ optionsȱ openȱ toȱ youȱ andȱ theȱ processesȱinvolvedȱinȱformallyȱprotectingȱyourȱideas.ȱ Thereȱ areȱ someȱ veryȱ goodȱ reasonsȱ toȱ investigateȱ theȱ intellectualȱ propertyȱ rightsȱ (IPR)ȱ surroundingȱ yourȱ ideas.ȱ Oneȱ ofȱ theȱ mainȱ reasonsȱ forȱ doingȱ this,ȱ inȱ additionȱ toȱ potentiallyȱ protectingȱ yourȱ ownȱ rights,ȱ isȱ toȱ makeȱ sureȱ thatȱ youȱ areȱ notȱ goingȱ toȱ infringeȱ someoneȱ else’s.ȱ Inȱ otherȱ words,ȱ althoughȱ youȱ thinkȱ yourȱ ideaȱ isȱ newȱ itȱ mayȱ notȱ be.ȱ Youȱ needȱ toȱ ensureȱ thatȱ sixȱ monthsȱ downȱ theȱ lineȱyouȱdon’tȱsuddenlyȱreceiveȱlegalȱrepresentationȱfromȱtheȱownerȱ ofȱ aȱ patentȱ orȱ trademarkȱ demandingȱ thatȱ youȱ stopȱ trading,ȱ payȱ themȱroyaltiesȱorȱfaceȱcourtȱaction.ȱȱ Ifȱ yourȱ businessȱ plansȱ involveȱ raisingȱ financeȱ fromȱ investors,ȱ formalȱ protectionȱ ofȱ yourȱ ideasȱ andȱ technologyȱ willȱ beȱ veryȱ important.ȱInvestorsȱlikeȱtoȱseeȱthatȱtheȱtechnologyȱtheyȱareȱinvestȬ ingȱ inȱ isȱ protected.ȱ Aȱ patentȱ orȱ registeredȱ rightȱ isȱ alsoȱ aȱ tradableȱ asset,ȱmeaningȱthatȱthereȱisȱpotentialȱtoȱsellȱorȱgrantȱlicensesȱtoȱitȱinȱ orderȱtoȱgenerateȱrevenue.ȱ

32ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

2.1 Loose talk costs lives! Beforeȱ weȱ getȱ intoȱ theȱ detailsȱ ofȱ intellectualȱ propertyȱ rights,ȱ itȱ isȱ worthȱspendingȱaȱbitȱofȱtimeȱlookingȱatȱtheȱareaȱofȱdisclosure.ȱYourȱ businessȱideaȱhasȱsignificantȱvalueȱandȱobviouslyȱyouȱdoȱnotȱwantȱ anybodyȱtoȱstealȱitȱorȱspoilȱitsȱpotential.ȱItȱstandsȱtoȱreasonȱthereforeȱ thatȱyouȱshouldȱbeȱcarefulȱwhoȱyouȱtellȱandȱwhatȱyouȱtellȱthem.ȱItȱ mayȱbeȱpossibleȱtoȱapplyȱforȱaȱpatentȱonȱyourȱidea,ȱbutȱthisȱwillȱbeȱ rejectedȱ ifȱ youȱ haveȱ previouslyȱ disclosedȱ theȱ ideaȱ inȱ public.ȱ Yourȱ businessȱideaȱcouldȱbeȱdeadȱbeforeȱyouȱhaveȱevenȱstarted!ȱ Atȱ someȱ pointȱ however,ȱ youȱ areȱ goingȱ toȱ haveȱ toȱ shareȱ yourȱ thoughtsȱwithȱpotentialȱcustomers,ȱpotentialȱbusinessȱpartnersȱandȱ suppliers.ȱ Soȱ whatȱ canȱ youȱ do?ȱ Inȱ theȱ earlyȱ stages,ȱ theȱ simpleȱ answerȱ isȱ toȱ protectȱ suchȱ conversationsȱ withȱ aȱ nonȬdisclosureȱ orȱ confidentialityȱ agreementȱ (usuallyȱ abbreviatedȱ toȱ NDA).ȱ Thisȱ isȱ aȱ simpleȱ legalȱ document,ȱ normallyȱ onlyȱ oneȱ pageȱ inȱ length,ȱ whichȱ bindsȱ theȱ otherȱ partyȱ toȱ keepȱ yourȱ discussionsȱ withȱ themȱ secret.ȱ Modelȱ nonȬdisclosureȱ agreementsȱ areȱ availableȱ onȱ theȱ internet,ȱ alternativelyȱaȱlawyerȱshouldȱbeȱableȱtoȱdraftȱyouȱaȱdocumentȱthatȱ youȱcanȱuseȱforȱaȱreasonableȱfee.ȱȱ Doȱ notȱ beȱ afraidȱ toȱ askȱ peopleȱ toȱ signȱ anȱ NDAȱ beforeȱ yourȱ discussionsȱ withȱ them.ȱ Inȱ manyȱ casesȱ theyȱ willȱ beȱ expectingȱ it,ȱ soȱ havingȱ oneȱ readyȱ itȱ willȱ showȱ yourȱ levelȱ ofȱ seriousnessȱ andȱ professionalism.ȱ Thereȱ areȱ aȱ fewȱ exceptionsȱ toȱ thisȱ rule;ȱ patentȱ agentsȱ andȱ corporateȱ lawyersȱ willȱ notȱ generallyȱ signȱ suchȱ agreementsȱasȱtheyȱareȱboundȱbyȱtheirȱprofessionalȱcodeȱofȱethicsȱtoȱ maintainȱconfidentialityȱwithȱtheirȱclients.ȱȱ

2.2 Types of intellectual property Intellectualȱ propertyȱ rightsȱ areȱ dividedȱ intoȱ registeredȱ andȱ nonȬ registeredȱrights.ȱRegisteredȱrightsȱareȱthoseȱthatȱyouȱneedȱtoȱapplyȱ for,ȱunȬregisteredȱrightȱbecomeȱyoursȱautomatically.ȱȱ

2.2ȱTypesȱofȱintellectualȱpropertyȱȱȱȱȱȱ33ȱ

Registeredȱrightsȱinclude:ȱ x Patentsȱ x IndustrialȱDesignsȱ x RegisteredȱTrademarksȱ Allȱofȱtheseȱrequireȱyouȱtoȱmakeȱanȱapplicationȱthatȱisȱscrutinisedȱtoȱ ensureȱ thatȱ itȱ isȱ novelȱ andȱ practicalȱ beforeȱ beingȱ granted.ȱ Inȱ allȱ casesȱ thereȱ areȱ feesȱ toȱ beȱ paidȱ bothȱ atȱ theȱ applicationȱ stageȱ andȱ throughoutȱtheȱlifeȱofȱtheȱprotection.ȱ UnȬregisteredȱrightsȱinclude:ȱ x Copyrightȱ x CommonȱLawȱTrademarksȱ x UnregisteredȱDesignȱRightsȱ x TradeȱSecretsȱ Tradeȱ secretsȱ areȱ includedȱ inȱ theȱ listȱ becauseȱ thisȱ strategyȱ isȱ sometimesȱ usedȱ toȱ protectȱ processesȱ orȱ methods,ȱ butȱ strictlyȱ speakingȱisȱnotȱaȱright.ȱOneȱofȱtheȱmostȱfamousȱexamplesȱofȱaȱtradeȱ secretȱisȱtheȱrecipeȱforȱCocaȬCola.ȱIfȱtheȱrecipeȱwasȱmadeȱpublic,ȱtheȱ companyȱ couldȱ probablyȱ sueȱ theȱ personȱ thatȱ leakedȱ it,ȱ butȱ onlyȱ ifȱ theyȱ brokeȱ theirȱ termsȱ ofȱ employmentȱ orȱ aȱ confidentialityȱ agreeȬ ment.ȱ Theȱ companyȱ couldȱ notȱ however,ȱ stopȱ otherȱ peopleȱ fromȱ thenȱmakingȱandȱsellingȱdrinksȱusingȱtheȱrecipe,ȱwhichȱwouldȱthenȱ beȱinȱtheȱpublicȱdomain.ȱ ThereȱareȱalsoȱsomeȱregisteredȱquasiȬrightsȱsuchȱasȱinternetȱdomainȱ names.ȱ Anyoneȱ canȱ registerȱ anȱ internetȱ domainȱ nameȱ ifȱ itȱ isȱ available,ȱbutȱthatȱdoesȱnotȱgiveȱthemȱtheȱrightȱtoȱtradeȱusingȱthatȱ nameȱ ifȱ itȱ infringesȱ anȱ existingȱ trademark.ȱ Theȱ rightsȱ ofȱ domainȱ nameȱ registrantsȱ areȱ beingȱ erodedȱ sinceȱ theȱ practiceȱ ofȱ cyberȬ squatting,ȱwhereȱindividualsȱwouldȱregisterȱdomainȱnamesȱofȱlargeȱ companiesȱandȱthenȱproceedȱtoȱtryȱtoȱsellȱthemȱtoȱtheȱcompanyȱforȱ largeȱ fees.ȱ Theȱ courtsȱ areȱ nowȱ startingȱ toȱ legislateȱ inȱ favorȱ ofȱ companiesȱ withȱ establishedȱ andȱ registeredȱ brandsȱ andȱ forcingȱ theȱ domainȱregistrantsȱtoȱgiveȱthemȱup.ȱȱ

34ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

Asȱ theȱ internetȱ hasȱ becomeȱ suchȱ aȱ powerfulȱ andȱ importantȱ marketingȱ tool,ȱ theȱ searchȱ forȱ aȱ suitableȱ tradingȱ nameȱ forȱ yourȱ companyȱ orȱ productȱ shouldȱ includeȱ aȱ searchȱ forȱ relevantȱ domainȱ names.ȱ Thisȱ hasȱ becomeȱ soȱ importantȱ thatȱ inȱ reality,ȱ ifȱ youȱ can’tȱ findȱ aȱ suitablyȱ representativeȱ domainȱ nameȱ forȱ yourȱ intendedȱ company,ȱyouȱshouldȱkeepȱlookingȱforȱaȱnewȱcompanyȱname.ȱ Inȱ general,ȱ unȬregisteredȱ rightsȱ areȱ muchȱ cheaperȱ toȱ manageȱ thanȱ registeredȱ rightsȱ butȱ theyȱ areȱ muchȱ moreȱ difficultȱ toȱ enforceȱ andȱ cannotȱbeȱtreatedȱasȱanȱasset.ȱȱ

2.3 Patents Inȱgeneral,ȱcommercialȱlawȱhasȱbeenȱestablishedȱoverȱtheȱcenturiesȱ toȱallowȱfreeȱmarketȱcompetitionȱandȱrestrictȱmonopolisticȱpracticesȱ thatȱ disadvantageȱ consumersȱ andȱ theȱ economy.ȱ Patentȱ lawȱ isȱ anȱ exceptionȱ toȱ thisȱ principle.ȱ Patentȱ lawȱ hasȱ beenȱ developedȱ inȱ recognitionȱ ofȱ theȱ factȱ thatȱ technologicalȱ developmentsȱ areȱ aȱ goodȱ thingȱforȱanȱeconomyȱbutȱareȱveryȱexpensiveȱtoȱdevelopȱandȱriskyȱ toȱintroduce.ȱPatentsȱgrantȱinventorsȱaȱlimitedȱmonopolyȱperiodȱinȱ whichȱtoȱexploitȱtheirȱinventionȱinȱreturnȱforȱaȱpublicȱdisclosureȱofȱ howȱ theȱ technologyȱ works.ȱ Inȱ thisȱ wayȱ theȱ lawȱ encouragesȱ theȱ developmentȱ andȱ improvementȱ ofȱ newȱ technologiesȱ whilstȱ atȱ theȱ sameȱ timeȱ encouragingȱ disseminationȱ ofȱ knowledgeȱ forȱ theȱ publicȱ good.ȱ Novelty and confidentiality Inȱorderȱforȱaȱpatentȱtoȱbeȱgranted,ȱtheȱinventionȱmustȱbeȱnovel.ȱItȱ standsȱ toȱ reasonȱ thatȱ ifȱ detailsȱ ofȱ theȱ inventionȱ haveȱ alreadyȱ beenȱ disclosedȱandȱareȱthereforeȱalreadyȱinȱtheȱpublicȱdomain,ȱthereȱisȱnoȱ needȱforȱtheȱstateȱtoȱgrantȱaȱmonopolyȱtoȱtheȱinventor.ȱItȱisȱthereforeȱ veryȱ importantȱ forȱ youȱtoȱ keepȱ yourȱ ideasȱ secretȱ andȱ protectȱ yourȱ conversationsȱwithȱNDAsȱbeforeȱyouȱfileȱyourȱpatentȱapplication.ȱ

2.3ȱPatentsȱȱȱȱȱȱ35ȱ

Someȱ countriesȱ allowȱ aȱ graceȱ periodȱ betweenȱ publicȱ disclosureȱ byȱ theȱ inventorȱ andȱ aȱ patentȱ filingȱ date.ȱ Currentlyȱ theȱ USAȱ allowsȱ aȱ graceȱperiodȱofȱtwelveȱmonthsȱandȱJapanȱallowsȱsixȱmonths.ȱThereȱ isȱalsoȱaȱtwelveȱmonthȱgraceȱperiodȱforȱfilingȱinternationalȱpatentsȱ followingȱ aȱ filingȱ inȱ yourȱ homeȱ country.ȱ Weȱ willȱ lookȱ atȱ thisȱ processȱinȱmoreȱdetailȱlater.ȱ Disclosureȱ isȱ aȱ majorȱ issueȱ forȱ academicȱ researchersȱ whoȱ developȱ newȱ technologies.ȱ Academicȱ practiceȱ isȱ toȱ publishȱ researchȱ resultsȱ andȱ technologicalȱ developmentsȱ asȱ theyȱ areȱ achieved.ȱ Thisȱ canȱ causeȱ severeȱ problemsȱ whenȱ itȱ comesȱ toȱ protectingȱ andȱ exploitingȱ thoseȱ sameȱ results.ȱ Thereȱ haveȱ beenȱ manyȱ examplesȱ ofȱ patentȱ applicationsȱbeingȱrejectedȱbecauseȱtheȱtechnologyȱhasȱalreadyȱbeenȱ publishedȱinȱjournalsȱorȱdiscussedȱatȱconferences.ȱIfȱyouȱareȱinȱthisȱ situation,ȱ talkȱ toȱ aȱ patentȱ agentȱ earlyȱ inȱ theȱ processȱ andȱ discussȱ yourȱpublicationȱneeds.ȱInitiallyȱtheyȱmayȱadviceȱyouȱnotȱtoȱpublishȱ atȱall,ȱbutȱonceȱtheyȱunderstandȱtheȱrealitiesȱofȱyourȱposition,ȱtheyȱ willȱ beȱ ableȱ toȱ planȱ andȱ achieveȱ patentȱ filingsȱ toȱ suitȱ bothȱ yourȱ academicȱandȱcommercialȱagenda.ȱ Examplesȱ ofȱ publicȱ disclosureȱ thatȱ canȱ affectȱ yourȱ chancesȱ ofȱ obtainingȱaȱpatentȱinclude:ȱ x Conferenceȱpresentations.ȱ x Conferenceȱproceedingsȱandȱjournalȱpapers.ȱ x Tradeȱfairs.ȱ x Openȱdays,ȱincludingȱdegreeȱshows.ȱ x Tradeȱpressȱarticles.ȱ x Oralȱdisclosure,ȱnotȱcoveredȱbyȱanȱNDA.ȱ x TVȱorȱradioȱinterviews.ȱ x Internetȱwebsites,ȱblogsȱandȱchatȬroomȱconversations.ȱ Theȱpublicȱdomainȱknowsȱnoȱnationalȱboundaries.ȱIfȱtheȱinventionȱ isȱknownȱanywhereȱinȱtheȱworld,ȱthenȱitȱisȱconsideredȱtoȱbeȱinȱtheȱ publicȱdomain.ȱInterestingly,ȱthisȱwasȱnotȱalwaysȱtheȱcase,ȱuntilȱasȱ lateȱ asȱ 1977ȱ theȱ UKȱ patentȱ systemȱ allowedȱ importedȱ inventionsȱ toȱ beȱprotected.ȱThisȱstemmedȱfromȱtheȱneedȱtoȱprovideȱincentivesȱforȱ

36ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

explorersȱ toȱ findȱ andȱ bringȱ backȱ technologyȱ fromȱ theȱ restȱ ofȱ theȱ world.ȱTheȱrationalȱwasȱveryȱsimilarȱtoȱtheȱneedȱtoȱencourageȱhomeȱ grownȱinnovationȱbyȱprovidingȱaȱcommercialȱincentive.ȱ How far does a patent protect me? TheȱlawȱsurroundingȱIPRȱisȱentirelyȱcivilȱratherȱthanȱcriminal.ȱThisȱ meansȱthatȱifȱyouȱareȱgrantedȱaȱpatentȱandȱsomeoneȱinfringesȱit,ȱtheȱ responsibilityȱisȱyoursȱtoȱtakeȱaction.ȱYouȱcannotȱcallȱtheȱpoliceȱandȱ youȱcannotȱexpectȱanyoneȱelseȱtoȱpayȱforȱtheȱlegalȱproceedings.ȱȱ Asȱ theȱ ownerȱ ofȱ aȱ pieceȱ ofȱ IPRȱ youȱ haveȱ theȱ rightȱ toȱ protectȱ itȱ byȱ takingȱtheȱinfringerȱtoȱcourt.ȱYouȱmightȱdoȱthisȱtoȱstopȱtheirȱactivityȱ orȱdemandȱaȱroyaltyȱfeeȱfromȱthem.ȱTheȱprocessȱwillȱhowever,ȱbeȱatȱ yourȱ ownȱ cost.ȱ Asȱ aȱ smallȱ companyȱ thisȱ canȱ beȱ hardȱ toȱ bear,ȱ soȱ manyȱ companiesȱ takeȱ outȱ insuranceȱ againstȱ theȱ costȱ ofȱ legalȱ feesȱ spentȱdefendingȱtheirȱpatents.ȱȱ Itȱ isȱ importantȱ toȱ understandȱ theȱ scopeȱ ofȱ protectionȱ thatȱ aȱ patentȱ givesȱ you.ȱ Ifȱ youȱ areȱ grantedȱ aȱ UKȱ patent,ȱ youȱ haveȱ theȱ exclusiveȱ rightȱ toȱ controlȱ theȱ making,ȱ sellingȱ andȱ usingȱ ofȱ yourȱ inventionȱ withinȱtheȱUK,ȱforȱtheȱdurationȱofȱtheȱpatent’sȱlife.ȱItȱdoesȱnotȱstopȱ someoneȱinȱFranceȱcopyingȱyourȱidea,ȱmakingȱproductsȱandȱsellingȱ themȱ there,ȱorȱ evenȱ exportingȱ themȱ toȱ anywhereȱ elseȱ inȱ theȱ worldȱ exceptȱtheȱUK.ȱMostȱpatentsȱareȱthereforeȱfiledȱinȱmultipleȱcountriesȱ toȱ provideȱ internationalȱ protection.ȱ Fortunatelyȱ internationalȱ treatiesȱ andȱ processesȱ haveȱ beenȱ establishedȱ toȱ makeȱ itȱ fairlyȱ straightȱforward,ȱbutȱinevitablyȱtheȱmoreȱterritoriesȱyouȱprotect,ȱtheȱ moreȱexpensiveȱtheȱprocessȱbecomes.ȱ Theȱmonopolyȱyouȱhaveȱboughtȱinȱfilingȱyourȱpatentȱonlyȱremainsȱ whileȱyouȱcontinueȱtoȱpayȱforȱit.ȱEachȱyearȱyouȱwillȱhaveȱtoȱpayȱaȱ renewalȱ feeȱ toȱ keepȱ theȱ right.ȱ Ifȱ youȱ letȱ theȱ rightȱ lapse,ȱ byȱ notȱ payingȱ theȱ renewalȱ fee,ȱ theȱ monopolyȱ isȱ permanentlyȱ endedȱ andȱ anyoneȱ isȱ thenȱ freeȱ toȱ copy,ȱ useȱ andȱ sellȱ productsȱ basedȱ onȱ theȱ informationȱdisclosedȱinȱtheȱpatent.ȱ

2.3ȱPatentsȱȱȱȱȱȱ37ȱ

What can be patented? Inȱ mostȱ countries,ȱ patentsȱ areȱ grantedȱ toȱ inventionsȱ thatȱ solveȱ aȱ technicalȱ orȱ industrialȱ problemȱ throughȱ anȱ innovativeȱ productȱ orȱ process.ȱȱ Thereȱareȱfourȱbasicȱcriteriaȱthatȱmustȱbeȱsatisfiedȱforȱaȱpatentȱtoȱbeȱ granted.ȱTheȱrulesȱareȱsubtlyȱdifferentȱfromȱcountryȱtoȱcountryȱbutȱ theȱcommonȱcriteriaȱare:ȱ x Theȱinventionȱmustȱbeȱnewȱorȱnovel.ȱ x Theȱinventionȱmustȱbeȱinventiveȱorȱnotȱobvious.ȱ x Theȱinventionȱmustȱbeȱindustriallyȱapplicable,ȱi.e.ȱcapableȱofȱ beingȱconstructedȱorȱoperated.ȱ x Theȱ inventionȱ mustȱ notȱ beȱ inȱ oneȱ ofȱ aȱ numberȱ ofȱ excludedȱ areas.ȱ Asȱweȱhaveȱalreadyȱseen,ȱaȱpatentȱisȱaȱtradeȱbetweenȱtheȱstateȱandȱ theȱinventor.ȱInȱreturnȱforȱpublishingȱhowȱtheȱinventionȱworks,ȱtheȱ stateȱisȱpreparedȱtoȱgrantȱaȱmonopoly.ȱTheȱinventionȱmustȱthereforeȱ notȱformȱpartȱofȱtheȱcurrentȱpublicȱ knowledgeȱorȱ‘stateȱofȱtheȱart’.ȱ Theȱ stateȱ ofȱ theȱ artȱ isȱ definedȱ asȱ everythingȱ madeȱ availableȱ toȱ theȱ publicȱ byȱ writtenȱ orȱ oralȱ disclosureȱ orȱ use.ȱ Whenȱ youȱ applyȱ forȱ aȱ patentȱ oneȱ ofȱ theȱ firstȱ actionsȱ theȱ patentȱ officeȱ willȱ undertakeȱ isȱ aȱ searchȱ toȱ ensureȱ thatȱ theȱ inventionȱ isȱ indeedȱ novel.ȱ Theyȱ willȱ examineȱtheȱ‘priorȱart’ȱ(theȱstateȱofȱtheȱartȱpriorȱtoȱyourȱinvention)ȱ toȱensureȱthatȱeachȱaspectȱofȱyourȱinventionȱisȱnew.ȱ Theȱ inventionȱ isȱ consideredȱ novelȱ unlessȱ theȱ priorȬartȱ disclosesȱ allȱ theȱ essentialȱ elementsȱ ofȱ theȱ idea.ȱ Thisȱ makesȱ itȱ possibleȱ toȱ haveȱ patentsȱ grantedȱ thatȱ describeȱ improvementsȱ toȱ existingȱ inventionsȱ whereȱ allȱ butȱ aȱ fewȱ ofȱtheȱ essentialȱ featuresȱ areȱ alreadyȱ known.ȱ Aȱ goodȱ exampleȱ ofȱ thisȱ isȱ theȱ drinksȱ canȱ ringȬpull.ȱ Theȱ originalȱ design,ȱ andȱ patent,ȱ describedȱ aȱ tearȱ offȱ portionȱ onȱ theȱ topȱ ofȱ theȱ can.ȱ Theȱ currentlyȱ usedȱ design,ȱ whichȱ leavesȱ theȱ tornȱ flapȱ stillȱ attachedȱ toȱ theȱ canȱ wasȱ anȱ improvementȱ onȱ thisȱ designȱ andȱ wasȱ grantedȱinternationalȱpatentsȱevenȱthoughȱtheȱconceptȱandȱmanyȱofȱ

38ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

theȱ elementsȱ wereȱ similar.ȱ Toȱ giveȱ youȱ anȱ ideaȱ ofȱ theȱ potentialȱ scopeȱ ofȱ improvements,ȱ thereȱ haveȱ beenȱ approximatelyȱ 30,000ȱ patentsȱgrantedȱforȱtypesȱofȱhingesȱandȱswitches.ȱ Theȱ requirementȱ toȱ beȱ inventiveȱ isȱ aȱ moreȱ difficultȱ areaȱ toȱ judge.ȱ Theȱformalȱdefinitionȱisȱthatȱ“anȱinventionȱinvolvesȱanȱinventiveȱstepȱifȱ itȱisȱnotȱobviousȱtoȱaȱpersonȱskilledȱinȱtheȱartȱhavingȱregardȱtoȱtheȱstateȱofȱ theȱart”.ȱ Whatȱ thisȱ meansȱ is,ȱ ifȱ anȱ uninventiveȱ colleagueȱ orȱ peerȱ withȱ experienceȱinȱtheȱsameȱareaȱofȱtechnology,ȱwithȱaccessȱtoȱtheȱpriorȱ art,ȱdoesȱnotȱimmediatelyȱmakeȱtheȱinventiveȱstep,ȱthenȱitȱisȱjudgedȱ inventive.ȱThisȱisȱnotȱeasyȱtoȱjudgeȱforȱyourself,ȱitȱisȱeasyȱtoȱimagineȱ thatȱ yourȱ solutionȱ isȱ obvious.ȱ Butȱ itȱ isȱ oftenȱ onlyȱ obviousȱ ifȱ youȱ knowȱ theȱ answer.ȱ Howȱ obviousȱ canȱ itȱ reallyȱ beȱ ifȱ noȱ oneȱ hasȱ thoughtȱofȱitȱbeforeȱyou?ȱ Thereȱisȱaȱpotentialȱtrapȱhereȱthatȱyouȱshouldȱbeȱveryȱcarefulȱabout.ȱ Theȱtestȱofȱobviousnessȱisȱmadeȱagainstȱtheȱpubliclyȱknownȱstateȱofȱ theȱart.ȱItȱisȱagainstȱthisȱbackgroundȱthatȱtheȱapplicationȱisȱjudged.ȱ Onȱ moreȱ thanȱ oneȱ occasion,ȱ enthusiasticȱ inventorsȱ haveȱ madeȱ presentationsȱthatȱinȱthemselvesȱdidȱnotȱdiscloseȱtheȱinventionȱbutȱ hintedȱatȱitȱenoughȱtoȱerodeȱtheȱgapȱbetweenȱtheȱpublishedȱstateȱofȱ theȱ artȱ andȱ theȱ invention.ȱ Subsequently,ȱ theȱ patentȱ applicationsȱ wereȱrejectedȱasȱbeingȱobviousȱgivenȱtheȱearlierȱdisclosures.ȱIfȱyouȱ areȱinȱtheȱpositionȱofȱhavingȱtoȱmakeȱpresentationsȱbeforeȱyouȱcanȱ fileȱ theȱ patent,ȱ firstȱ discussȱ yourȱ intendedȱ presentationȱ withȱ aȱ patentȱagent.ȱ Theȱ requirementȱ toȱ beȱ ‘capableȱ ofȱ industrialȱ application’ȱ derivesȱ fromȱ yourȱ partȱ ofȱ theȱ bargainȱ toȱ publishȱ theȱ inventionȱ withinȱ theȱ patent.ȱ Theȱ descriptionȱ youȱ writeȱ shouldȱ beȱ detailedȱ enoughȱ forȱ someoneȱcompetentȱinȱtheȱareaȱ(‘skilledȱinȱtheȱart’),ȱtoȱbeȱableȱtoȱuseȱ orȱ constructȱ theȱ inventionȱ andȱ forȱ itȱ toȱ work.ȱ Toȱ satisfyȱ thisȱ requirementȱ thereȱ mustȱ beȱ noȱ missingȱ linksȱ inȱ theȱ inventionȱ orȱ itsȱ description.ȱȱ

2.3ȱPatentsȱȱȱȱȱȱ39ȱ

Whatȱ thisȱ meansȱ inȱ practiceȱ isȱ thatȱ youȱ cannotȱ getȱ aȱ patentȱ forȱ aȱ brightȱ ideaȱ alone.ȱ Youȱ needȱ toȱ haveȱ solvedȱ everyȱ aspectȱ ofȱ howȱ itȱ works.ȱEveryȱyear,ȱPatentȱOffices,ȱreceiveȱapplicationsȱforȱperpetualȱ motionȱ machinesȱ thatȱ solveȱ allȱ ourȱ energyȱ needs.ȱ Unfortunatelyȱ theyȱareȱyetȱtoȱreceiveȱoneȱthatȱisȱindustriallyȱapplicable.ȱ Inȱmostȱcountries,ȱtheȱinventionȱmustȱbeȱaȱphysicalȱconstructionȱorȱ anȱ industrialȱ process.ȱ Inȱ theȱ USAȱ however,ȱ businessȱ processesȱ areȱ eligibleȱ forȱ patentȱ protection.ȱ Amazon.com’sȱ oneȱ clickȱ systemȱ forȱ purchasingȱgoodsȱonȬlineȱisȱsubjectȱtoȱaȱpatentȱinȱtheȱUS.ȱȱ Theȱ finalȱ requirementȱ forȱ patentȱ eligibilityȱ isȱ thatȱ theȱ inventionȱ mustȱnotȱbeȱinȱoneȱofȱaȱnumberȱofȱexcludedȱareas.ȱȱ Methodsȱ ofȱ medicalȱ treatmentȱ suchȱ asȱ therapeutics,ȱ surgicalȱ techniquesȱ orȱ diagnosticȱ processesȱ areȱ notȱ eligibleȱ forȱ patentingȱ sinceȱitȱisȱnotȱinȱtheȱinterestsȱofȱtheȱpublicȱtoȱrestrictȱaccessȱthroughȱ theȱ creationȱ ofȱ aȱ monopoly.ȱ Medicalȱ equipmentȱ isȱ patentableȱ butȱ notȱtheȱmethodsȱofȱuse.ȱ Someȱ technologiesȱ relatedȱ toȱ theȱ defenseȱ ofȱ theȱ realmȱ areȱ alsoȱ restrictedȱ sinceȱ itȱ isȱ notȱ inȱ theȱ statesȱ interestȱ toȱ haveȱ suchȱ technologyȱdisclosedȱtoȱtheȱwiderȱworld.ȱIfȱyouȱinventionȱrelatesȱtoȱ aȱ defenseȱ application,ȱ youȱ shouldȱ seekȱ adviceȱ fromȱ aȱ patentȱ agentȱ beforeȱproceeding.ȱ Otherȱexclusionsȱinclude:ȱ x Scientificȱdiscoveries,ȱtheoriesȱandȱmathematicalȱmethods.ȱ x Aestheticȱcreations.ȱ x Schemes,ȱ rulesȱ orȱ methodsȱ forȱ performingȱ mentalȱ acts,ȱ playingȱ gamesȱ orȱ doingȱ businessȱ (exceptȱ inȱ theȱ USAȱ asȱ mentionedȱabove).ȱ x Computerȱprogramsȱ(moreȱonȱthisȱlater).ȱ x Presentationȱofȱinformation.ȱ x InventionsȱwhichȱareȱantiȬsocialȱinȱnature.ȱ

40ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

Writing and submitting a patent application Theȱ mainȱ bodyȱ ofȱ aȱ patentȱ applicationȱ consistsȱ ofȱ twoȱ mainȱ sections,ȱtheȱspecificationȱandȱtheȱclaims.ȱȱ Theȱspecificationȱisȱaȱwrittenȱdescriptionȱofȱtheȱinvention.ȱItȱshouldȱ includeȱaȱdescriptionȱofȱtheȱproblemȱthatȱtheȱinventionȱisȱdesignedȱ toȱsolve,ȱaȱdescriptionȱofȱtheȱpriorȱartȱandȱitsȱlimitationsȱandȱfinallyȱ aȱdescriptionȱofȱtheȱinventionȱitself.ȱȱ Theȱ specificationȱ canȱ beȱ asȱ shortȱ asȱ oneȱ pageȱ orȱ asȱ longȱ asȱ aȱ hundredȱ dependingȱ onȱ theȱ complexityȱ ofȱ theȱ inventionȱ andȱ priorȱ art.ȱThisȱisȱtheȱpartȱofȱtheȱpatentȱdocumentȱthatȱyouȱshouldȱbeȱableȱ toȱpassȱtoȱaȱskilledȱindividualȱandȱtheyȱshouldȱbeȱableȱtoȱreproduceȱ theȱ invention.ȱ Aȱ goodȱ descriptionȱ willȱ provideȱ thisȱ levelȱ ofȱ detailȱ forȱatȱleastȱoneȱembodiment,ȱorȱexampleȱofȱtheȱinventionsȱuse.ȱTheȱ descriptionȱ shouldȱ describeȱ theȱ structure,ȱ eachȱ functionalȱ interȬ actionȱ andȱ theȱ benefitsȱ andȱ advantagesȱ ofȱ theȱ inventionȱ overȱ theȱ priorȱart.ȱ Theȱspecificationȱshouldȱthenȱdescribeȱanyȱpotentialȱvariantsȱtoȱtheȱ invention,ȱeitherȱinȱtheȱmethodsȱusedȱorȱitsȱpotentialȱapplications.ȱȱ Theȱ specificationȱ usuallyȱ makesȱ referenceȱ toȱ drawingsȱ whichȱ illustrateȱtheȱinvention.ȱMostȱpatentȱofficesȱhaveȱstrictȱguidelinesȱasȱ toȱtheȱformatȱandȱannotationȱofȱtheseȱdrawings.ȱYouȱmustȱadhereȱtoȱ theseȱinstructionsȱtoȱgetȱyourȱpatentȱapplicationȱaccepted.ȱ Theȱclaimsȱsectionȱofȱtheȱpatentȱisȱtheȱmostȱimportant.ȱInȱaȱseriesȱofȱ short,ȱ numberedȱ statements,ȱ theȱ claimsȱ defineȱ exactlyȱ whatȱ monȬ opolyȱ isȱ beingȱ sought.ȱ Theȱ writingȱ ofȱ claimsȱ isȱ aȱ skilledȱ jobȱ asȱ theȱ wordingȱ needsȱ toȱ beȱ veryȱ preciseȱ inȱ orderȱ toȱ provideȱ theȱ bestȱ protection.ȱ Aȱ seriesȱ ofȱ claimsȱ isȱ usedȱ inȱ orderȱ toȱ separateȱ novelȱ componentsȱ thatȱ couldȱ beȱ madeȱ orȱ soldȱ separately.ȱ Claimsȱ thenȱ buildȱ onȱ eachȱ

2.3ȱPatentsȱȱȱȱȱȱ41ȱ

otherȱtoȱprotectȱdifferentȱvariationsȱ orȱembodimentsȱ ofȱtheȱinventȬ tion.ȱȱ Onceȱtheȱapplicationȱisȱwritten,ȱitȱisȱsubmittedȱtoȱtheȱnationalȱpatentȱ office.ȱTheȱdateȱitȱisȱfiledȱisȱcalledȱtheȱpriorityȱdateȱandȱtheȱtimingȱofȱ allȱtheȱsubsequentȱeventsȱreferȱbackȱtoȱthisȱdate.ȱȱ Theȱ patentȱ officeȱ thenȱ conductsȱ aȱ searchȱ forȱ earlierȱ patentsȱ andȱ documentsȱ thatȱ discloseȱ theȱ sameȱ orȱ similarȱ ideasȱ toȱ thoseȱ containedȱinȱyourȱapplication.ȱTheȱresultsȱofȱthisȱsearchȱwillȱbeȱsentȱ toȱyouȱforȱcomment.ȱȱ Theȱ patentȱ officeȱ thenȱ conductsȱ anȱ examinationȱ toȱ determineȱ whetherȱ theȱ ideaȱ involvesȱ aȱ trueȱ inventiveȱ stepȱ fromȱ theȱ previousȱ stateȱofȱtheȱart.ȱTheȱresultȱofȱthisȱexaminationȱwillȱbeȱaȱreportȱthatȱ willȱbeȱsentȱtoȱyou.ȱȱ Itȱ isȱ veryȱ commonȱ forȱ theȱ examinerȱ toȱ uncoverȱ severalȱ documentsȱ andȱ raiseȱ aȱ numberȱ ofȱ objectionsȱ toȱ yourȱ application,ȱ soȱ don’tȱ getȱ tooȱdisheartened.ȱYouȱthenȱhaveȱtheȱopportunityȱtoȱargueȱyourȱcaseȱ withȱtheȱexaminer’sȱobjections.ȱThisȱmayȱinvolveȱyouȱrefiningȱyourȱ specificationȱandȱclaimsȱtoȱclarifyȱtheȱdistinctionȱbetweenȱtheȱpriorȱ artȱandȱyourȱinvention.ȱThisȱprocessȱmayȱinvolveȱseveralȱroundsȱofȱ argumentsȱandȱamendments.ȱIfȱyouȱareȱsuccessfulȱandȱcanȱreachȱaȱ positionȱwhereȱtheȱexaminerȱisȱsatisfied,ȱtheȱpatentȱisȱgranted.ȱȱ Onceȱ granted,ȱ yourȱ monopolyȱ rightsȱ areȱ effectivelyȱ backȬdatedȱ toȱ theȱoriginalȱpriorityȱdate.ȱ Patenting computer software Strictlyȱ speaking,ȱ computerȱ softwareȱ isȱ notȱ eligibleȱ forȱ patentȱ protectionȱ inȱ mostȱ countries,ȱ includingȱ thoseȱ inȱ Europe.ȱ Notablyȱ though,ȱ softwareȱ isȱ patentableȱ inȱ theȱ USA.ȱ Soȱ howȱ canȱ youȱ getȱ patentȱprotectionȱforȱsoftwareȱbasedȱinventionsȱinȱEurope?ȱ

42ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

Inȱ manyȱ cases,ȱ itȱ isȱ possibleȱ toȱ achieveȱ patentȱ protectionȱ byȱ describingȱ anȱ inventionȱ thatȱ reliesȱ partlyȱ onȱ computingȱ processesȱ withinȱ it.ȱ Toȱ doȱ thisȱ youȱ needȱ toȱ breakȱ downȱ yourȱ inventionȱ intoȱ theȱ threeȱ componentsȱ ofȱ hardwareȱ includingȱ anyȱ interfaces,ȱ dataȱ andȱfinallyȱsoftware.ȱTheȱsoftwareȱshouldȱbeȱdescribedȱinȱtermsȱofȱ itsȱ actionȱ onȱ theȱ dataȱ andȱ controlȱ ofȱ theȱ hardware.ȱ Ifȱ youȱ canȱ describeȱ aȱ beneficialȱ technicalȱ effect,ȱ thereȱ isȱ goodȱ chanceȱ ofȱ beingȱ grantedȱEuropeanȱpatents.ȱ Examiningȱeachȱcomponentȱinȱturn:ȱIsȱtheȱcomputerȱhardwareȱusedȱ inȱ theȱ inventionȱ entirelyȱ conventionalȱ orȱ areȱ thereȱ novelȱ andȱ inventiveȱaspectsȱtoȱtheȱhardwareȱthatȱareȱnecessaryȱtoȱcarryȱoutȱtheȱ operation?ȱIfȱsoȱthenȱitȱmayȱbeȱpossibleȱtoȱfileȱaȱpatentȱtoȱprotectȱtheȱ novelȱhardwareȱdesign.ȱ Nextȱ describeȱ theȱ softwareȱ systemȱ inȱ termsȱ ofȱ theȱ structureȱ andȱ functionalityȱ ofȱ theȱ processȱ itȱ carriesȱ out.ȱ Thisȱ willȱ beȱ particularlyȱ relevantȱ ifȱ theȱ systemȱ hasȱ someȱ formȱ ofȱ inputȱ data,ȱ processingȱ operationȱandȱthenȱoutputȱorȱcontrolȱdata.ȱTheȱpatentȱspecificationȱ canȱ thenȱ describeȱ aȱ machineȱ thatȱ performsȱ thisȱ functionality,ȱ theȱ preferredȱembodimentȱofȱwhichȱisȱaȱsoftwareȱmethod.ȱExamplesȱofȱ successfullyȱpatentedȱsoftwareȱsystemsȱinclude:ȱ x Computerȱbasedȱmonitoringȱorȱdiagnosticȱsystems.ȱ x Imageȱprocessingȱandȱsurveillanceȱsystems.ȱ x Naturalȱlanguageȱprocessingȱsuchȱasȱspeechȱrecognitionȱandȱ voiceȱcontrolȱsystems.ȱ Inȱallȱcases,ȱmakeȱsureȱyouȱdescribeȱtheȱtechnicalȱeffectȱandȱbenefitsȱ achievedȱ byȱ usingȱ yourȱ computerȱ basedȱ solution,ȱ comparedȱ toȱ conventionalȱ means.ȱ Theseȱ couldȱ beȱ higherȱ speed,ȱ moreȱ economicȱ useȱ ofȱ memory,ȱ moreȱ efficientȱ searchȱ strategiesȱ orȱ betterȱ userȱ interfaces.ȱ Theȱclaimsȱforȱsuchȱpatentsȱstartȱwithȱstatementsȱaboutȱtheȱprocess,ȱ describedȱinȱfunctionalȱtermsȱandȱthenȱdescribeȱtheȱuseȱofȱsoftwareȱ toȱachieveȱit.ȱȱ

2.3ȱPatentsȱȱȱȱȱȱ43ȱ

Filing international patents Asȱpreviouslyȱmentionedȱaȱpatentȱisȱaȱbargainȱbetweenȱtheȱinventorȱ andȱtheȱstateȱandȱthereforeȱcanȱonlyȱprovideȱprotectionȱinȱthatȱstate.ȱ Mostȱcountriesȱhaveȱtheirȱownȱnationalȱpatentȱoffices.ȱOneȱmethodȱ ofȱobtainingȱprotectionȱinȱmultipleȱcountriesȱwouldȱthereforeȱbeȱtoȱ directlyȱ applyȱ toȱ eachȱ officeȱ forȱ whichȱ youȱ needȱ protection.ȱ Eachȱ applicationȱ wouldȱ haveȱ toȱ satisfyȱ theȱ localȱ regulationsȱ andȱ beȱ presentedȱinȱtheȱlocalȱlanguage.ȱEachȱofficeȱwouldȱthenȱcarryȱoutȱitsȱ ownȱ examinationȱ andȱ respondȱ directly.ȱ Ifȱ youȱ takeȱ thisȱ route,ȱ youȱ couldȱfindȱallȱyourȱtimeȱisȱtakenȱupȱrespondingȱandȱarguingȱwithȱaȱ largeȱnumberȱofȱdifferentȱoffices.ȱFortunatelyȱinternationalȱsystemsȱ haveȱbeenȱputȱintoȱplaceȱtoȱmakeȱtheȱprocessȱmoreȱstraightȱforward.ȱ TheȱEuropeanȱPatentȱOfficeȱ(EPO)ȱprovidesȱaȱmeansȱofȱsimplifyingȱ theȱ processȱ ofȱ obtainingȱ patentsȱ inȱ upȱ toȱ 36ȱ countries.ȱ Theȱ OPEȱ isȱ notȱ aȱ partȱ ofȱ theȱ Europeanȱ Unionȱ andȱ soȱ alsoȱ providesȱ accessȱ toȱ neighbouringȱcountriesȱincludingȱSwitzerland,ȱTurkeyȱandȱmanyȱofȱ theȱeasternȱEuropeanȱstates.ȱ Whenȱ youȱ applyȱ forȱ aȱ patentȱ throughȱ theȱ EPO,ȱ youȱ fileȱ aȱ singleȱ applicationȱ andȱ designateȱ theȱ countriesȱ inȱ whichȱ youȱ requireȱ protection.ȱ Theȱ officeȱ thenȱ carriesȱ outȱ aȱ singleȱ searchȱ andȱ examȬ inationȱprocedure.ȱIfȱsuccessful,ȱtheȱpatentȱisȱthenȱregisteredȱinȱeachȱ ofȱtheȱcountriesȱnominated.ȱInȱmostȱcasesȱyouȱwillȱneedȱtoȱhaveȱtheȱ specificationȱtranslatedȱatȱthisȱpoint.ȱȱ Toȱstreamlineȱinternationalȱpatentȱapplicationsȱacrossȱtheȱworld,ȱtheȱ Patentȱ CoȬOperationȱ Treatyȱ (PCT)ȱ canȱ beȱ used.ȱ Ultimatelyȱ thisȱ isȱ moreȱ expensiveȱ thanȱ individualȱ countryȱ applications,ȱ butȱ inȱ manyȱ casesȱtheȱPCTȱprovidesȱaȱwayȱofȱdeferringȱcostsȱandȱrisksȱforȱoverȱ twoȱyears.ȱ Underȱ theȱ PCTȱ procedure,ȱ youȱ firstȱ fileȱ aȱ nationalȱ patentȱ inȱ yourȱ homeȱ country.ȱ Withinȱ twelveȱ monthsȱ youȱ thenȱ fileȱ aȱ singleȱ internationalȱ applicationȱ withȱ yourȱ nationalȱ office.ȱ Theȱ PCTȱ authȬ oritiesȱthenȱcarryȱoutȱaȱcentralȱnoveltyȱsearchȱandȱprovideȱaȱreportȱ

44ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

inȱ aboutȱ twoȱ months.ȱ Withinȱ nineteenȱ monthsȱ ofȱ theȱ originalȱ nationalȱ filingȱ date,ȱ youȱ thenȱ requestȱ theȱ PCTȱ authoritiesȱ toȱ examineȱ theȱ applicationȱ inȱ moreȱ detail.ȱ Theȱ resultingȱ reportȱ isȱ purelyȱ indicativeȱ andȱ soȱ notȱ binding,ȱ butȱ itȱ doesȱ provideȱ aȱ veryȱ goodȱ indicationȱ asȱ toȱ theȱ likelyȱ successȱ ofȱ theȱ subsequentȱ nationalȱ filings.ȱ Theȱ PCTȱ applicationȱ thenȱ needsȱ toȱ beȱ convertedȱ intoȱ nationalȱ applicationsȱ withinȱ thirtyȱ monthsȱ ofȱ theȱ originalȱ nationalȱ appȬ lication.ȱAtȱ thisȱpointȱtheȱnormalȱlocalȱfilingȱcostsȱandȱtranslationsȱ areȱrequiredȱbutȱyouȱhaveȱsomeȱlevelȱofȱconfidenceȱthatȱitȱisȱlikelyȱ toȱ beȱ worthwhile.ȱ Itȱ alsoȱ providesȱ aȱ goodȱ periodȱ ofȱ timeȱ betweenȱ theȱ initialȱ filingȱ andȱ theȱ commitmentȱ ofȱ largeȱ costs.ȱ Timeȱ youȱ canȱ useȱtoȱexamineȱtheȱmarketȱpotentialȱandȱimportanceȱofȱeachȱofȱtheȱ countriesȱyouȱareȱinterestedȱin.ȱ Theȱ PCTȱ processȱ canȱ beȱ usedȱ toȱ fileȱ patentsȱ inȱ overȱ 130ȱ countriesȱ includingȱallȱtheȱkeyȱmarketsȱofȱtheȱworld.ȱInterestinglyȱtheȱEPOȱisȱ aȱ memberȱ ofȱ theȱ PCTȱ soȱ youȱ could,ȱ forȱ exampleȱ makeȱ yourȱ initialȱ applicationȱinȱtheȱUKȱthenȱuseȱtheȱPCTȱrouteȱtoȱgainȱprotectionȱinȱ theȱUSA,ȱJapan,ȱandȱanyȱnumberȱofȱEuropeanȱcountriesȱthroughȱtheȱ EPO.ȱȱ Theȱpriorityȱdateȱfromȱyourȱfirstȱnationalȱfilingȱisȱusedȱtoȱjudgeȱtheȱ noveltyȱinȱeachȱofȱtheȱsubsequentȱlocalȱexaminationsȱsoȱyouȱareȱableȱ toȱ discloseȱ moreȱ ofȱ yourȱ inventionȱ onceȱ youȱ haveȱ madeȱ yourȱ firstȱ filing.ȱȱ How long and how much? Iȱ haveȱ hintedȱ soȱ farȱ thatȱ applyingȱ forȱ patents,ȱ especiallyȱ internatȬ ionally,ȱ canȱ beȱ aȱ slowȱ andȱ expensiveȱ business,ȱ butȱ howȱ longȱ andȱ howȱmuchȱareȱweȱtalkingȱabout?ȱ Figureȱ 2.1ȱ showsȱ theȱ completeȱ patentȱ processȱ asȱ aȱ timeline.ȱ Fromȱ initialȱ filingȱ orȱ priorityȱ date,ȱ theȱ grantedȱ patentsȱ canȱtakeȱbetweenȱ

2.3ȱPatentsȱȱȱȱȱȱ45ȱ

sixȱ monthsȱ andȱ threeȱ yearsȱ toȱ beȱ achievedȱ dependingȱ onȱ theȱ complexityȱ ofȱ theȱ caseȱ andȱ theȱ numberȱ ofȱ objectionsȱ raisedȱ byȱ theȱ examiner.ȱ Theȱ processȱ forȱ grantingȱ internationalȱ patentsȱ isȱ evenȱ longerȱdueȱtoȱtheȱdelaysȱbuildȱintoȱtheȱPCTȱsystem.ȱȱ

ȱ Fig.ȱ2.1.ȱInternationalȱpatentȱfilingȱprocessȱ

Theȱcostȱofȱfilingȱpatentsȱinvolvesȱsomeȱfixedȱfeesȱthatȱareȱpayableȱ toȱ theȱ patentȱ officesȱ atȱ variousȱ stagesȱ ofȱ theȱ processȱ andȱ patentȱ agentȱ fees,ȱ ifȱ youȱ chooseȱ toȱ useȱ theirȱ services.ȱ Theȱ followingȱ approximateȱcostsȱassumeȱthatȱyouȱhaveȱanȱinventionȱofȱmoderateȱ complexityȱ requiringȱ aȱ specificationȱ ofȱ twentyȱ pagesȱ withȱ 5ȱ sheetsȱ ofȱdrawings.ȱTheyȱalsoȱassumeȱyouȱuseȱaȱpatentȱagentȱtoȱdraftȱtheȱ applicationȱandȱprosecuteȱyourȱpatentȱapplication.ȱȱ ToȱapplyȱforȱaȱsingleȱUKȱpatent:ȱ Tableȱ2.1.ȱUKȱpatentȱcostsȱ Eventȱ Draftingȱandȱfilingȱ Searchȱreportȱ Examinationȱrequestȱ Prosecutionȱ Grantȱ Totalȱ

ȱ

Costȱ($)ȱ 8,750ȱ 175ȱ–ȱ1,750ȱ 500ȱ 750ȱ–ȱ7000ȱ 260ȱ 10,000ȱ–ȱ17,500ȱ

46ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

ToȱmakeȱaȱsubsequentȱPCTȱapplication:ȱ Tableȱ2.2.ȱPCTȱpatentȱcostsȱ Eventȱ PCTȱfilingȱ Searchȱreportȱ PCTȱExaminationȱrequestȱ Totalȱ

Costȱ($)ȱ 7,850ȱ 300ȱ–ȱ3,000ȱ 2,600ȱ 10,000ȱ–ȱ13,000ȱ

ȱ ToȱapplyȱforȱpatentsȱthroughȱtheȱEuropeanȱPatentȱOfficeȱ(basedȱonȱ 7ȱcountries):ȱ Tableȱ2.3.ȱEuropeanȱpatentȱofficeȱcostsȱ Eventȱ EPOȱfilingȱ Searchȱreportȱ Examinationȱrequestȱ Prosecutionȱ Grantȱ Nationalȱregistrationsȱ Totalȱ

Costȱ($)ȱ 7,000ȱ 175ȱ–ȱ1,750ȱ 2,200ȱ 875ȱ–ȱ7,000ȱ 2,600ȱ 350ȱ–ȱ5,250ȱeachȱ ~31,500ȱforȱ7ȱcountriesȱ

ȱ Toȱ applyȱ forȱ nationalȱ patentsȱ throughȱ theȱ PCTȱ routeȱ eachȱ countryȱ willȱ costȱ betweenȱ $8,750ȱ andȱ $17,500ȱ whenȱ youȱ startȱ theȱ nationalȱ filingȱ process.ȱ Someȱ ofȱ thisȱ isȱ spentȱ onȱ servicesȱ toȱ translateȱ yourȱ applicationȱintoȱtheȱlocalȱlanguage.ȱȱ Unfortunately,ȱ evenȱ onceȱ theȱ patentsȱ areȱ granted,ȱ theȱ costsȱ doȱ notȱ stopȱthere.ȱEachȱseparateȱcountryȱrequiresȱannualȱrenewalȱfeesȱtoȱbeȱ paid.ȱInȱmostȱcasesȱtheseȱstartȱlowȱandȱincreaseȱtowardsȱtheȱendȱofȱ theȱ patent’sȱ life.ȱ Renewalȱ feesȱ rangeȱ fromȱ $175ȱ toȱ $1,400ȱ perȱ yearȱ initiallyȱgrowingȱtoȱ$875ȱtoȱ$5,250ȱforȱtheȱlastȱyear.ȱȱ Ifȱyouȱallowȱaȱpatentȱtoȱlapseȱbyȱnotȱpayingȱtheȱrenewalȱfeeȱwhenȱitȱ isȱdue,ȱyouȱlooseȱyourȱmonopolyȱpermanently.ȱManyȱpatentȱagentsȱ offerȱ aȱ reminderȱ serviceȱ toȱ ensureȱ thatȱ youȱ doȱ notȱ allowȱ valuableȱ patentsȱtoȱlapseȱaccidentally.ȱ

2.4ȱRegisteredȱdesignsȱȱȱȱȱȱ47ȱ

2.4 Registered designs Designȱrightsȱoperateȱinȱaȱsimilarȱwayȱtoȱpatentsȱbutȱareȱconcernedȱ withȱ theȱ appearanceȱ ofȱ theȱ wholeȱ orȱ partȱ ofȱ aȱ product.ȱ Aȱ designȱ rightȱ canȱ beȱ usedȱ toȱ protectȱ theȱ appearanceȱ ofȱ yourȱ productȱ thatȱ derivesȱ fromȱ featuresȱ suchȱ asȱ lines,ȱ contours,ȱ shapes,ȱ colours,ȱ textureȱorȱevenȱuseȱofȱmaterials.ȱȱ Designȱrightsȱcannotȱbeȱusedȱtoȱprotectȱaȱsingleȱartisticȱcreationȱbutȱ canȱ beȱ usedȱ toȱ protectȱ theȱ shape,ȱ formȱ orȱ surfaceȱ decorationȱ ofȱ aȱ productȱthatȱwillȱbeȱproducedȱinȱquantitiesȱofȱmoreȱthanȱ50ȱunits.ȱȱ Unlikeȱpatents,ȱdesignȱrightsȱexistȱbyȱdefaultȱwhenȱeverȱyouȱdesignȱ andȱmanufactureȱaȱproductȱwithȱaȱnewȱlookȱorȱfeel.ȱTheseȱareȱunȬ registeredȱ designȱ rights.ȱ Theseȱ rightsȱ offerȱ limitedȱ protectionȱ thoughȱ asȱ youȱ wouldȱ haveȱ toȱ proveȱ thatȱ anyoneȱ producingȱ aȱ similarȱdesignȱhadȱactuallyȱcopiedȱyourȱdesignȱratherȱthanȱarrivedȱ atȱ theȱ sameȱ pointȱ byȱ coincidence.ȱ Byȱ registeringȱ yourȱ design,ȱ youȱ areȱ protectedȱ againstȱ imitationsȱ evenȱ ifȱ theyȱ areȱ notȱ theȱ resultȱ ofȱ copying.ȱ Registeringȱ theȱ designȱ ofȱ yourȱ productȱ canȱ beȱ anȱ importantȱ additionalȱ commercialȱ protection.ȱ Itȱ canȱ beȱ particularlyȱ importantȱ inȱ marketsȱ thatȱ competeȱ onȱ fashionȱ suchȱ asȱ theȱ mobileȱ phoneȱ market.ȱTheȱfunctionalityȱofȱmostȱofȱtheȱavailableȱmodelsȱisȱalmostȱ identical,ȱ manufacturersȱ competeȱ onȱ theȱ basisȱ ofȱ styleȱ andȱ easyȱ toȱ useȱ formȱ features.ȱ Theseȱ areȱ rarelyȱ patentableȱ butȱ couldȱ beȱ protectedȱthroughȱregisteredȱdesignȱrights.ȱ Theȱprocessȱofȱapplyingȱforȱaȱregisteredȱdesignȱisȱsimilarȱtoȱthatȱofȱ applyingȱ forȱ aȱ patent.ȱ Thereȱ isȱ stillȱ aȱ requirementȱ ofȱ noveltyȱ andȱ youȱ stillȱ completeȱ anȱ applicationȱ andȱ fileȱ it,ȱ normallyȱ throughȱ theȱ nationalȱ patentȱ office.ȱ Theȱ processȱ isȱ muchȱ quickerȱ however,ȱ withȱ mostȱ applicationsȱ beingȱ processedȱ withinȱ aȱ matterȱ ofȱ weeks.ȱ Grantedȱrightsȱtypicallyȱlastȱforȱtwentyȱfiveȱyears.ȱ

48ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

Thereȱ isȱ oneȱ importantȱ limitationȱ toȱ designȱ rights.ȱ Theyȱ cannotȱ beȱ appliedȱ toȱ ‘mustȱ fit’ȱ orȱ ‘mustȱ match’ȱ components.ȱ Whatȱ doesȱ thisȱ mean?ȱ Ifȱ yourȱ productȱ interactsȱ withȱ componentsȱ thatȱ couldȱ beȱ suppliedȱ byȱ aȱ thirdȱ party,ȱ yourȱ designȱ rightsȱ cannotȱ inhibitȱ theirȱ abilityȱ toȱ beȱ ableȱ toȱ fitȱ toȱ yourȱ product.ȱ Theȱ testȱ caseȱ thatȱ broughtȱ aboutȱ thisȱ limitationȱ occurredȱ inȱ theȱ replacementȱ exhaustȱ pipeȱ sectorȱ ofȱ theȱ automotiveȱ industry.ȱ Aȱ motorȱ manufacturerȱ triedȱ toȱ claimȱthatȱtheȱshapeȱandȱfittingsȱofȱtheirȱmotorȱcar’sȱexhaustȱsystemȱ wasȱaȱdesignȱrightȱandȱthatȱtheyȱcouldȱthereforeȱdemandȱaȱroyaltyȱ fromȱ theȱ producersȱ ofȱ replacementȱ exhaustȱ systemsȱ thatȱ tookȱ theȱ sameȱform.ȱTheȱcourtȱfoundȱthatȱtoȱallowȱsuchȱaȱrestrictionȱcreatedȱ tooȱstrongȱaȱmonopolyȱforȱtheȱautomotiveȱcompanies.ȱȱ Anȱimportantȱelementȱofȱaȱregisteredȱdesignȱisȱthatȱinfringementȱisȱ deemedȱ toȱ haveȱ occurredȱ evenȱ ifȱ theȱ infringingȱ designȱ hasȱ beenȱ derivedȱindependentlyȱwithoutȱanyȱevidenceȱofȱcopying.ȱ

2.5 Trade marks Aȱ tradeȱ markȱ isȱ anyȱ signȱ whichȱ canȱ distinguishȱ yourȱ goodsȱ andȱ servicesȱ fromȱ thoseȱ ofȱ otherȱ traders.ȱ Marksȱ canȱ takeȱ theȱ formȱ ofȱ words,ȱlogos,ȱpicturesȱorȱaȱcombinationȱofȱthese.ȱLikeȱdesignȱrights,ȱ tradeȱmarksȱcanȱbeȱregisteredȱorȱunȬregistered.ȱ Tradeȱmarksȱareȱdesignedȱtoȱprotectȱbothȱyouȱandȱyourȱcustomers.ȱ Youȱ areȱ ableȱ toȱ protectȱ yourȱ brandȱ fromȱ competitorsȱ effectivelyȱ pretendingȱ toȱ beȱ youȱ andȱ tradingȬoffȱ theȱ goodȱ willȱ thatȱ youȱ haveȱ generatedȱ withȱ yourȱ customers.ȱ Theȱ customerȱ isȱ protectedȱ byȱ theȱ knowledgeȱthatȱ whenȱ theyȱ buyȱ aȱ productȱ withȱ yourȱ markȱ onȱ it,ȱ itȱ willȱbeȱofȱtheȱqualityȱtheyȱexpectȱfromȱyou.ȱ Registeredȱ tradeȱ markȱ protectionȱ canȱ beȱ extremelyȱ importantȱ forȱ protectingȱ yourȱ brandȱ andȱ image.ȱ Youȱ canȱ registerȱ trademarksȱ forȱ yourȱ companyȱ name,ȱ logo,ȱ andȱ theȱ namesȱ andȱ logosȱ associatedȱ withȱyourȱproductsȱandȱservices.ȱWhenȱaȱtradeȱmarkȱisȱregistered,ȱitȱ

2.5ȱTradeȱmarksȱȱȱȱȱȱ49ȱ

isȱusual,ȱthoughȱnotȱaȱrequirement,ȱtoȱindicateȱitsȱregisteredȱstatusȱ byȱusingȱtheȱ®ȱsymbol.ȱ Inȱtheȱsameȱwayȱthatȱundertakingȱaȱpatentȱsearchȱcanȱhighlightȱtheȱ rightsȱofȱothersȱthatȱyouȱmightȱinfringe,ȱtheȱsameȱisȱtrueȱofȱaȱtradeȱ markȱ application.ȱ Seriousȱ damageȱ canȱ beȱ doneȱ toȱ yourȱ businessȱ ifȱ youȱ startȱ tradingȱ andȱ buildingȱ aȱ reputationȱ forȱ yourȱ productȱ withoutȱ knowingȱ thatȱ youȱ areȱ infringingȱ someoneȱ else’sȱ tradeȱ mark.ȱ Theyȱ willȱ beȱ withinȱ theirȱ rightsȱ toȱ demandȱ thatȱ youȱ stopȱ tradingȱ underȱ thatȱ nameȱ orȱ usingȱ thatȱ logo.ȱ Allȱ theȱ timeȱ andȱ investmentȱ youȱ haveȱ madeȱ inȱ buildingȱ yourȱ brandȱ willȱ beȱ wastedȱ andȱyouȱwillȱhaveȱtoȱstartȱagain.ȱ Tradeȱmarkȱregistrationsȱareȱawardedȱforȱspecificȱmarketȱsectors.ȱItȱ isȱ thereforeȱ possibleȱ forȱ twoȱ orȱ moreȱ organisationsȱ toȱ registerȱ similarȱorȱevenȱidenticalȱtrademarkedȱnamesȱifȱtheyȱdoȱnotȱcompeteȱ inȱ theȱ sameȱ markets.ȱ Lotusȱ isȱ aȱ goodȱ exampleȱ ofȱ thisȱ principle;ȱ twentyȱ trademarksȱ haveȱ beenȱ registeredȱ inȱ theȱ UKȱ forȱ theȱ wordȱ Lotus.ȱ Theseȱ includeȱ itsȱ useȱ byȱ aȱ sportsȱ carȱ company,ȱ aȱ softwareȱ servicesȱprovider,ȱaȱtableȱlinenȱmanufacturerȱandȱaȱgardenȱfurnitureȱ company.ȱȱ Itȱshouldȱbeȱnotedȱthatȱowningȱaȱtradeȱmarkȱdoesȱnotȱautomaticallyȱ giveȱyouȱaȱrightȱtoȱownȱanȱinternetȱdomainȱname.ȱInȱsomeȱcasesȱitȱ mayȱbeȱpossibleȱtoȱproveȱthatȱsomeoneȱhasȱboughtȱaȱdomainȱnameȱ specificallyȱtoȱsellȱtoȱyouȱasȱtheȱtradeȱmarkȱowner.ȱInȱthisȱcaseȱyouȱ canȱ appealȱ forȱ itȱ toȱ beȱ released,ȱ butȱ inȱ mostȱ casesȱ thisȱ willȱ notȱ beȱ possible.ȱIfȱanȱinternetȱpresenceȱisȱimportantȱtoȱyourȱbusiness,ȱitȱisȱ probablyȱ worthȱ identifyingȱ namesȱ thatȱ areȱ availableȱ asȱ domainȱ namesȱandȱtradeȱmarksȱearlyȱon.ȱOnceȱyouȱhaveȱidentifiedȱaȱgoodȱ availableȱname,ȱatȱleastȱregisterȱtheȱdomainȱnameȱwithoutȱdelay.ȱ Tradeȱmarksȱareȱrelativelyȱeasyȱtoȱdefendȱasȱinfringementȱisȱusuallyȱ simpleȱ toȱ prove.ȱ Youȱ shouldȱ takeȱ legalȱ adviceȱ ifȱ youȱ findȱ yourȱ rightsȱ areȱ beingȱ infringed.ȱ Inȱ manyȱ cases,ȱ disputesȱ canȱ beȱ settledȱ outȱofȱcourt.ȱ

50ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

Un-registered trade marks Tradeȱ marksȱ canȱ alsoȱ beȱ protectedȱ throughȱ commonȬlaw.ȱ Ifȱ youȱ haveȱ beenȱ usingȱ aȱ tradingȱ nameȱ orȱ logoȱ forȱ aȱ periodȱ ofȱ time,ȱ youȱ automaticallyȱ generateȱ someȱ rightsȱ toȱ protectȱ it.ȱ Theȱ enforcementȱ canȱ onlyȱ beȱ appliedȱ ifȱ youȱ canȱ proveȱ thatȱ youȱ haveȱ generatedȱ aȱ reputationȱ inȱ theȱ marketȱ underȱ theȱ mark.ȱ Thisȱ canȱ beȱ difficultȱ toȱ proveȱ andȱ upholdȱ soȱ itȱ makesȱ goodȱ businessȱ senseȱ toȱ registerȱ anyȱ trademarksȱthatȱyourȱbusinessȱwillȱrelyȱon.ȱ Ifȱyouȱareȱusingȱaȱtradeȱnameȱorȱlogoȱthatȱisȱnotȱregistered,ȱitȱmakesȱ senseȱtoȱdrawȱattentionȱtoȱitsȱuseȱasȱaȱtradeȱmarkȱbyȱaddingȱTMȱtoȱ theȱ sideȱ ofȱ theȱ textȱ orȱ logo.ȱ Youȱ shouldȱ notȱ howeverȱ useȱ theȱ ®ȱ symbolȱunlessȱitȱisȱregistered.ȱ

2.6 Copyright CopyrightȱisȱentirelyȱunȬregistered.ȱEveryȱtimeȱyouȱcreateȱanȱartisticȱ orȱliteraryȱworkȱandȱfixȱitȱonȱpaper,ȱfilm,ȱviaȱsoundȱrecordingȱorȱbyȱ publishingȱitȱonȱtheȱinternet,ȱtheȱcopyrightȱbelongsȱtoȱyou.ȱThereȱisȱ noȱlinkȱtoȱtheȱartisticȱorȱliteraryȱmeritsȱofȱtheȱwork.ȱȱ Copyrightȱ isȱ usedȱ toȱ protectȱ musicalȱ arrangements,ȱ drawings,ȱ writtenȱ worksȱ suchȱ asȱ booksȱ andȱ magazinesȱ andȱ interestingly,ȱ softwareȱcode.ȱȱ Infringementȱoccursȱonlyȱifȱaȱsubstantialȱpartȱofȱtheȱworkȱhasȱbeenȱ copied.ȱ Theȱ actȱ ofȱ copyingȱ hasȱ toȱ beȱ provedȱ inȱ orderȱ forȱ theȱ infringementȱtoȱbeȱproved.ȱ Itȱisȱaȱgoodȱideaȱtoȱuseȱtheȱ©ȱsymbolȱtogetherȱwithȱyourȱnameȱandȱ theȱ dateȱ onȱ materialȱ thatȱ youȱ wishȱ toȱ protect.ȱ Thisȱ providesȱ aȱ warningȱtoȱothersȱagainstȱcopyingȱit,ȱbutȱisȱnotȱaȱlegalȱrequirement.ȱ Asȱ proofȱ ofȱ authorshipȱ canȱ beȱ difficultȱ toȱ prove,ȱ oneȱ methodȱ forȱ establishingȱauthorshipȱofȱaȱkeyȱdocumentȱisȱtoȱpostȱaȱcopyȱofȱitȱtoȱ

2.7ȱWorkingȱwithȱpatentȱagentsȱandȱIPȱlawyersȱȱȱȱȱȱ51ȱ

yourselfȱ andȱ thenȱ keepȱ theȱ sealed,ȱ postmarkedȱ packageȱ inȱ aȱ safeȱ place.ȱ Alternativelyȱ youȱ haveȱ someoneȱ signȱ andȱ dateȱ aȱ copyȱ asȱ witness,ȱorȱyouȱcouldȱlodgeȱaȱcopyȱwithȱyourȱsolicitor.ȱȱ

2.7 Working with patent agents and IP lawyers Throughoutȱ thisȱ chapterȱ weȱ haveȱ discussedȱ howȱ youȱ wouldȱ beȱ advisedȱ toȱ useȱ theȱ servicesȱ ofȱ aȱ professionalȱ patentȱ agentȱ inȱ theȱ drafting,ȱfilingȱandȱprosecutionȱofȱyourȱintellectualȱpropertyȱrights.ȱ Theȱ truthȱ isȱ thatȱ youȱ could,ȱ ofȱ course,ȱ doȱ allȱ thisȱ workȱ yourself.ȱ Howeverȱ theȱ skillȱ andȱ experienceȱ thatȱ professionalȱ patentȱ agentsȱ bringȱtoȱbareȱonȱtheȱprocessȱwillȱusuallyȱbeȱworthȱtheȱextraȱexpense.ȱ Thisȱ isȱ particularlyȱ trueȱ ifȱ yourȱ businessȱ isȱ goingȱ toȱ raiseȱ financeȱ throughȱequityȱinvestment.ȱInvestorsȱwillȱbeȱgreatlyȱreassuredȱifȱtheȱ technologyȱ theyȱ areȱ investingȱ in,ȱ isȱ protectedȱ byȱ professionallyȱ writtenȱpatentsȱandȱotherȱregisteredȱrights.ȱ Thatȱ said,ȱ workingȱ withȱ aȱ patentȱ agentȱ isȱ notȱ simplyȱ aȱ caseȱ ofȱ describingȱyourȱideaȱoverȱaȱcupȱofȱcoffee,ȱthenȱexpectingȱthemȱtoȱdoȱ theȱ rest.ȱ Youȱ shouldȱ expectȱ toȱ investȱ aȱ significantȱ amountȱ ofȱ timeȱ withȱ yourȱ agent.ȱ Inȱ additionȱ toȱ describingȱ yourȱ invention,ȱ youȱ shouldȱalsoȱexplainȱtoȱthemȱhowȱyouȱseeȱyourȱbusinessȱdeveloping,ȱ whatȱyouȱwantȱtoȱachieveȱandȱwhereȱyouȱwantȱtoȱachieveȱit.ȱOnlyȱ thenȱ willȱ theyȱ beȱ ableȱ toȱ adviseȱ youȱ properlyȱ aboutȱ theȱ formȱ thatȱ yourȱ protectionȱ shouldȱ takeȱ andȱ whatȱ marketsȱ areȱ likelyȱ toȱ beȱ worthȱprotecting.ȱ Dependingȱ onȱ theȱ complexityȱ ofȱ yourȱ invention,ȱ youȱ shouldȱ putȱ asideȱseveralȱhalfȱdayȱsessionsȱtoȱproperlyȱdescribeȱitȱtoȱtheȱagent.ȱ Youȱ willȱ thenȱ needȱ toȱcarefullyȱ readȱ throughȱtheȱ specificationȱ andȱ claimsȱ thatȱ theyȱ draft.ȱ Yourȱ agentȱ willȱ alsoȱ needȱ helpȱ creatingȱ argumentsȱagainstȱtheȱexaminer’sȱobjectionsȱandȱanyȱpriorȱartȱthatȱ theȱsearchȱidentifiesȱbeforeȱtheȱpatentȱisȱgranted.ȱȱ

52ȱȱȱȱȱȱ2ȱHowȱcanȱyouȱprotectȱyourȱideas?ȱȱ

Asȱyouȱcanȱsee,ȱyouȱareȱlikelyȱtoȱbuildȱupȱaȱcloseȱrelationshipȱwithȱ yourȱpatentȱagent.ȱItȱisȱquiteȱcommonȱforȱagentsȱtoȱkeepȱclientsȱwithȱ themȱforȱmanyȱyears,ȱevenȱasȱtheyȱmoveȱfromȱagencyȱtoȱagency.ȱȱ Asȱ yourȱ businessȱ progressesȱ itȱ isȱ importantȱ toȱ continuallyȱ reviewȱ yourȱ intellectualȱ propertyȱ position.ȱ Youȱ couldȱ useȱ regularȱ internalȱ meetingsȱ toȱ captureȱ anyȱ newȱ inventionsȱ thatȱ haveȱ beenȱ madeȱ orȱ youȱ couldȱ useȱ yourȱ patentȱ agentȱ toȱ carryȱ outȱ reviewsȱ ofȱ yourȱ developmentȱ activitiesȱ toȱ adviseȱ onȱ whetherȱ thereȱ areȱ anyȱ protectionȱopportunitiesȱthatȱshouldȱbeȱtaken.ȱȱ ȱ

3 What is a company?

Untilȱ theȱ middleȱ ofȱ theȱ 19thȱ century,ȱ theȱ onlyȱ wayȱ toȱ doȱ businessȱ wasȱasȱaȱsoleȱtraderȱorȱasȱpartȱofȱaȱpartnership.ȱUnderȱbothȱofȱtheseȱ models,ȱtheȱproprietorsȱwereȱentirelyȱresponsibleȱandȱliableȱforȱtheȱ actionsȱ ofȱ theȱ business.ȱ Ifȱ theȱ businessȱ becameȱ insolvent,ȱ theȱ proprietorȱwentȱtoȱtheȱdebtors’ȱprisonȱandȱtheirȱfamilyȱtoȱtheȱworkȱ house.ȱ Thisȱ wasȱ hardlyȱ theȱ incentiveȱ thatȱ investorsȱ andȱ entreȬ preneursȱ neededȱ toȱ buildȱ theȱ newȱ venturesȱ ofȱ theȱ industrialȱ revolution.ȱȱ Atȱtheȱsameȱtime,ȱtheȱnatureȱofȱbusinessȱwasȱchangingȱawayȱfromȱ smallȱ cottageȱ industriesȱ andȱ familyȱ firmsȱ toȱ larger,ȱ innovationȱ basedȱ ventures.ȱ Businessesȱ wereȱ alsoȱ lookingȱ intoȱ activitiesȱ thatȱ tookȱthemȱoverseas.ȱȱ Toȱ driveȱ theȱ newȱ economyȱ forward,ȱ theȱ conceptȱ ofȱ theȱ limitedȱ liabilityȱ companyȱ wasȱ introduced.ȱ Theȱ conceptȱ wasȱ highlyȱ innovȬ ative,ȱelegantȱandȱsimpleȱandȱhasȱprovedȱtoȱbeȱsuperblyȱsuccessful.ȱȱ Aȱ Limitedȱ Companyȱ allowsȱ investorsȱ toȱ riskȱ onlyȱ theȱ priceȱ ofȱ theȱ sharesȱ theyȱ buyȱ inȱ theȱ company.ȱ Shouldȱ theȱ companyȱ becomeȱ insolvent,ȱ theyȱ loseȱ theirȱ investment,ȱ butȱ nothingȱ more.ȱ Itȱ allowsȱ entrepreneursȱ toȱ beȱ creativeȱ andȱ adventurousȱ withoutȱ riskingȱ everythingȱ onȱ theȱ dream.ȱ Cruciallyȱ itȱ alsoȱ allowsȱ aȱ separationȱ ofȱ responsibilitiesȱ betweenȱ thoseȱ thatȱ ownȱ theȱ companyȱ (theȱ Shareholders)ȱandȱthoseȱthatȱrunȱtheȱcompanyȱ(theȱDirectors).ȱȱ

54ȱȱȱȱȱȱ3ȱWhatȱisȱaȱcompany?ȱȱ

3.1 The company as a legal entity Theȱ Limitedȱ Liabilityȱ Companyȱ isȱ incorporatedȱ asȱ anȱ independentȱ legalȱentity.ȱInȱotherȱwords,ȱitȱisȱrecognisedȱalmostȱasȱaȱpersonȱinȱitsȱ ownȱright.ȱItȱhasȱtheȱrightȱtoȱownȱproperty,ȱmakeȱcontractsȱandȱhasȱ legalȱ liabilityȱ overȱ itsȱ actions.ȱ Inȱ factȱ itȱ hasȱ aȱ lifeȱ ofȱ itsȱ own.ȱ Theȱ companyȱisȱseparatedȱfromȱitsȱowners,ȱwhoseȱliabilityȱforȱitsȱdebtsȱ andȱ actionsȱ isȱ limitedȱ toȱ theȱ amountȱ ofȱ equityȱ capitalȱ theyȱ haveȱ bought.ȱ Inȱ thisȱ wayȱ aȱ ‘corporateȱ veil’ȱ isȱ drawnȱ overȱ theȱ companyȱ thatȱprotectsȱtheȱinvestors.ȱ Inȱtheȱleftȱhandȱdiagramȱbelow,ȱtheȱsoleȱtraderȱproprietorȱisȱtheȱoneȱ whoȱentersȱintoȱcontractsȱwithȱtheȱsuppliersȱandȱcustomers.ȱShouldȱ eitherȱ ofȱ themȱ sue,ȱ theȱ ownerȱ isȱ entirelyȱ liable.ȱ Onȱ theȱ rightȱ handȱ side,ȱtheȱcompanyȱentersȱintoȱtheȱcontracts,ȱnowȱifȱlegalȱactionȱtakesȱ place,ȱitȱisȱtheȱcompanyȱthatȱisȱsued,ȱratherȱthanȱtheȱowner.ȱȱ

ȱ Fig.ȱ3.1.ȱProtectedȱcreatedȱbyȱaȱlimitedȱcompanyȱ

Theȱ companyȱ isȱ allowedȱ toȱ ownȱ propertyȱ andȱ thisȱ extendsȱ toȱ owningȱ sharesȱ inȱ otherȱ companies.ȱ Corporateȱ structuresȱ canȱ thereforeȱemergeȱtoȱseparateȱdifferentȱpartsȱofȱaȱlargerȱbusiness.ȱInȱ theȱ exampleȱ below,ȱ theȱ intellectualȱ propertyȱ isȱ ownedȱ byȱ theȱ

3.1ȱTheȱcompanyȱasȱaȱlegalȱentityȱȱȱȱȱȱ55ȱ

holdingȱ companyȱ atȱ theȱ top.ȱ Theȱ twoȱ daughterȱ companiesȱ areȱ whollyȱownedȱsubsidiariesȱofȱtheȱholdingȱcompany.ȱEachȱofȱthemȱisȱ grantedȱ anȱ exclusiveȱ licenseȱ toȱ useȱ theȱ technologyȱ inȱ theirȱ ownȱ marketsȱbyȱtheȱholdingȱcompany.ȱȱ

ȱ Fig.ȱ3.2.ȱAnȱexampleȱcorporateȱstructureȱ

Theȱ benefitȱ ofȱ thisȱ modelȱ isȱ thatȱ shouldȱ oneȱ ofȱ theȱ sistersȱ fail,ȱ theȱ intellectualȱpropertyȱisȱprotected,ȱasȱisȱtheȱotherȱsuccessfulȱbusiness.ȱȱ Mostȱ startȬupȱ businessesȱ willȱ onlyȱ requireȱ aȱ singleȱ companyȱ structureȱ however.ȱ Youȱ shouldȱ discussȱ yourȱ businessȱ plansȱ andȱ aspirationsȱwithȱaȱcorporateȱlawyerȱwhoȱwillȱadviceȱyouȱofȱtheȱbestȱ structureȱforȱyourȱnewȱbusiness.ȱ Types of company Thereȱareȱfourȱbasicȱtypesȱofȱcompanyȱthatȱcanȱbeȱformedȱtoȱcarryȱ outȱcommercialȱactivities.ȱTheȱfirstȱtwo,ȱsoleȱtraderȱandȱpartnership,ȱ doȱnotȱprovideȱanyȱlimitȱtoȱtheȱliabilityȱofȱtheȱproprietors.ȱȱ Anyoneȱcanȱtradeȱasȱaȱsoleȱtraderȱorȱasȱpartȱofȱaȱpartnership.ȱThereȱ isȱ noȱ registrationȱ processȱ andȱ noȱ legalȱ needȱ forȱ anyȱ formalȱ

56ȱȱȱȱȱȱ3ȱWhatȱisȱaȱcompany?ȱȱ

agreementsȱorȱpaperworkȱtoȱbeȱputȱintoȱplace.ȱIfȱyouȱmakeȱorȱbuyȱ somethingȱtoȱthenȱsell,ȱorȱofferȱaȱserviceȱonȱaȱcommercialȱbasisȱyouȱ areȱ actingȱ asȱ aȱ soleȱ trader.ȱ Thatȱ couldȱ evenȱ includeȱ yourȱ activitiesȱ onȱeBay!ȱTheȱonlyȱofficialȱactionȱyouȱneedȱtoȱtakeȱisȱtoȱnotifyȱtheȱtaxȱ authoritiesȱofȱyourȱchangedȱstatusȱandȱadditionalȱincome.ȱ Theȱsameȱisȱtrueȱofȱaȱpartnership.ȱIfȱyouȱandȱaȱfriend,ȱorȱmemberȱofȱ yourȱ family,ȱ startȱ tradingȱ together,ȱ underȱ theȱ lawȱ youȱ areȱ aȱ partnership.ȱ Youȱ shareȱ theȱ proceedsȱ ofȱ theȱ businessȱ butȱ youȱ alsoȱ shareȱtheȱliability.ȱThisȱmeansȱthatȱyouȱareȱpersonallyȱliableȱforȱtheȱ actionsȱ ofȱ yourȱ partner.ȱ Ifȱ theyȱ makeȱ aȱ mistakeȱ andȱ areȱ sued,ȱ youȱ areȱ equallyȱ responsibleȱ andȱ liable.ȱ Understandably,ȱ thisȱ isȱ notȱ theȱ preferredȱrouteȱtoȱstartingȱaȱnewȱriskyȱbusinessȱventure.ȱȱ Thereȱ areȱ however,ȱ plentyȱ ofȱ examplesȱ ofȱ successfulȱ soleȱ tradersȱ andȱ partnerships.ȱ Inȱ fact,ȱ someȱ professionsȱ doȱ notȱ allowȱ theirȱ practitionersȱ toȱ hideȱ behindȱ aȱ corporateȱ veil.ȱ Forȱ example,ȱ allȱ lawȱ firmsȱareȱinȱfactȱpartnerships.ȱ Theȱ vastȱ majorityȱ ofȱ startȬupȱ companiesȱ areȱ howeverȱ formedȱ asȱ Limitedȱ Liabilityȱ Companies.ȱ Toȱ formȱ aȱ Limitedȱ Company,ȱ youȱ needȱtoȱregisterȱitȱwithȱtheȱstate.ȱThisȱisȱtheȱequivalentȱofȱobtainingȱ aȱbirthȱcertificateȱforȱtheȱcompanyȱandȱnormallyȱinvolvesȱaȱsmallȱsetȱ ofȱ formsȱ toȱ beȱ completed,ȱ togetherȱ withȱ theȱ preparationȱ ofȱ theȱ company’sȱ constitution.ȱ Theȱ followingȱ sectionsȱ describeȱ thisȱ processȱinȱmoreȱdetail.ȱ Forȱ completeness,ȱ theȱ fourthȱ formȱ ofȱ commercialȱ companyȱ isȱ theȱ Publicȱ Limitedȱ Companyȱ orȱ PLC.ȱ Essentially,ȱ theȱ structureȱ isȱ theȱ sameȱ asȱ forȱ aȱ limitedȱ company,ȱ butȱ theȱ sharesȱ areȱ offeredȱ toȱ theȱ public.ȱToȱprotectȱtheseȱnonȬsophisticatedȱinvestors,ȱtheȱregulationsȱ surroundingȱ howȱtheȱcompanyȱoperatesȱandȱreportsȱitsȱresultsȱareȱ moreȱ onerous.ȱ Mostȱ PLCsȱ haveȱ sharesȱ thatȱ areȱ tradedȱ onȱ aȱ publicȱ stockȱ market,ȱ butȱ thisȱ isȱ notȱ alwaysȱ theȱ case.ȱ Ifȱ aȱ companyȱ hasȱ aȱ largeȱ numberȱ ofȱ smallȱ shareholders,ȱ itȱ mayȱ needȱ toȱ becomeȱ andȱ thereforeȱcomplyȱwithȱtheȱregulationsȱofȱaȱPLC,ȱevenȱthoughȱthereȱ

3.1ȱTheȱcompanyȱasȱaȱlegalȱentityȱȱȱȱȱȱ57ȱ

isȱnoȱmarketȱtrading.ȱWeȱwillȱlookȱmoreȱcloselyȱatȱpublicȱmarketsȱinȱ theȱchapterȱonȱraisingȱfinance.ȱ Company constitution Imagineȱtheȱscenarioȱofȱaȱgroupȱofȱinvestorsȱorȱbusinessmenȱinȱtheȱ earlyȱ 19thȱ Centuryȱ investingȱ moneyȱ inȱ aȱ shipȱ toȱ sailȱ toȱ farȱ awayȱ shoresȱ andȱ bringȱ backȱ spicesȱ toȱ sellȱ inȱ theȱ homeȱ market.ȱ Asȱ aȱ partnership,ȱ theyȱ shareȱ theȱ liabilityȱ ofȱ theȱ projectȱ asȱ wellȱ asȱ theȱ potentialȱ profits.ȱ Atȱ theȱ planningȱ stage,ȱ theyȱ wouldȱ allȱ wantȱ toȱ knowȱ exactlyȱ whatȱ suppliesȱ wereȱ beingȱ boughtȱ andȱ whatȱ crewȱ wereȱbeingȱhired.ȱAsȱtheȱshipȱsailedȱfromȱport,ȱmostȱofȱtheȱpartnersȱ stayȱ behind.ȱ Theyȱ areȱ nowȱ liableȱ forȱ eventsȱ thatȱ theyȱ canȱ haveȱ noȱ controlȱ over.ȱ Ifȱ aȱ mastȱ shouldȱ break,ȱ theyȱ couldȱ notȱ expectȱ toȱ beȱ consultedȱoverȱtheȱdecisionȱtoȱbuyȱaȱnewȱone,ȱorȱagreeȱtoȱtheȱprice.ȱ Theyȱ couldȱ notȱ beȱ consultedȱ overȱ theȱ choiceȱ ofȱ purchasesȱ toȱ bringȱ home,ȱorȱevenȱtheȱrouteȱtoȱbeȱsailed.ȱ Theȱinventionȱofȱtheȱlimitedȱcompanyȱhadȱaȱbigȱimpactȱonȱthisȱtypeȱ ofȱ trade.ȱ Now,ȱ theȱ investorsȱ becomeȱ shareholdersȱ inȱ theȱ businessȱ andȱareȱprotectedȱfromȱsuchȱliabilitiesȱandȱresponsibilities.ȱTheȱroleȱ ofȱ runningȱ theȱ business,ȱ orȱ shipȱ inȱ thisȱ case,ȱ isȱ passedȱ toȱ theȱ Directors,ȱ orȱ Officers,ȱ whoȱ areȱ empoweredȱ toȱ makeȱ decisionsȱ andȱ useȱ theȱ companiesȱ resourcesȱ toȱ theȱ benefitȱ ofȱ theȱ business,ȱ andȱ ultimatelyȱtoȱtheȱbenefitȱofȱtheȱshareholders.ȱ Toȱ regulateȱ aȱ companyȱ twoȱ documentsȱ areȱ required,ȱ Theȱ Memorandumȱ ofȱ Associationȱ andȱ theȱ Articlesȱ ofȱ Association.ȱ Theȱ memorandumȱregulatesȱtheȱexternalȱaffairsȱofȱtheȱcompanyȱandȱtheȱ Articlesȱregulateȱitsȱinternalȱaffairs.ȱ Theȱ memorandumȱ statesȱ theȱ purposeȱ forȱ whichȱ theȱ companyȱ hasȱ beenȱ established,ȱ inȱ thisȱ caseȱ toȱ sailȱ toȱ foreignȱ countries,ȱ purchaseȱ goodsȱandȱreturnȱthemȱtoȱtheȱhomeȱmarketȱforȱsale.ȱThisȱdocumentȱ preventsȱ theȱ companyȱ fromȱ enteringȱ intoȱ anyȱ otherȱ businessȱ area.ȱ

58ȱȱȱȱȱȱ3ȱWhatȱisȱaȱcompany?ȱȱ

Theȱshareholdersȱareȱthereforeȱawareȱofȱtheȱpurposesȱtoȱwhichȱtheirȱ fundsȱareȱbeingȱput.ȱ TheȱArticlesȱregulateȱhowȱtheȱcompanyȱmanagesȱitsȱinternalȱaffairs,ȱ itȱsetsȱtheȱrightsȱofȱtheȱshareholders,ȱtheȱrequirementsȱforȱmeetings,ȱ theȱ powersȱ ofȱ theȱ Directorsȱ andȱ theȱ abilityȱ ofȱ theȱ companyȱ toȱ borrowȱ moneyȱ andȱ purchaseȱ property.ȱ Theȱ Articlesȱ areȱ aȱ muchȱ longerȱ documentȱ butȱ aȱ numberȱ ofȱ standardȱ templatesȱ haveȱ emerȬ ged.ȱ Mostȱ privateȱ companiesȱ formedȱ inȱ theȱ UKȱ useȱ aȱ standardȱ templateȱforȱtheirȱArticlesȱknownȱasȱTableȱA.ȱ

3.2 Role and rights of shareholders Theȱownershipȱcapitalȱofȱaȱcompanyȱisȱnormallyȱdividedȱintoȱmanyȱ individualȱshares.ȱEachȱshareȱhasȱaȱvotingȱrightȱonȱcertainȱcompanyȱ decisions.ȱTheȱmoreȱsharesȱanȱindividualȱowns,ȱtheȱmoreȱvotesȱtheyȱ haveȱandȱtherefore,ȱtheȱgreaterȱtheirȱcontrolȱofȱtheȱcompany.ȱȱ Sinceȱtheȱshareholdersȱeffectivelyȱhandȱoverȱtheȱmanagementȱofȱtheȱ companyȱtoȱtheȱdirectors,ȱwhatȱpowersȱdoȱtheyȱhaveȱleft?ȱ Shareholdersȱ areȱ requiredȱ toȱ voteȱ onȱ mattersȱ thatȱ affectȱ theȱ structureȱ ofȱ theȱ company.ȱ Theseȱ resolutionsȱ areȱ putȱ toȱ theȱ shareȬ holdersȱ whenȱ theȱ companyȱ wantsȱ toȱ changeȱ itsȱ name,ȱ makeȱ anyȱ alterationsȱtoȱtheȱmemorandumȱorȱarticlesȱofȱassociationȱandȱwhenȱ theȱ companyȱ wantsȱ toȱ issueȱ newȱ shares.ȱ Resolutionsȱ areȱ dividedȱ intoȱtwoȱclasses,ȱordinaryȱandȱextraordinaryȱorȱspecial.ȱToȱpassȱanȱ ordinaryȱresolutionȱmoreȱthanȱ50%ȱofȱtheȱsharesȱneedȱtoȱapproveȱit,ȱ forȱaȱspecialȱresolution,ȱmoreȱthanȱ75%ȱisȱrequired.ȱTheȱcompany’sȱ articlesȱ ofȱ associationȱ setȱ outȱ theȱ decisionsȱ toȱ beȱ treatedȱ asȱ specialȱ resolutions,ȱ butȱ theyȱ normallyȱ includeȱ thingsȱ likeȱ makingȱ changesȱ toȱtheȱarticlesȱorȱwaivingȱtheȱconstitutionȱforȱaȱparticularȱaction.ȱTheȱ diagramȱ belowȱ summarisesȱ theȱ shareholdingsȱ requiredȱ toȱ takeȱ specificȱactions.ȱȱ

3.3ȱCompanyȱownershipȱandȱtypesȱofȱsharesȱȱȱȱȱȱ59ȱ

ȱ Fig.ȱ3.3.ȱTheȱrightsȱofȱdifferentȱshareholdingsȱ

Theȱ shareholdersȱ haveȱ theȱ rightȱ toȱ appointȱ andȱ dismissȱ directorsȱ usuallyȱ throughȱ anȱ ordinaryȱ resolution.ȱ Aȱ majorityȱ shareholderȱ isȱ thereforeȱableȱtoȱcompletelyȱcontrolȱtheȱcompositionȱofȱtheȱboardȱofȱ directors.ȱThisȱcouldȱbeȱimportantȱforȱaȱfounderȱwhoȱhasȱattractedȱ investmentȱandȱsoldȱmoreȱthanȱ50%ȱofȱtheȱcompany.ȱIfȱtheȱfounderȱ fallsȱoutȱwithȱtheȱinvestorsȱorȱtheyȱfeelȱthatȱtheyȱareȱnotȱperforming,ȱ theȱ newȱ shareholdersȱ areȱ entirelyȱ withinȱ theirȱ rightsȱ toȱ sackȱ theȱ founderȱandȱappointȱtheirȱownȱmanagementȱteam.ȱ

3.3 Company ownership and types of shares Inȱmostȱsimpleȱsituations,ȱtheȱshareholdersȱofȱtheȱcompanyȱvoteȱonȱ theȱ basisȱ ofȱ oneȱ share,ȱ oneȱ vote.ȱ Thereȱ canȱ howeverȱ beȱ moreȱ thanȱ oneȱtypeȱofȱshareȱinȱaȱcompanyȱandȱsoȱthingsȱcanȱstartȱtoȱgetȱmoreȱ complex.ȱ Forȱ mostȱ startȬupsȱ however,ȱ itȱ isȱ wiseȱ toȱ keepȱ theȱ shareholdingȱbasedȱonȱaȱsingleȱtypeȱofȱordinaryȱsharesȱatȱleastȱuntilȱ anyȱ seriousȱ investmentȱ occursȱ thatȱ forcesȱ aȱ differentȱ structureȱ onȱ you.ȱSoȱwhatȱtypesȱofȱsharesȱareȱthere?ȱ

60ȱȱȱȱȱȱ3ȱWhatȱisȱaȱcompany?ȱȱ

Ordinary shares Inȱtheȱsimplestȱcases,ȱallȱtheȱsharesȱofȱaȱcompanyȱwillȱbeȱtheȱsameȱ andȱwillȱbeȱ‘ordinary’ȱinȱnature.ȱThisȱwillȱalmostȱcertainlyȱinitiallyȱ beȱtheȱcaseȱforȱaȱstartȬup,ȱbutȱasȱtheȱcompanyȱprogressesȱandȱmoreȱ shareholdersȱareȱbroughtȱinȱdifferentȱclassesȱofȱordinaryȱsharesȱmayȱ beȱformed.ȱ Classes of shares Withinȱ theȱ differentȱ typesȱ ofȱ share,ȱ youȱ canȱ haveȱ differentȱ classesȱ withȱslightlyȱdifferentȱrightsȱbetweenȱthem.ȱForȱexampleȱyouȱmightȱ establishȱtwoȱclassesȱofȱshare,ȱAȱandȱB.ȱBothȱareȱordinaryȱandȱstandȱ equalȱtoȱreceiveȱdividendsȱandȱcanȱbeȱtradedȱunderȱtheȱsameȱterms.ȱ YouȱmightȱkeepȱtheȱAȱsharesȱforȱtheȱfoundersȱandȱtheȱBȱsharesȱforȱ theȱnewȱinvestors.ȱTheȱsharesȱcouldȱdifferȱinȱthatȱtheȱAȱsharesȱhaveȱ differentȱvotingȱrightsȱtoȱtheȱBȱshares.ȱInȱthisȱcaseȱtheȱAȱsharesȱareȱ setȱ upȱ toȱ alwaysȱ commandȱ aȱ majorityȱ ofȱ theȱ votesȱ inȱ theȱ appointmentȱ andȱ dismissalȱ ofȱ Directors.ȱ Inȱ thisȱ wayȱ theȱ foundersȱ haveȱ protectedȱ theirȱ rightȱ toȱ controlȱ theȱ boardȱ ofȱ theȱ companyȱ regardlessȱofȱtheirȱactualȱownershipȱpercentageȱofȱtheȱcompany.ȱȱ Differentȱclassesȱofȱsharesȱareȱveryȱusefulȱforȱcreatingȱspecialȱrights,ȱ votingȱblocksȱorȱprotectionȱmechanisms.ȱȱ Preference shares Theȱ dividendȱ paidȱ toȱ ordinaryȱ sharesȱ isȱ uncertainȱ andȱ variable.ȱ Itȱ mayȱbeȱhighȱifȱtheȱcompanyȱhasȱaȱgoodȱyearȱandȱlowȱifȱitȱperformsȱ badly.ȱ Preferenceȱ sharesȱ areȱ aȱ typeȱ ofȱ shareȱ thatȱ existsȱ toȱ provideȱ someȱ shareholdersȱ withȱ aȱ specificȱ fixedȱ dividendȱ aheadȱ ofȱ theȱ ordinaryȱshareholders.ȱȱ Theȱ mostȱ commonȱ formȱ ofȱ preferenceȱ sharesȱ willȱ attractȱ aȱ fixedȱ dividend.ȱ Ifȱ theȱ companyȱ cannotȱ affordȱ toȱ payȱ theȱ dividend,ȱ itȱ accruesȱuntilȱitȱcanȱbeȱpaid,ȱoftenȱattractingȱinterestȱinȱtheȱprocess.ȱȱ

3.3ȱCompanyȱownershipȱandȱtypesȱofȱsharesȱȱȱȱȱȱ61ȱ

Inȱ theȱ eventȱ ofȱ theȱ companyȱ beingȱ woundȱ up,ȱ theȱ preferenceȱ shareholdersȱ willȱ alsoȱ receiveȱ anyȱ remainingȱ valueȱ beforeȱ theȱ ordinaryȱshareholders,ȱtheȱvalueȱtheyȱreceiveȱwillȱnormallyȱbeȱtheirȱ issueȱ price.ȱ Preferenceȱ sharesȱ doȱ notȱ normallyȱ haveȱ anyȱ votingȱ rights.ȱ Sharesȱ likeȱ theseȱ normallyȱ formȱ partȱ ofȱ theȱ shareholdingȱ ofȱ aȱ ventureȱcapitalist.ȱItȱallowsȱthemȱtoȱaddȱsomeȱformȱofȱprotectionȱtoȱ theirȱinvestmentȱandȱensureȱthatȱtheyȱgetȱanyȱprofitȱbenefitsȱfirst.ȱ Redeemable shares Redeemableȱ sharesȱ areȱ sharesȱ thatȱ theȱ issuingȱ companyȱ hasȱ theȱ rightȱ toȱ buyȱ backȱ fromȱ theȱ shareholder.ȱ Theseȱ sharesȱ oftenȱ haveȱ aȱ shelfȬlifeȱinȱthatȱtheȱredemptionȱdatesȱmayȱbeȱspecificȱorȱtriggeredȱ byȱeventsȱorȱmilestonesȱachievedȱbyȱtheȱcompany.ȱȱ Thisȱtypeȱofȱshareȱcanȱbeȱusedȱtoȱredressȱtheȱbalanceȱofȱanȱinvestor’sȱ shareholdingȱshouldȱyouȱmeetȱyourȱ targets.ȱTheȱscenarioȱcouldȱ beȱ anȱ investorȱ whoȱ takesȱ 50%ȱ ofȱ theȱ sharesȱ becauseȱ itȱ isȱ aȱ highȱ riskȱ investment.ȱ Halfȱ ofȱ theseȱ sharesȱ couldȱ beȱ redeemable.ȱ Ifȱ theȱ companyȱachievesȱcertainȱtargetsȱthatȱreduceȱtheȱrisk,ȱtheȱsharesȱareȱ redeemedȱ toȱ effectivelyȱ reduceȱ theirȱ shareholdingȱ toȱ aȱ moreȱ appropriateȱlevel.ȱThisȱwillȱactȱasȱaȱgoodȱincentiveȱforȱtheȱfounderȱ toȱachieveȱtheȱtargetsȱset.ȱ Convertible shares Convertibleȱ sharesȱ areȱ sharesȱ thatȱ haveȱ theȱ abilityȱ toȱ changeȱ typeȱ andȱ number.ȱ Forȱ example,ȱ aȱ companyȱ mightȱ issueȱ oneȱ convertibleȱ shareȱthatȱhasȱtheȱabilityȱtoȱbeȱconvertedȱintoȱ100ȱordinaryȱsharesȱatȱ someȱ pointȱ inȱ theȱ future.ȱ Thisȱ couldȱ beȱ doneȱ toȱ allowȱ aȱ particularȱ shareholderȱ toȱ convertȱ justȱ priorȱ toȱ theȱ companyȱ beingȱ sold,ȱ toȱ achieveȱ fullȱ valueȱ withoutȱ themȱ havingȱ theȱ votingȱ rightsȱ ofȱ thatȱ blockȱofȱsharesȱpriorȱtoȱthatȱtime.ȱ

62ȱȱȱȱȱȱ3ȱWhatȱisȱaȱcompany?ȱȱ

Oneȱ usefulȱ applicationȱ ofȱ thisȱ typeȱ ofȱ shareȱ canȱ beȱ foundȱ inȱ universityȱ spinȬoutȱ companies.ȱ Theȱ Universityȱ oftenȱ wantsȱ moreȱ thanȱaȱ25%ȱstake,ȱbutȱthisȱcanȱdamageȱtheȱcompany’sȱeligibilityȱasȱ anȱSMEȱforȱsomeȱtaxȱbenefitsȱandȱgrants.ȱIfȱtheȱUniversityȱisȱissuedȱ 24%ȱinȱnormalȱsharesȱandȱ1ȱconvertibleȱshare,ȱthatȱcanȱbeȱexpendedȱ toȱtheirȱfullȱintendedȱshareholdingȱatȱsomeȱstageȱinȱtheȱfuture,ȱtheȱ initialȱshareholdingȱremainsȱunderȱtheȱthreshold.ȱ Convertibleȱloansȱworkȱinȱaȱsimilarȱway.ȱTheȱcompanyȱmayȱborrowȱ moneyȱ inȱ theȱ formȱ ofȱ aȱ convertibleȱ loan.ȱ Theȱ lenderȱ mayȱ thenȱ decideȱwhetherȱtoȱretrieveȱtheȱmoneyȱorȱhaveȱtheȱdebtȱconvertedȱtoȱ sharesȱ atȱ aȱpreȬarrangedȱ price.ȱ Thisȱ mechanismȱ isȱ sometimesȱ usedȱ byȱ directorsȱ whoȱ lendȱ moneyȱ toȱ theȱ companyȱ orȱ byȱ shareholdersȱ thatȱwantȱtoȱspreadȱtheirȱfinancialȱexposureȱtoȱtheȱcompany.ȱ Complex shares Eachȱ ofȱ theseȱ specialȱ shareȱ typesȱ canȱ beȱ usedȱ inȱ isolationȱ orȱ theirȱ propertiesȱ canȱ beȱ mergedȱ toȱ createȱ complexȱ shares.ȱ Forȱ exampleȱ aȱ shareȱ thatȱ attractsȱ aȱ fixedȱ dividendȱ butȱ thatȱ canȱ beȱ convertedȱ toȱ aȱ numberȱ ofȱ ordinaryȱ sharesȱ orȱ boughtȱ backȱ byȱ theȱ companyȱ inȱ theȱ futureȱwouldȱbeȱaȱconvertibleȱredeemableȱpreferenceȱshare.ȱ Theȱexactȱdefinitionȱofȱwhatȱaȱshareȱtypeȱorȱclassȱcanȱandȱcannotȱdoȱ isȱdownȱtoȱtheȱwordingȱofȱtheȱarticlesȱofȱassociation.ȱItȱisȱthereforeȱ entirelyȱ possibleȱ toȱ createȱ allȱ sortsȱ ofȱ complexȱ shareȱ types.ȱ Iȱ haveȱ definedȱtheȱcommonȱformsȱhereȱbutȱyouȱmayȱcomeȱacrossȱothersȱasȱ yourȱbusinessȱprogresses.ȱȱ Share option schemes Soȱ farȱ weȱ haveȱ lookedȱ atȱ sharesȱ inȱ theȱ companyȱ thatȱ areȱ actuallyȱ issued.ȱ Shareȱ optionsȱ areȱ promisesȱ thatȱ theȱ companyȱ makesȱ toȱ allowȱ theȱ purchaseȱ ofȱ sharesȱ inȱ theȱ futureȱ atȱ aȱ fixedȱ price.ȱ Theȱ benefitȱforȱtheȱoptionȱholderȱisȱthatȱifȱtheȱshareȱpriceȱgoesȱup,ȱtheyȱ canȱbuyȱthemȱinȱtheȱfutureȱforȱaȱlowerȱpriceȱthanȱtheyȱwouldȱthenȱ

3.4ȱShareholdersȱagreementsȱȱȱȱȱȱ63ȱ

beȱworth.ȱAtȱtheȱsameȱtime,ȱifȱtheȱvalueȱgoesȱdown,ȱtheyȱhaveȱnotȱ lostȱanyȱactualȱmoney.ȱȱ Shareȱoptionsȱareȱaȱveryȱgoodȱwayȱofȱattractingȱandȱkeepingȱgoodȱ staff.ȱ Byȱ offeringȱ options,ȱ theȱ companyȱ isȱ providingȱ theȱ incentiveȱ thatȱifȱitȱdoesȱwell,ȱemployeesȱwillȱbeȱableȱtoȱshareȱinȱtheȱsuccess.ȱȱ Manyȱoptionȱschemesȱareȱapprovedȱbyȱtheȱtaxȱauthoritiesȱtoȱallowȱ taxȱtoȱbeȱpaidȱonlyȱwhenȱaȱcapitalȱgainȱisȱachieved.ȱThisȱisȱimporȬ tantȱbecauseȱifȱtheȱemployeeȱwasȱfacedȱwithȱaȱtaxȱbillȱbasedȱonȱtheȱ valueȱofȱtheȱoptionȱwhenȱitȱwasȱfirstȱgranted,ȱtheyȱwouldȱbeȱoutȱofȱ pocketȱandȱunlikelyȱtoȱacceptȱtheȱopportunity.ȱ OptionȱschemesȱshouldȱbeȱconsideredȱforȱallȱstartȬupȱcompaniesȱasȱ soonȱasȱtheyȱstartȱtoȱemployȱstaff.ȱInȱadditionȱtoȱtheȱincentiveȱtoȱseeȱ theȱcompanyȱprosper,ȱitȱalsoȱdetersȱvaluableȱstaffȱfromȱleavingȱtheȱ company.ȱIfȱtheyȱleave,ȱtheyȱlooseȱtheȱrightȱtoȱtakeȱupȱtheȱoption.ȱIfȱ yourȱ businessȱ isȱ goingȱ toȱ relyȱ onȱ theȱ knowledgeȱ orȱ experienceȱ ofȱ keyȱ membersȱ ofȱ staff,ȱ theseȱ ‘goldenȱ handcuffs’ȱ couldȱ beȱ veryȱ important.ȱ Optionsȱ willȱ beȱ expectedȱ byȱ newȱ seniorȱ managementȱ positionsȱinȱmanyȱcases.ȱ Itȱwouldȱnotȱbeȱunusualȱtoȱhaveȱupȱtoȱ10%ȱofȱtheȱcompanyȱequityȱ committedȱtoȱoptions.ȱTheȱexistingȱshareholdersȱareȱdilutedȱbyȱthisȱ amount,ȱbutȱifȱitȱpromotesȱaȱgrowthȱinȱtheȱshareȱvalue,ȱtheyȱwillȱbeȱ happy.ȱ

3.4 Shareholders agreements Inȱ additionȱ toȱ theȱ memorandumȱ andȱ articlesȱ whichȱ governȱ theȱ behaviourȱ ofȱ theȱ company,ȱ shareholdersȱ canȱ enterȱ intoȱ additionalȱ agreementsȱtoȱregulateȱtheȱrelationshipsȱbetweenȱthemȱandȱalsoȱtoȱ overcomeȱ anyȱ potentialȱ problemsȱ causedȱ byȱ aȱ majorityȱ shareȬ holding.ȱ Theseȱ agreementsȱ areȱ alsoȱ commonȱ inȱ casesȱ whereȱ shareholdersȱareȱworkingȱasȱdirectorsȱofȱtheȱcompany.ȱShareholdersȱ agreementsȱareȱthereforeȱveryȱcommonȱinȱstartȬupȱcompanies.ȱ

64ȱȱȱȱȱȱ3ȱWhatȱisȱaȱcompany?ȱȱ

Aȱgoodȱexampleȱofȱtheȱneedȱforȱaȱshareholdersȱagreementȱisȱinȱtheȱ caseȱofȱanȱacademicȱspinȬout.ȱInȱthisȱcaseȱtheȱprofessorȱisȱaȱdirectorȱ andȱshareholderȱofȱtheȱcompanyȱbutȱwillȱstillȱrequireȱaccessȱtoȱtheȱ universityȱ laboratoriesȱ toȱ developȱ theȱ researchȱ toȱ beȱ exploited.ȱ Thereȱ isȱ nowhereȱ inȱ theȱ articlesȱ ofȱ theȱ companyȱ thatȱ canȱ makeȱ provisionsȱlikeȱthis,ȱsoȱtheȱshareholdersȱagreementȱisȱusedȱtoȱallowȱ theȱ universityȱ (alsoȱ aȱ shareholder)ȱ toȱ promiseȱ toȱ commitȱ itsȱ resourcesȱ forȱ theȱ goodȱ ofȱ theȱ company.ȱ Theȱ identificationȱ andȱ vestingȱofȱanyȱnewȱintellectualȱpropertyȱthatȱisȱgeneratedȱcouldȱalsoȱ beȱdealtȱwithȱbyȱthisȱagreement.ȱ Shareholdersȱ agreementsȱ areȱ onlyȱ bindingȱ forȱ thoseȱ shareholdersȱ thatȱ signȱ upȱ toȱ them.ȱ Itȱ isȱ thereforeȱ possibleȱ toȱ haveȱ manyȱ agreementsȱ coveringȱ differentȱ topics,ȱ enteredȱ intoȱ byȱ differentȱ shareholders.ȱ Inȱ someȱ cases,ȱ theȱ directorsȱ ofȱ theȱ companyȱ andȱ theȱ otherȱshareholdersȱmayȱnotȱevenȱknowȱofȱanȱagreement.ȱȱ Theȱcompanyȱcouldȱalsoȱbeȱaȱpartyȱtoȱaȱshareholdersȱagreement,ȱinȱ itsȱ capacityȱ asȱ aȱ legalȱ entityȱ inȱ itsȱ ownȱ right.ȱ Inȱ thisȱ way,ȱ shareholdersȱagreementsȱcanȱbeȱusedȱtoȱprovideȱcontrolȱoverȱpolicyȱ forȱ dividendȱ payments,ȱ resolvingȱ conflictsȱ ofȱ interestȱ andȱ lotsȱ ofȱ otherȱcontrolȱandȱmanagementȱissues.ȱ

3.5 Roles and duties of directors Ifȱ aȱ companyȱ isȱ anȱ independentȱ legalȱ entity,ȱ theȱ directorsȱ areȱ itsȱ mindȱandȱwill.ȱ Theȱ purposeȱ ofȱ aȱ boardȱ ofȱ directorsȱ isȱ toȱ determineȱ theȱ missionȱ ofȱ theȱ company,ȱ setȱ theȱ strategyȱ toȱ achieveȱ it,ȱ allocateȱ theȱ resourcesȱ andȱ provideȱ oversightȱ toȱ theȱ delegatedȱ tasksȱ setȱ toȱ achieveȱ theȱ strategy.ȱ Atȱ theȱ sameȱ timeȱ theȱ directorsȱ areȱ accountableȱ toȱ theȱ shareholders.ȱ Theȱ boardȱofȱdirectorsȱisȱjointlyȱresponsibleȱforȱtheȱstewardshipȱofȱ theȱ companyȱ andȱ itsȱ assets.ȱ Theyȱ haveȱ aȱ dutyȱ ofȱ careȱ overȱ theȱ

3.5ȱRolesȱandȱdutiesȱofȱdirectorsȱȱȱȱȱȱ65ȱ

companyȱ forȱ theȱ shareholders.ȱ Unlikeȱ shareholders,ȱ eachȱ directorȱ onȱ aȱ boardȱ hasȱ aȱ singleȱ voteȱ andȱ allȱ votesȱ areȱ consideredȱ equal.ȱ Evenȱ ifȱ theyȱ areȱ theȱ majorityȱ shareholders,ȱ directorsȱ canȱ beȱ outvotedȱinȱboardȱlevelȱdecisions.ȱȱ Theȱjointȱresponsibilityȱisȱsharedȱbyȱallȱdirectors,ȱwhetherȱtheyȱholdȱ executiveȱpositionsȱorȱnot.ȱThisȱmeansȱthatȱnonȬexecutiveȱdirectors,ȱ whoȱ mayȱ onlyȱ attendȱ aȱ singleȱ boardȱ meetingȱ eachȱ month,ȱ holdȱ equalȱresponsibilityȱforȱtheȱcompanyȱunderȱtheȱlawȱasȱtheȱfullȱtimeȱ managingȱdirector.ȱThisȱisȱanȱimportantȱpointȱtoȱnoteȱforȱacademicsȱ whoȱtakeȱdirectorshipsȱofȱuniversityȱspinȬoutȱcompanies,ȱorȱfamilyȱ membersȱorȱfriendsȱwhoȱjointȱaȱboardȱtoȱhelpȱoutȱanȱentrepreneur,ȱ andȱmayȱnotȱrealiseȱtheȱlevelȱofȱresponsibilityȱtheyȱareȱtakingȱon.ȱȱ Theȱmanagementȱlevelȱofȱtheȱcompanyȱisȱempoweredȱbyȱtheȱboardȱ toȱ actȱ onȱ itsȱ strategy.ȱ Thisȱ distinctionȱ betweenȱ theȱ boardȱ andȱ theȱ managementȱcanȱbecomeȱblurredȱwithinȱaȱsmallȱstartȬupȱcompany.ȱ Itȱisȱimportantȱtoȱtryȱtoȱseparateȱtheȱtwoȱroles.ȱThisȱcanȱbeȱachievedȱ throughȱtheȱrunningȱofȱtwoȱregularȱmeetings,ȱoneȱaȱboardȱmeetingȱ andȱ oneȱ aȱ managementȱ meeting.ȱ Theȱ attendantsȱ mayȱ beȱ veryȱ similarȱbutȱtheȱagendaȱshouldȱclearlyȱseparateȱproperȱboardȱissuesȱ fromȱ managementȱ issues.ȱ Minutesȱ shouldȱ beȱ keptȱ ofȱ allȱ boardȱ meetings,ȱ andȱ managementȱ meetingsȱ forȱ thatȱ matter.ȱ Futureȱ investorsȱorȱbuyersȱwillȱwantȱtoȱseeȱtheseȱboardȱminutesȱtoȱseeȱthatȱ theȱcompanyȱhasȱbeenȱproperlyȱrunȱfromȱtheȱstart.ȱȱ Board composition Executiveȱ directors,ȱ whichȱ mightȱ includeȱ aȱ managingȱ director,ȱ technicalȱ director,ȱ marketingȱ directorȱ etc.,ȱ haveȱ dualȱ roles.ȱ Theyȱ mustȱfulfilȱtheȱresponsibilitiesȱofȱcorporateȱgovernanceȱonȱoneȱpartȱ andȱ theȱ responsibilitiesȱ ofȱ managementȱ onȱ theȱ other.ȱ Thereȱ areȱ likelyȱ toȱ beȱ timesȱ whenȱ thereȱ areȱ conflictsȱ ofȱ interestȱ betweenȱ theȱ twoȱroles.ȱMoreȱpotentialȱconflictsȱofȱinterestȱoccurȱwhenȱtheȱboardȱ setsȱexecutiveȱdirectors’ȱpay.ȱ

66ȱȱȱȱȱȱ3ȱWhatȱisȱaȱcompany?ȱȱ

TheȱinclusionȱofȱstrongȱandȱeffectiveȱnonȬexecutiveȱdirectorsȱonȱtheȱ boardȱ willȱ oftenȱ helpȱ toȱ addressȱ suchȱ conflictsȱ andȱ tensions.ȱ NonȬ executivesȱmayȱbeȱdrawnȱfromȱtheȱinvestorsȱorȱmayȱbeȱappointedȱtoȱ bringȱ specialistȱ expertiseȱ orȱ experience.ȱ Inȱ largeȱ companiesȱ theseȱ positionsȱattractȱaȱsalaryȱbutȱveryȱoftenȱinȱsmallȱstartȬupȱcompanies,ȱ goodȱnonȬexecutivesȱcanȱbeȱrewardedȱthroughȱshareȱoptions.ȱȱ Differentȱ aspectsȱ ofȱ theȱ board’sȱ responsibilitiesȱ canȱ beȱ dealtȱ withȱ throughȱ boardȱ committees.ȱ Thisȱ canȱ beȱ aȱ usefulȱ tacticȱ whenȱ youȱ wantȱ toȱ includeȱ additionalȱ experienceȱ onȱ yourȱ boardȱ butȱ avoidȱ heavyȱinterferenceȱinȱtheȱcompany’sȱstrategy.ȱSomeȱcommonȱboardȱ committeesȱ includeȱ anȱ auditȱ committee,ȱ remunerationȱ committeeȱ andȱplanningȱcommittee.ȱ Director’s duties ThereȱisȱnoȱsingleȱcodeȱofȱconductȱforȱdirectorsȱinȱtheȱUK,ȱratherȱaȱ setȱofȱdutiesȱprovidedȱforȱbyȱdifferentȱlawsȱandȱtestȱcases.ȱThereȱareȱ alsoȱ severalȱ sourcesȱ ofȱ bestȱ practiceȱ information.ȱ Lawsȱ governingȱ companyȱregulationȱandȱdirector’sȱdutyȱvaryȱthroughoutȱtheȱworld.ȱ TheȱfollowingȱappliesȱtoȱUKȱlimitedȱcompanies.ȱ Asȱalreadyȱmentioned,ȱtheȱdirectorsȱofȱaȱcompanyȱshareȱtheȱduties.ȱ Thisȱ actuallyȱ extendsȱ toȱ peopleȱ whoȱ actȱ andȱ areȱ treatedȱ likeȱ directorsȱ butȱ whoȱ areȱ notȱ formallyȱ appointed.ȱ Theseȱ soȱ calledȱ ‘shadowȱdirectors’ȱshareȱtheȱresponsibilities.ȱ Theȱ director’sȱ dutiesȱ areȱ owedȱ toȱ theȱ company,ȱ notȱ toȱ individualȱ shareholders.ȱ Onlyȱ inȱ exceptionalȱ circumstancesȱ canȱ aȱ shareholderȱ sueȱtheȱcompanyȱtoȱenforceȱitsȱrightȱtoȱsueȱanȱerrantȱdirector.ȱȱ Director’sȱdutiesȱandȱresponsibilitiesȱfallȱintoȱ6ȱmainȱheadings:ȱ x Fiduciaryȱdutiesȱ x Dutiesȱofȱcareȱandȱskillȱ x Dutiesȱofȱinternalȱmanagementȱ x Dutiesȱtoȱthirdȱpartiesȱ

3.5ȱRolesȱandȱdutiesȱofȱdirectorsȱȱȱȱȱȱ67ȱ

x x

Criminalȱactsȱ DutiesȱduringȱtheȱwindingȬupȱofȱtheȱcompanyȱ

Underȱtheirȱfiduciaryȱduties,ȱaȱdirectorȱmustȱnotȱputȱthemselvesȱinȱ aȱ positionȱ whereȱ theȱ interestsȱ ofȱ theȱ companyȱ conflictȱ withȱ theirȱ personalȱ interestsȱ orȱ dutiesȱ toȱ aȱ thirdȱ party.ȱ Directorsȱ canȱ haveȱ outsideȱinterests,ȱbutȱmustȱdeclareȱthemȱtoȱtheȱboardȱifȱaȱconflictȱisȱ likely.ȱ Forȱ exampleȱ ifȱ aȱ directorȱ isȱ alsoȱ aȱ shareholderȱ ofȱ aȱ supplierȱ companyȱ whichȱ tendersȱ forȱ business,ȱ orȱ ifȱ anȱ individualȱ isȱ aȱ directorȱofȱtwoȱcompaniesȱthatȱmightȱcompeteȱwithȱeachȱotherȱforȱaȱ contract.ȱȱ Otherȱfiduciaryȱdutiesȱincludeȱnotȱmakingȱaȱprofitȱfromȱtheȱpositionȱ ofȱdirectorȱandȱactingȱinȱgoodȱfaithȱinȱtheȱinterestsȱofȱtheȱcompany.ȱ Directorsȱareȱexpectedȱtoȱcarryȱoutȱtheirȱroleȱshowingȱaȱlevelȱofȱskillȱ andȱ care.ȱ Ifȱ aȱ directorȱ breachesȱ thisȱ dutyȱ theyȱ canȱ beȱ personallyȱ liable.ȱ Ignoranceȱ isȱ noȱ defence,ȱ ifȱ theȱ breachȱ couldȱ haveȱ beenȱ avoidedȱ hadȱ theȱ directorȱ takenȱ legalȱ orȱ professionalȱ advice,ȱ theyȱ willȱnotȱbeȱexcused.ȱ Directorsȱhaveȱcertainȱdutiesȱofȱinternalȱmanagementȱsetȱoutȱbyȱtheȱ 1985ȱCompaniesȱAct.ȱTheseȱincludeȱtheȱkeepingȱofȱaccounts,ȱbooksȱ andȱmakingȱtimelyȱfilingsȱtoȱtheȱstate.ȱFailureȱtoȱcomplyȱcanȱresultȱ inȱfinesȱandȱinȱseriousȱcases,ȱimprisonment.ȱ Directorsȱ alsoȱ haveȱ dutiesȱ toȱ thirdȱ partiesȱ includingȱ employees,ȱ shareholders,ȱcustomers,ȱsuppliersȱandȱtoȱensureȱthatȱtheȱcompanyȱ compliesȱwithȱhealthȱandȱsafetyȱregulations.ȱȱ Ifȱ theȱ companyȱ commitsȱ aȱ criminalȱ offence,ȱ theȱ directorsȱ mayȱ beȱ judgedȱ toȱ haveȱ committedȱ anȱ equivalentȱ offenceȱ ifȱ theyȱ providedȱ consentȱ toȱ theȱ actȱ orȱ ifȱ theȱ actȱ occurredȱ dueȱ toȱ negligenceȱ orȱ aȱ failureȱ ofȱ theirȱ dutyȱ ofȱ care.ȱ Casesȱ ofȱ Directorsȱ beingȱ personallyȱ chargedȱasȱresponsibleȱforȱtheirȱcompany’sȱcriminalȱbehaviourȱhaveȱ includedȱ tobaccoȱ companies,ȱ companiesȱ chargedȱ ofȱ environmentalȱ

68ȱȱȱȱȱȱ3ȱWhatȱisȱaȱcompany?ȱȱ

pollutionȱ andȱ moreȱ recently,ȱ publicȱ transportȱ operationsȱ thatȱ haveȱ beenȱinvolvedȱinȱfatalȱaccidents.ȱȱ Insolvency Whileȱonȱtheȱtopicȱofȱdirectorsȱresponsibilities,ȱitȱisȱalsoȱworthȱyouȱ knowingȱ theȱ definitionsȱ ofȱ insolvency,ȱ fraudulentȱ andȱ wrongfulȱ trading.ȱ Unfortunatelyȱ theseȱ areȱ veryȱ relevantȱ toȱ smallȱ companiesȱ thatȱrunȱintoȱcashȱflowȱproblems.ȱȱ Aȱ companyȱ becomesȱ insolventȱ whenȱ itȱ noȱ longerȱ hasȱ theȱ financialȱ meansȱtoȱsettleȱitsȱdebts.ȱDirectorsȱshouldȱbeȱawareȱofȱthisȱsituationȱ shouldȱ itȱ ariseȱ andȱ shouldȱ notȱ commitȱ theȱ companyȱ toȱ furtherȱ debts.ȱ Directorsȱ canȱ becomeȱ personallyȱ liableȱ forȱ debtsȱ thatȱ areȱ incurredȱafterȱtheȱcompanyȱhasȱbecomeȱinsolvent.ȱ Fraudulentȱtradingȱisȱdefinedȱasȱknowinglyȱcarryingȱonȱaȱbusinessȱ withȱtheȱintentȱtoȱdefraudȱcreditors.ȱInȱtheȱcaseȱwhereȱaȱcompanyȱisȱ insolvent,ȱ thisȱ becomesȱ relevantȱ asȱ incurringȱ debtsȱ whenȱ theȱ directorsȱ knowȱ thatȱ thereȱ isȱ littleȱ prospectȱ ofȱ theȱ companyȱ beingȱ ableȱ toȱ payȱ themȱ isȱ deemedȱ asȱ fraudulent.ȱ Asȱ thisȱ isȱ aȱ seriousȱ criminalȱoffence,ȱprisonȱsentencesȱareȱnotȱuncommon.ȱ Again,ȱignoranceȱofȱtheȱfinancialȱstateȱofȱtheȱcompanyȱisȱnoȱdefence.ȱ Wrongfulȱ tradingȱ coversȱ casesȱ whereȱ theȱ directorsȱ haveȱ failedȱ toȱ realiseȱthatȱtheȱcompanyȱwasȱbecomingȱinsolvent.ȱWrongfulȱtradingȱ assumesȱthatȱtheȱdirectorsȱshouldȱhaveȱknownȱtheȱsituationȱandȱareȱ thereforeȱliable.ȱȱ Whenȱpresentedȱlikeȱthis,ȱtheȱdutiesȱandȱresponsibilitiesȱofȱdirectorsȱ mayȱ seemȱ aȱ littleȱ scary.ȱ Becomingȱ aȱ directorȱ ofȱ aȱ companyȱ isȱ aȱ seriousȱ matterȱ andȱ oneȱ thatȱ shouldȱ notȱ beȱ takenȱ lightly.ȱ Thereȱ areȱ manyȱ sourcesȱ ofȱ adviceȱ onȱ everythingȱ coveredȱ inȱ thisȱ chapterȱ andȱ inȱtheȱsameȱwayȱasȱyouȱareȱadvisedȱtoȱseekȱprofessionalȱintellectualȱ propertyȱadvice,ȱaȱgoodȱcorporateȱlawyerȱwillȱbeȱveryȱimportantȱtoȱ yourȱcompanyȱasȱitȱprogresses.ȱ

4 How do you market your product?

Soȱ farȱ weȱ haveȱ exploredȱ theȱ potentialȱ demandȱ forȱ yourȱ idea,ȱ weȱ haveȱ lookedȱ atȱ theȱ industryȱ youȱ willȱ beȱ competingȱ inȱ andȱ weȱ areȱ readyȱtoȱestablishȱaȱlimitedȱcompanyȱasȱtheȱvehicleȱforȱyourȱplans.ȱ Allȱthatȱremainsȱisȱtoȱstartȱselling.ȱ Well,ȱnotȱexactly.ȱMarketingȱisȱindeedȱtheȱnextȱthingȱonȱourȱlistȱbutȱ marketingȱ isȱ notȱ justȱ businessȱ speakȱ forȱ selling,ȱ itȱ involvesȱ aȱ greatȱ dealȱmoreȱthanȱthat.ȱȱ

4.1 Marketing and selling Iȱdefineȱmarketingȱas:ȱ Theȱ strategiesȱ employedȱ acrossȱ theȱ entireȱ processȱ ofȱ designingȱ yourȱ offeringȱ toȱ meetȱ theȱ needsȱ ofȱ theȱ customersȱ youȱ wantȱ toȱ sellȱ to,ȱ andȱ theȱ mechanismsȱ byȱ whichȱ youȱ promoteȱ itȱ andȱ finallyȱ deliverȱ itȱ toȱ theirȱ satisfaction.ȱ Thereȱisȱanȱoldȱsayingȱthatȱstatesȱthatȱ‘ifȱyouȱinventȱaȱbetterȱmouseȱ trap,ȱtheȱworldȱwillȱbeatȱaȱpathȱtoȱyourȱdoor’.ȱUnfortunatelyȱthisȱisȱ simplyȱnotȱtrue.ȱProductsȱthatȱachieveȱgreatȱmarketȱsuccessȱrelyȱonȱ aȱ lotȱ moreȱ thanȱ simplyȱ beingȱ technicallyȱ superiorȱ toȱ theȱ compȬ etition.ȱ Betterȱmarketingȱisȱresponsibleȱforȱaȱlongȱlistȱofȱsuccessfulȱproductsȱ thatȱ haveȱ beatenȱ offȱ technicallyȱ superiorȱ competition.ȱ VHSȱ videoȱ beatȱ Betamax,ȱ whichȱ wasȱ aȱ betterȱ technologyȱ andȱ isȱ stillȱ usedȱ byȱ broadcastȱprofessionals.ȱApple’sȱphenomenalȱsuccessȱwithȱtheȱiPodȱ isȱ lessȱ aboutȱ itsȱ technology,ȱ thereȱ areȱ anyȱ numberȱ ofȱ cleverȱ MP3ȱ

70ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

players,ȱ butȱ moreȱ aboutȱ Apple’sȱ marketingȱ strategy.ȱ Thatȱ markȬ etingȱ effortȱ hasȱ includedȱ theȱ product’sȱ physicalȱ designȱ andȱ easyȱ controls,ȱ theȱ trademarkȱ whiteȱ earpieceȱ leads,ȱ theȱ introductionȱ ofȱ iTunesȱ toȱ provideȱ theȱ music,ȱ encouragementȱ ofȱ theȱ PodCastȱ mediumȱ asȱ wellȱ asȱ theȱ moreȱ traditionalȱ promotionȱ andȱ sellingȱ activities.ȱItȱisȱlikelyȱthatȱtheȱcurrentȱcompetitionȱbetweenȱrivalȱhighȱ densityȱ DVDȱ formatsȱ willȱ notȱ beȱ wonȱ onȱ theȱ groundsȱ ofȱ technicalȱ superiorityȱbutȱonȱtheȱmarketingȱthoughtȱandȱeffortȱthatȱeachȱcampȱ canȱbringȱtoȱbare.ȱ Definingȱ marketingȱ asȱ aȱ strategicȱ processȱ thatȱ encapsulatesȱ everythingȱ fromȱ technicalȱ specificationȱ throughȱ toȱ eventualȱ delivery,ȱ meansȱ thatȱ everyȱ productȱ decisionȱ becomesȱ aȱ marketingȱ decision.ȱ Thisȱ isȱ whereȱ aȱ thoroughȱ understandingȱ ofȱ yourȱ targetȱ customer’sȱproblem,ȱwhichȱyouȱdevelopedȱinȱchapterȱ1,ȱwillȱreallyȱ becomeȱ valuable.ȱ Everyȱ decisionȱ thatȱ youȱ makeȱ inȱ developingȱ theȱ productȱ orȱ serviceȱ needsȱ toȱ referȱ backȱ toȱ theȱ customersȱ needȱ toȱ solveȱ theirȱ problem.ȱ Workingȱ thisȱ wayȱ isȱ sometimesȱ knownȱ asȱ beingȱmarketȱledȱandȱifȱyouȱgetȱthatȱright,ȱtheȱpromotingȱandȱactualȱ sellingȱofȱtheȱproductȱwillȱbeȱmuchȱeasier.ȱ Myȱ definitionȱ ofȱ marketingȱ alsoȱ refersȱ toȱ ‘customersȱ youȱ wantȱ toȱ sellȱto’.ȱThisȱdefinesȱyourȱmarket.ȱAsȱyourȱbusinessȱgrowsȱyouȱwillȱ needȱ toȱ moveȱ fromȱ oneȱ marketȱ toȱ theȱ next,ȱ butȱ howȱ doȱ youȱ drawȱ boundariesȱ betweenȱ themȱ andȱ decideȱ whatȱ orderȱ toȱ addressȱ themȱ in?ȱTheȱboundariesȱwithinȱanȱoverallȱmarketȱwillȱvary,ȱbutȱcouldȱbeȱ basedȱ onȱ geography,ȱ language,ȱ targetȱ customers’ȱ age,ȱ industryȱ sector,ȱavailableȱrevenueȱorȱtheȱnatureȱofȱtheȱcustomersȱneed.ȱȱ Aȱgoodȱwayȱtoȱhelpȱyouȱdefineȱtheseȱboundariesȱisȱtoȱseparateȱoutȱ groupsȱwithinȱtheȱmarketȱthatȱareȱreasonablyȱlikelyȱtoȱcommunicateȱ withȱeachȱotherȱinȱsomeȱway.ȱThisȱcouldȱbeȱthroughȱtheȱinfluenceȱofȱ theȱ sameȱ people,ȱ readingȱ theȱ sameȱ tradeȱ pressȱ orȱ attendingȱ theȱ sameȱexhibitions.ȱCustomersȱdoȱlikeȱtoȱshareȱopinionsȱaboutȱthingsȱ theyȱ haveȱ boughtȱ orȱ servicesȱ theyȱ haveȱ used.ȱ Whenȱ wasȱ theȱ lastȱ timeȱyouȱateȱatȱanȱexpensiveȱrestaurantȱwithoutȱreadingȱaȱreviewȱorȱ

4.2ȱTheȱproductȱadoptionȱlifecycleȱȱȱȱȱ71ȱȱ

hearingȱsomewhereȱthatȱitȱwasȱgood.ȱTheȱmarketȱforȱthatȱrestaurantȱ hasȱ boundariesȱ definedȱ byȱ howȱ farȱ wordȱ canȱ spreadȱ aboutȱ itsȱ quality.ȱ Geographyȱisȱthereforeȱanȱobviousȱboundary.ȱAȱsatisfiedȱcustomerȱ hasȱlimitsȱtoȱhowȱfarȱtheyȱcanȱspreadȱtheȱnewsȱandȱtheȱrelevanceȱofȱ theȱrecommendationȱcanȱbecomeȱlessȱasȱtheȱdistanceȱincreases.ȱTheȱ internetȱhasȱdramaticallyȱreducedȱgeographicȱrelevanceȱbutȱifȱyourȱ serviceȱisȱlocationȱbased,ȱtheȱboundaryȱwillȱbeȱveryȱlocalised.ȱ Toȱ defineȱ yourȱ marketȱ boundaries,ȱ returnȱ toȱ yourȱ answersȱ toȱ theȱ questionsȱ posedȱ inȱ theȱ firstȱ chapter.ȱ Fromȱ yourȱ definitionȱ ofȱ whoȱ yourȱ customersȱ are,ȱ divideȱ themȱ intoȱ differentȱ marketȱ segmentsȱ usingȱ sensibleȱ distinctionsȱ suchȱ asȱ geography,ȱ age,ȱ industryȱ sectorȱ andȱ soȱ on.ȱWhatȱ youȱ willȱ endȱ upȱ withȱ isȱ aȱ setȱ ofȱ differentȱ smallerȱ marketsȱ withinȱ whichȱ itȱ isȱ reasonableȱ toȱ expectȱ thatȱ ifȱ youȱ convincedȱ aȱ keyȱ opinionȱ leaderȱ orȱ placedȱ aȱ strategicȱ advert,ȱ wordȱ couldȱspreadȱthroughoutȱthatȱniche.ȱ

4.2 The product adoption lifecycle Marketsȱareȱalsoȱsegmentedȱbyȱtheirȱattitudeȱtoȱnewȱproductsȱandȱ theirȱ buyingȱ behaviour.ȱ Inȱ 1991,ȱ inȱ hisȱ widelyȱ acclaimedȱ bookȱ ‘Crossingȱ theȱ Chasm’,ȱ Geoffreyȱ Mooreȱ describedȱ theȱ technologyȱ adoptionȱlifecycleȱandȱtheȱdifferentȱgroupsȱwithinȱit.ȱTheȱprincipleȱ isȱthatȱwithinȱanyȱmarket,ȱthereȱwillȱbeȱsomeȱbuyersȱwhoȱareȱkeenȱ toȱ experiment,ȱ othersȱ whoȱ willȱ onlyȱ buyȱ whenȱ theirȱ peersȱ doȱ andȱ yetȱothersȱwhoȱwillȱresistȱbuyingȱuntilȱthereȱisȱnoȱotherȱchoice.ȱȱ Theseȱ behaviouralȱ differencesȱ withinȱ theȱ marketȱ spreadȱ outȱ yourȱ salesȱ overȱ aȱ longȱ periodȱ ofȱ time.ȱ Theȱ diagramȱ belowȱ representsȱ aȱ typicalȱ marketȱ penetrationȱ rateȱ forȱ aȱ newȱ productȱ orȱ service.ȱ Theȱ differentȱ stagesȱ ofȱ theȱ curveȱ canȱ beȱ attributedȱ toȱ differentȱ buyingȱ behavioursȱandȱinȱmostȱcases,ȱyouȱwillȱneedȱtoȱadjustȱtheȱwayȱyouȱ

72ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

marketȱ yourȱ productȱ orȱ serviceȱ toȱ meetȱ theȱ demandsȱ ofȱ theseȱ differentȱcustomerȱgroups.ȱ

ȱ Fig.ȱ4.1.ȱTheȱproductȱadoptionȱcurveȱ

Theȱ areasȱ withinȱ eachȱ partȱ ofȱ theȱ curveȱ areȱ veryȱ important.ȱ Theȱ biggerȱtheȱarea,ȱtheȱmoreȱcustomersȱthereȱareȱofȱthatȱtype.ȱThereforeȱ thereȱ willȱ beȱ manyȱ moreȱ customersȱ inȱ theȱ earlyȱ majorityȱ marketȱ thanȱinȱtheȱearlyȱadopterȱmarket.ȱLet’sȱlookȱatȱeachȱofȱtheȱgroupsȱinȱ turn.ȱ Innovators Ifȱ youȱ haveȱ aȱ newȱ enablingȱ technologyȱ orȱ somethingȱ particularlyȱ unique,ȱyourȱfirstȱcustomersȱareȱlikelyȱtoȱbeȱinnovators.ȱInnovatorsȱ seekȱ outȱ newȱ technology,ȱ productsȱ andȱ servicesȱ oftenȱ beforeȱ itȱ isȱ formallyȱ marketed.ȱ Theyȱ areȱ interestedȱ inȱ theȱ technologyȱ forȱ itsȱ ownȱ sakeȱ andȱ happyȱ toȱ liveȱ withȱ poorȱ performance,ȱ nonȬexistentȱ documentationȱandȱteethingȱproblems.ȱȱ Innovatorsȱ wereȱ theȱ peopleȱ whoȱ boughtȱ theȱ veryȱ firstȱ digitalȱ camerasȱ whenȱ theȱ imageȱ qualityȱ wasȱ bad,ȱ thereȱ wasȱ aȱ 2ȱ secondȱ delayȱ betweenȱ pressingȱ theȱ shutterȱ buttonȱ andȱ theȱ photoȱ beingȱ taken,ȱyouȱcouldȱonlyȱstoreȱaȱfewȱimagesȱonȱtheȱtinyȱmemoryȱcardȱ andȱthenȱitȱtookȱagesȱtoȱtransferȱtheȱresultsȱtoȱaȱPC.ȱItȱdidn’tȱmatterȱ

4.2ȱTheȱproductȱadoptionȱlifecycleȱȱȱȱȱ73ȱȱ

thatȱitȱwasȱhighlyȱimpractical,ȱitȱwasȱaȱdigitalȱcameraȱandȱtheyȱhadȱ toȱhaveȱone.ȱ Quiteȱ clearly,ȱ theseȱ individualȱ customersȱ areȱ fewȱ inȱ numberȱ andȱ youȱ mightȱ evenȱ beȱ temptedȱ toȱ skipȱ overȱ themȱ onȱ yourȱ wayȱ toȱ theȱ largerȱmarkets.ȱHoweverȱtheyȱareȱveryȱusefulȱforȱcarryingȱoutȱearlyȱ productȱtrialsȱandȱtheyȱoftenȱprovideȱgoodȱqualityȱfeedbackȱasȱtheyȱ areȱknowledgeableȱaboutȱallȱtheȱlikelyȱcompetition.ȱ Early adopters Earlyȱ adoptersȱ areȱ theȱ firstȱ groupȱ ofȱ customersȱ whoȱ areȱ actuallyȱ interestedȱ inȱ whatȱ yourȱ productȱ canȱ doȱ forȱ themȱ andȱ howȱ itȱ willȱ solveȱtheirȱproblems.ȱTheyȱareȱhoweverȱvisionaries.ȱTheyȱareȱprepȬ aredȱ toȱ buyȱ yourȱ productȱ becauseȱ itȱ willȱ offerȱ thenȱ aȱ strategicȱ advantage.ȱȱ Earlyȱadoptersȱwereȱtheȱfirstȱtoȱbuyȱmobileȱphonesȱinȱtheȱearlyȱ90s.ȱ Theȱcostȱwasȱhighȱandȱtheȱcoverageȱwasȱpatchy,ȱbutȱitȱgaveȱthemȱaȱ strategicȱ advantageȱ inȱ beingȱ ableȱ toȱ performȱ betterȱ byȱ keepingȱ inȱ constantȱcommunication.ȱ Earlyȱadoptersȱareȱoftenȱhappyȱtoȱactȱasȱhighlyȱvisibleȱreferencesȱforȱ yourȱproduct,ȱwritingȱtradeȱarticlesȱandȱpapersȱaboutȱitsȱuse.ȱEarlyȱ adoptersȱ provideȱ goodȱ earlyȱ salesȱ growth,ȱ butȱ theyȱ soonȱ moveȱ onȱ toȱtheȱnextȱbigȱthing.ȱȱ Theȱ majorityȱ marketȱ isȱ theȱ bigȱ prize.ȱ Inȱ mostȱ casesȱ thereȱ isȱ notȱ enoughȱrevenueȱpotentialȱinȱtheȱfirstȱtwoȱearlyȱmarketȱstagesȱtoȱpayȱ forȱyourȱdevelopmentȱcostsȱandȱcertainlyȱnotȱenoughȱcustomersȱtoȱ sustainȱyourȱbusinessȱgoingȱforward.ȱTheȱbehaviourȱofȱtheȱmajorityȱ marketȱcanȱbeȱseparatedȱintoȱtwo,ȱtheȱearlyȱandȱlateȱmajorities.ȱ

74ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

Early majority Theȱ earlyȱ majorityȱ areȱ muchȱ moreȱ pragmaticȱ thanȱ theȱ earlyȱ adopters.ȱ Theseȱ customersȱ areȱ keenȱ toȱ haveȱ theirȱ problemȱ solvedȱ butȱ areȱ muchȱ moreȱ riskȱ averse.ȱ Theyȱ takeȱ theȱ attitudeȱ thatȱ itȱ isȱ betterȱtoȱletȱsomeoneȱelseȱdeȬbugȱtheȱproduct.ȱCruciallyȱtheyȱareȱtheȱ firstȱ groupȱ ofȱ customersȱ forȱ whomȱ referencesȱ areȱ important.ȱ Thisȱ meansȱthatȱtheyȱareȱhighlyȱinfluencedȱbyȱwhatȱtheirȱpeersȱthinkȱofȱ theȱproduct.ȱȱ Late majority Theȱ lateȱ majorityȱ areȱ moreȱ conservativeȱ inȱ theirȱ attitudeȱ toȱ newȱ technologyȱandȱideas.ȱTheyȱhaveȱaȱnostalgicȱandȱtraditionalȱoutlookȱ andȱ onlyȱ buyȱ intoȱ anȱ ideaȱ whenȱ itȱ isȱ wellȱ established,ȱ typicallyȱ suppliedȱ byȱ aȱ brandȱ theyȱ trustȱ andȱ theȱ priceȱ hasȱ droppedȱ toȱ aȱ sensibleȱ levelȱ inȱ theirȱ mind.ȱ Lateȱ majorityȱ customersȱ likeȱ toȱ buyȱ bundledȱproductsȱthatȱworkȱseamlessly.ȱ Laggards Theȱ finalȱ groupȱ inȱ theȱ processȱ areȱ theȱ laggards.ȱ Thisȱ sometimesȱ surprisinglyȱ largeȱ groupȱ areȱ highlyȱ resistantȱ toȱ changeȱ andȱ anythingȱ new.ȱ Theyȱ onlyȱ buyȱ whenȱ thereȱ isȱ absolutelyȱ noȱ alterȬ nativeȱ andȱ theȱ priceȱ hasȱ droppedȱ toȱ theȱ lowestȱ itȱ isȱ likelyȱ to.ȱ Laggardsȱ areȱ theȱ peopleȱ whoȱ stillȱ haven’tȱ boughtȱ aȱ DVDȱ playerȱ evenȱthoughȱtheyȱareȱunderȱ$50ȱandȱcomeȱwithȱ50ȱfreeȱfilms.ȱThisȱ groupȱ isȱ oftenȱ ignoredȱ butȱ theyȱ doȱ representȱ aȱ sizableȱ marketȱ soȱ mayȱ beȱ worthȱ makingȱ theȱ effortȱ for,ȱ especiallyȱ ifȱ yourȱ offeringȱ includesȱtheȱsupplyȱofȱpartsȱorȱfollowȬonȱservicesȱthatȱcouldȱlastȱforȱ aȱconsiderableȱtime.ȱ

4.3ȱMovingȱfromȱoneȱgroupȱtoȱtheȱnextȱȱȱȱȱ75ȱȱ

4.3 Moving from one group to the next Theseȱdifferentȱbehavioursȱsegmentȱvirtuallyȱeveryȱmarketȱbutȱareȱ particularlyȱ acuteȱ inȱ technologyȱ basedȱ markets.ȱ Asȱ youȱ canȱ see,ȱ theirȱ behaviourȱ isȱ likelyȱ toȱ requireȱ differentȱ marketingȱ strategiesȱ andȱ thisȱ meansȱ thatȱ asȱ aȱ business,ȱ youȱ needȱ toȱ identifyȱ whenȱ theȱ transitionsȱareȱlikelyȱtoȱoccurȱandȱplanȱforȱthem.ȱ TheȱprincipleȱmessageȱofȱMoore’sȱbookȱisȱthatȱtheȱtransitionsȱareȱaȱ littleȱ moreȱ thanȱ simpleȱ bumpsȱ inȱ theȱ road.ȱ Ifȱ weȱ lookȱ atȱ theȱ transitionȱ betweenȱ earlyȱ adopterȱ andȱ earlyȱ majority,ȱ notȱ gettingȱ itȱ rightȱcanȱeasilyȱstopȱyouȱinȱyourȱtracks.ȱ Theȱ difficultyȱ isȱ causedȱ byȱ theȱ pragmatistsȱ needingȱ toȱ seeȱ theirȱ peersȱ successfullyȱ workȱ withȱ youȱ beforeȱ theyȱ willȱ takeȱ thatȱ risk.ȱ Peersȱ toȱ aȱ pragmatistȱ meanȱ peopleȱ likeȱ them,ȱ notȱ theȱ innovatorsȱ andȱvisionariesȱthatȱyouȱhaveȱalreadyȱsoldȱto.ȱThisȱcreatesȱaȱ‘catchȱ 22’ȱ situation,ȱ pragmaticsȱ won’tȱ buyȱ fromȱ youȱ untilȱ theyȱ seeȱ otherȱ pragmatistsȱbuyingȱfromȱyou.ȱȱ Breakingȱintoȱtheȱmajorityȱmarketȱbecomesȱtheȱsingleȱmostȱdifficultȱ stageȱofȱaȱstartȬupȱcompany’sȱlife.ȱOneȱminuteȱsalesȱareȱgrowingȱasȱ theȱ earlyȱ adoptersȱ buyȱ intoȱ yourȱ idea,ȱ theȱ nextȱ minute,ȱ salesȱ collapseȱasȱyouȱexhaustȱtheȱearlyȱadoptersȱbutȱfailȱtoȱwalkȱstraightȱ intoȱ theȱ majorityȱ market.ȱ Aȱ moreȱ typicalȱ salesȱ curveȱ isȱ shownȱ below.ȱ Theȱ sizeȱ andȱ durationȱ ofȱ theȱ dip,ȱ andȱ whetherȱ youȱ everȱ comeȱoutȱofȱit,ȱwillȱdependȱonȱyourȱmarketingȱstrategyȱforȱenteringȱ theȱmajorityȱmarket.ȱ

76ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

ȱ Fig.ȱ4.2.ȱTheȱrealȱadoptionȱcurveȱ

StartȬupȱcompaniesȱareȱparticularlyȱvulnerableȱtoȱthisȱdip.ȱTheȱearlyȱ growthȱofȱsalesȱisȱveryȱexcitingȱandȱitȱisȱeasyȱtoȱgetȱcarriedȱawayȱbyȱ theȱ success.ȱ Ifȱ theȱ dipȱ occursȱ justȱ afterȱ youȱ haveȱ appointedȱ yourȱ newȱpersonalȱassistantȱandȱputȱaȱdepositȱdownȱonȱaȱsportsȱcar,ȱyouȱ areȱgoingȱtoȱbeȱinȱtrouble.ȱ Theȱ laterȱ transitionsȱ areȱ stillȱ felt,ȱ butȱ areȱ notȱ asȱ dangerousȱ asȱ theȱ first.ȱYouȱcanȱseeȱtheȱeffectȱofȱbusinessesȱchangingȱtheirȱmarketingȱ strategiesȱ asȱ theyȱ moveȱ fromȱ earlyȱ toȱ lateȱ majorityȱ markets.ȱ PCȱ manufacturers,ȱ forȱ example,ȱ inȱ movingȱ fromȱ theȱ earlyȱ majorityȱ toȱ theȱ lateȱ majority,ȱ haveȱ changedȱ fromȱ sellingȱ separateȱ componentsȱ toȱ offeringȱ completeȱ bundlesȱ ofȱ PC,ȱ monitor,ȱ printer,ȱ scannerȱ andȱ pilesȱofȱsoftwareȱatȱeverȱreducedȱprices.ȱȱȱ Winning the majority market Theȱ secretȱ toȱ successfullyȱ breakingȱ intoȱ theȱ majorityȱ marketȱ isȱ carefulȱmarketȱsegmentation.ȱLet’sȱlookȱatȱResearchȱinȱMotionȱLtd.,ȱ theȱ highlyȱ successfulȱ Canadianȱ mobileȱ communicationsȱ companyȱ behindȱ theȱ Blackberryȱ wirelessȱ platform.ȱ RIMȱ wasȱ formedȱ inȱ 1984ȱ withȱ anȱ innovativeȱ newȱ technologyȱ thatȱ allowedȱ timeȱ sensitiveȱ informationȱtoȱbeȱ‘pushed’ȱtoȱcustomers’ȱmobileȱhandsetsȱasȱsoonȱasȱ itȱbecameȱknown.ȱUpȱuntilȱthisȱpoint,ȱdataȱwasȱavailableȱbutȱneededȱ toȱ beȱ fetchedȱ fromȱ aȱ sourceȱ orȱ serverȱ byȱ theȱ user’sȱ device.ȱ Theȱ

4.3ȱMovingȱfromȱoneȱgroupȱtoȱtheȱnextȱȱȱȱȱ77ȱȱ

differenceȱ mayȱ seemȱ almostȱ trivial.ȱ Onȱ oneȱ hand,ȱ ifȱ youȱ wantȱ toȱ knowȱsomethingȱyouȱask,ȱonȱtheȱother,ȱyouȱareȱtoldȱtheȱinformationȱ asȱsoonȱasȱitȱbecomesȱavailable.ȱȱ Theȱcompanyȱwasȱableȱtoȱidentifyȱlotsȱofȱpotentialȱusersȱwhoȱmightȱ beȱableȱtoȱbenefitȱfromȱthisȱcapabilityȱbutȱtryingȱtoȱsellȱtoȱthemȱallȱ wouldȱstretchȱtheȱresourcesȱofȱtheȱyoungȱcompanyȱveryȱthinlyȱandȱ theyȱwouldȱstruggleȱtoȱbreakȱintoȱanyȱofȱtheȱmajorityȱmarkets.ȱTheȱ companyȱwasȱhoweverȱableȱtoȱidentifyȱtheȱmarketȱwithȱtheȱmostȱtoȱ gainȱfromȱtheȱtechnologyȱandȱdevelopȱaȱcompleteȱsolutionȱforȱthem.ȱ Oneȱofȱtheirȱearlyȱmarketsȱwasȱtheȱcityȱtradersȱwhoȱcouldȱbeȱmadeȱ orȱ brokenȱ byȱ rapidȱ stockȱ orȱ currencyȱ priceȱ changes.ȱ Blackberryȱ offeredȱ aȱ stockȱ priceȱ broadcastȱ serviceȱ wherebyȱ subscribersȱ couldȱ beȱimmediatelyȱinformedȱofȱpriceȱfluctuationsȱwhereverȱtheyȱwere.ȱ Thisȱ providedȱ aȱ strategicȱ advantageȱ andȱ allowedȱ theȱ companyȱ toȱ successfullyȱbreakȱintoȱtheȱmarket.ȱȱ Havingȱ establishedȱ itselfȱ inȱ theȱ city,ȱ theȱ companyȱ thenȱ expandedȱ intoȱotherȱmarketȱsegmentsȱandȱusedȱtheȱsatisfiedȱcustomerȱbaseȱinȱ theȱ cityȱ asȱ theirȱ referencesȱ toȱ convinceȱ theȱ newȱ marketsȱ ofȱ theirȱ pedigree.ȱ Graduallyȱ byȱ movingȱ throughȱ medicalȱ professionals,ȱ salesȱforcesȱandȱbusinessȱconsultantȱmarketsȱtheyȱareȱnowȱenteringȱ theȱmainȱstreamȱmobileȱemailȱmarkets.ȱȱ Justȱ byȱ lookingȱ atȱ howȱ theȱ blackberryȱ hardwareȱ productȱ hasȱ changedȱfromȱaȱpagerȱdeviceȱtoȱaȱcolourȱscreenȱdigitalȱassistantȱthatȱ alsoȱcontainsȱaȱmobileȱphone,ȱcalendarȱandȱotherȱfacilities,ȱyouȱcanȱ seeȱhowȱtheȱproductȱmarketingȱhasȱchangedȱasȱitȱhasȱmovedȱfromȱ oneȱ marketȱ toȱ theȱ next.ȱ Inȱ 2005,ȱ RIMȱ surpassedȱ $1.3bnȱ inȱ revenueȱ withȱoverȱ2.5ȱmillionȱusers.ȱ Mobileȱ phonesȱ alsoȱ showȱ howȱ marketingȱ hasȱ enabledȱ theȱ sameȱ basicȱ productȱ toȱ moveȱ fromȱ oneȱ segmentȱ toȱ anotherȱ asȱ theȱ companiesȱinvolvedȱprogressȱthroughȱtheȱmajorityȱmarketȱspace.ȱAȱ goodȱexampleȱofȱthisȱwasȱtheȱentryȱintoȱtheȱschoolȱchildrenȱmarket.ȱ Thereȱ wasȱ aȱ needȱ andȱ certainlyȱ aȱ demand,ȱ butȱ parentsȱ wereȱ

78ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

concernedȱ aboutȱ uncontrolledȱ useȱ andȱ childrenȱ runningȱ upȱ largeȱ bills.ȱTheȱadventȱofȱpayȬasȬyouȬgoȱofferingsȱalleviatedȱthisȱconcernȱ byȱ allowingȱ parentsȱ toȱ controlȱ theȱ amountȱ ofȱ spending.ȱ Thisȱ wasȱ pureȱmarketing,ȱandȱallowedȱtheȱlucrativeȱsectorȱtoȱbeȱexploited.ȱ Keeping focus Breakingȱ intoȱ theȱ majorityȱ marketȱ isȱ thereforeȱ aboutȱ winningȱ theȱ easiestȱ nicheȱ firstȱ andȱ thenȱ expandingȱ intoȱ theȱ restȱ ofȱ theȱ marketȱ usingȱeachȱsegmentȱasȱaȱreferenceȱforȱtheȱnext.ȱTheȱeasiestȱnicheȱcanȱ beȱ identifiedȱ asȱ theȱ oneȱ withinȱ whichȱ theȱ benefitsȱ ofȱ yourȱ productȱ orȱ serviceȱ areȱ mostȱ obviousȱ andȱ yourȱ customersȱ problemsȱ areȱ theȱ mostȱacute.ȱSuccessȱcanȱonlyȱbeȱachievedȱbyȱconcentratingȱallȱyourȱ effortȱ onȱ theseȱ customersȱ toȱ ensureȱ thatȱ youȱ firstȱ breakȱ intoȱ andȱ then,ȱwinȱtheȱniche.ȱ Thereȱisȱhowever,ȱaȱcommonȱtemptationȱforȱstartȬupȱcompaniesȱtoȱ getȱdistractedȱandȱloseȱfocusȱonȱtheirȱtargetȱnicheȱmarket.ȱThisȱcanȱ beȱ madeȱ worseȱ byȱ innovatorsȱ fromȱ otherȱ marketsȱ enquiringȱ aboutȱ yourȱproductȱandȱsuggestingȱthatȱitȱcouldȱbeȱusefulȱforȱthemȱtoo.ȱIfȱ youȱareȱnotȱcareful,ȱyouȱfindȱyourȱcompanyȱbuildingȱprototypesȱforȱ otherȱ sectors,ȱ carryingȱ outȱ newȱ marketȱ research,ȱ evenȱ holdingȱ meetingsȱ withȱ customersȱ orȱ suppliers.ȱ Allȱ theseȱ activitiesȱ detractȱ fromȱ whatȱ youȱ shouldȱ beȱ doing,ȱ whichȱ isȱ toȱ winȱ theȱ firstȱ targetȱ niche.ȱOnceȱthisȱisȱachieved,ȱyouȱcanȱuseȱsomeȱofȱtheȱrevenueȱyouȱ earnȱtoȱinvestigateȱtheȱnextȱopportunity,ȱbutȱnotȱuntilȱthen.ȱȱ Keepingȱ focusȱ canȱ beȱ veryȱ difficult,ȱ especiallyȱ ifȱ youȱ haveȱ anȱ excitingȱnewȱtechnologyȱorȱproduct.ȱWhenȱtheȱgoingȱgetsȱtough,ȱitȱ canȱbeȱtemptingȱtoȱlookȱatȱotherȱsectorsȱandȱcapitaliseȱonȱtheirȱearlyȱ adopters.ȱ Youȱ mustȱ winȱ theȱ majorityȱ marketȱ though,ȱ thereȱ isȱ notȱ enoughȱpotentialȱinȱearlyȱadoptersȱtoȱsustainȱaȱbusinessȱinȱtheȱlongȱ term.ȱRememberȱtheȱoldȱsaying,ȱifȱyouȱchaseȱtwoȱrabbits,ȱbothȱwillȱ escape.ȱ

4.3ȱMovingȱfromȱoneȱgroupȱtoȱtheȱnextȱȱȱȱȱ79ȱȱ

Solve the problem Havingȱ establishedȱ thatȱ youȱ needȱ toȱ focusȱ onȱ yourȱ targetȱ nicheȱ marketȱ andȱnothingȱ else,ȱ howȱ doȱ youȱ achieveȱ theȱ bestȱ results?ȱ Goȱ backȱ toȱ theȱ answersȱ youȱ createdȱ inȱ chapterȱ oneȱ aboutȱ theȱ customer’sȱ problemȱ andȱ howȱ youȱ solveȱ it.ȱ Theȱ marketingȱ strategyȱ thatȱevolvesȱfromȱthisȱisȱtoȱcreateȱandȱofferȱyourȱproductȱorȱserviceȱ soȱ thatȱ itȱ doesȱ everythingȱ necessaryȱ toȱ solveȱ theȱ problemȱ butȱ nothingȱmore.ȱȱ Takeȱaȱwalkȱinȱtheirȱshoesȱ Ifȱ itȱ isȱ possibleȱ andȱ practical,ȱ becomeȱ yourȱ customerȱ forȱ aȱ shortȱ while.ȱ Forȱ example,ȱ ifȱ youȱ areȱ developingȱ aȱ qualityȱ controlȱ systemȱ whichȱ helpsȱ checkȱ forȱ errorsȱ onȱ aȱ productionȱ line,ȱarrangeȱtoȱworkȱonȱtheȱproductionȱlineȱforȱaȱfewȱshiftsȱtoȱ reallyȱgetȱanȱappreciationȱforȱtheȱenvironmentȱandȱtheȱsortsȱofȱ problemsȱ thatȱ occur.ȱ Whileȱ youȱ areȱ there,ȱ talkȱ toȱ theȱ operators,ȱ haveȱ teaȱ breaksȱ withȱ themȱ andȱ findȱ outȱ howȱ theȱ processȱactuallyȱworks.ȱ Thisȱ mayȱ soundȱ aȱ littleȱ farȱ fetchedȱ butȱ itȱ isȱ notȱ difficultȱ toȱ accomplish.ȱEarlyȱadopterȱcustomersȱareȱoftenȱveryȱhappyȱtoȱ extendȱ thisȱ sortȱ ofȱ hospitality.ȱ Theyȱ seeȱ youȱ asȱ partȱ ofȱ theirȱ teamȱtoȱachieveȱanȱadvantageȱforȱthem.ȱIfȱitȱhelpsȱyouȱdeliverȱ aȱ betterȱ productȱ toȱ them,ȱ whyȱ wouldȱ theyȱ notȱ allowȱ youȱ accessȱtoȱtheirȱprocess.ȱ Don’tȱ justȱ doȱ thisȱ yourself,ȱ butȱ ifȱ youȱ can,ȱ encourageȱ yourȱ staff,ȱespeciallyȱyourȱdevelopmentȱstaff,ȱtoȱgoȱoutȱtoȱmeetȱandȱ workȱ withȱ customers.ȱ Theirȱ understandingȱ ofȱ theȱ problemȱ willȱgreatlyȱenhanceȱtheirȱworkȱtowardsȱgoodȱsolutions.ȱ Youȱ willȱ needȱ toȱ understandȱ asȱ muchȱ asȱ possibleȱ aboutȱ yourȱ customer’sȱlifeȱorȱbusiness,ȱwhatȱtheyȱwant,ȱwhyȱtheyȱwantȱitȱandȱ whyȱotherȱsolutionsȱhaveȱnotȱyetȱsatisfiedȱthem.ȱȱ

80ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

Withȱ aȱ soundȱ understandingȱ ofȱ theȱ problem,ȱ youȱ canȱ buildȱ aȱ solutionȱ thatȱ customersȱ almostȱ haveȱ noȱ choiceȱ butȱ toȱ buy.ȱ Theirȱ satisfactionȱ willȱ beȱ highȱ andȱ theirȱ enthusiasmȱ toȱ spreadȱ theȱ wordȱ willȱalsoȱbenefitȱyouȱgreatly.ȱ

4.4 Critical success factors Thereȱareȱsomeȱthingsȱthatȱwithinȱanyȱindustryȱyouȱjustȱhaveȱtoȱgetȱ right.ȱ Failureȱ toȱ satisfyȱ theseȱ criticalȱ factorsȱ willȱ meanȱ thatȱ evenȱ ifȱ youȱ getȱ everythingȱ elseȱ right,ȱ yourȱ businessȱ willȱ stillȱ fail.ȱ Inȱ theȱ retailȱ sector,ȱ theȱ criticalȱ successȱ factorȱ isȱ location.ȱ Youȱ couldȱ haveȱ theȱbestȱlaidȱoutȱstoreȱdesign,ȱtheȱmostȱknowledgeableȱandȱhelpfulȱ salesȱ staff,ȱ theȱ bestȱ valueȱ forȱ moneyȱ forȱ yourȱ product,ȱ butȱ ifȱ theȱ locationȱ ofȱ yourȱ storeȱ isȱ wrong,ȱ noneȱ ofȱ theseȱ otherȱ strengthsȱ willȱ overcomeȱ thisȱ weakness.ȱ Someȱ criticalȱ successȱ factorsȱ areȱ obviousȱ or,ȱatȱleastȱwellȱknown,ȱsuchȱasȱlocationȱforȱretailȱorȱconformingȱtoȱ standardsȱ withinȱ engineering.ȱ Othersȱ canȱ beȱ lessȱ easyȱ toȱ spotȱ withoutȱ theȱ benefitȱ ofȱ hindsight.ȱ Theȱ firstȱ stepȱ isȱ toȱ carryȱ outȱ aȱ thoroughȱriskȱanalysisȱofȱyourȱbusiness.ȱIȱamȱafraidȱthatȱitȱisȱtimeȱtoȱ doȱsomeȱmoreȱhomework,ȱsoȱgrabȱthoseȱpencilsȱandȱpapersȱandȱgetȱ yourselfȱaȱfreshȱmugȱofȱcoffee.ȱ Analysing your business risks Byȱ farȱ theȱ bestȱ wayȱ ofȱ avoidingȱ troubleȱ isȱ notȱ toȱ getȱ intoȱ itȱ inȱ theȱ firstȱplace.ȱThisȱisȱallȱveryȱwell,ȱbutȱitȱreliesȱonȱbeingȱableȱtoȱspotȱtheȱ troubleȱinȱadvance.ȱThisȱisȱwhereȱriskȱanalysisȱcomesȱin.ȱWeȱneedȱtoȱ thinkȱaheadȱandȱidentifyȱallȱtheȱareasȱofȱriskȱthatȱyourȱbusinessȱwillȱ faceȱandȱthinkȱofȱwaysȱofȱeitherȱavoidingȱtheȱproblemȱaltogetherȱorȱ atȱleastȱmitigatingȱtheȱeffects.ȱ Typicallyȱweȱcanȱdivideȱtheȱrisksȱthatȱyourȱbusinessȱfacesȱintoȱthreeȱ sets;ȱ technical,ȱ commercialȱ andȱ managerial.ȱ Weȱ willȱ lookȱ atȱ managerialȱrisksȱlaterȱinȱtheȱbook,ȱforȱnowȱweȱwillȱjustȱconcentrateȱ

4.4ȱCriticalȱsuccessȱfactorsȱȱȱȱȱ81ȱȱ

onȱ theȱ technicalȱ andȱ commercialȱ risksȱ asȱ theseȱ areȱ theȱ areasȱ thatȱ relevantȱtoȱourȱmarketingȱplans.ȱ Forȱeachȱofȱtheȱrisksȱthatȱyouȱidentify,ȱyouȱneedȱtoȱdescribeȱfiveȱkeyȱ aspects:ȱ x Theȱnatureȱofȱtheȱriskȱorȱwhatȱcouldȱgoȱwrong.ȱ x Howȱ likelyȱ isȱ itȱ toȱ happen,ȱ hereȱ youȱ couldȱ useȱ aȱ scoreȱ fromȱ1ȱtoȱ5ȱorȱsingleȱwordsȱlikeȱhigh,ȱmediumȱandȱlow.ȱ x Whatȱ impactȱ wouldȱ theȱ problemȱ haveȱ orȱ whatȱ wouldȱ happenȱ ifȱ theȱ problemȱ occurred,ȱ Inȱ additionȱ toȱ aȱ quickȱ description,ȱ rankȱ theȱ impactȱ asȱ low,ȱ medium,ȱ highȱ orȱ showȬstopper.ȱ x Whatȱ warningȱ isȱ thereȱ likelyȱ toȱ beȱ thatȱ theȱ problemȱ isȱ goingȱtoȱoccur.ȱ x Whatȱmitigatingȱstrategiesȱcouldȱyouȱuseȱtoȱfirstly,ȱtryȱtoȱ avoidȱ theȱ problem,ȱ andȱ secondlyȱ overcomeȱ itȱ ifȱ itȱ doesȱ occur.ȱȱ Aȱgoodȱwayȱofȱcapturingȱthisȱinformationȱisȱtoȱcreateȱaȱtableȱwithȱ5ȱ columns,ȱ oneȱ forȱ eachȱ ofȱ theseȱ questions.ȱ Thenȱ useȱ theȱ tableȱ toȱ captureȱtheȱrisksȱasȱyouȱthinkȱofȱthem.ȱ Technical risks Theȱtechnicalȱrisksȱwillȱbeȱthoseȱthingsȱthatȱcouldȱgoȱwrongȱinȱtheȱ creationȱ ofȱ yourȱ product,ȱ itsȱ construction,ȱ manufactureȱ andȱ delivery.ȱ Thisȱ canȱ beȱ aȱ depressingȱ exercise,ȱ butȱ youȱ needȱ toȱ playȱ devil’sȱadvocate.ȱIfȱyouȱcanȱgetȱaȱgroupȱofȱpeopleȱtogetherȱtoȱcarryȱ outȱ theȱ exerciseȱ thenȱ youȱ willȱ standȱ aȱ goodȱ chanceȱ ofȱ thinkingȱ ofȱ mostȱofȱtheȱtechnicalȱrisksȱyouȱface.ȱ Firstly,ȱ analyseȱ anyȱ innovativeȱ aspectsȱ ofȱ yourȱ product.ȱ Whatȱ technicalȱchallengesȱstillȱexist?ȱRisksȱwillȱpresentȱthemselvesȱwhenȱ youȱask,ȱwhatȱif:ȱ x weȱcan’tȱgetȱthatȱbitȱtoȱwork?ȱ x theȱpowerȱrequirementsȱrunȱtheȱbatteriesȱdownȱtooȱquickly?ȱ x theȱmechanicalȱpartsȱdon’tȱfitȱtogether?ȱȱ

82ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

Workȱmethodicallyȱthroughȱyourȱproduct,ȱtestingȱeachȱaspectȱofȱtheȱ workȱyouȱstillȱneedȱtoȱdo.ȱ Nextȱthinkȱaboutȱtheȱdeliveryȱofȱyourȱproductȱorȱservice.ȱThisȱwillȱ includeȱ theȱ aspectsȱ ofȱ manufacture,ȱ qualityȱ controlȱ andȱ testing.ȱ Again,ȱ workȱ methodicallyȱ throughȱ eachȱ aspectȱ ofȱ theȱ deliveryȱ process,ȱaskingȱquestionsȱlikeȱwhatȱif:ȱȱ x weȱcan’tȱachieveȱtheȱdesiredȱtolerances?ȱȱ x theȱyieldȱfromȱanyȱprocessesȱareȱlow?ȱ x elementsȱareȱdamagedȱduringȱconstruction?ȱ Aȱnaturalȱnextȱstepȱisȱtoȱlookȱatȱtheȱsuppliesȱandȱsuppliersȱyouȱwillȱ relyȱonȱtoȱdeliverȱyourȱproductȱorȱservice.ȱWhatȱif:ȱȱ x suppliersȱletȱyouȱdownȱorȱcauseȱdelays?ȱ x suppliersȱ goȱ outȱ ofȱ businessȱ orȱ ceaseȱ toȱ makeȱ theȱ compȬ onentsȱyouȱneed?ȱȱ x salesȱ increaseȱ drastically,ȱ canȱ theyȱ keepȱ up,ȱ canȱ youȱ keepȱ up?ȱȱ Finallyȱexamineȱtheȱrisksȱtoȱcostsȱandȱproductivity.ȱWhatȱif:ȱȱ x suppliersȱincreasingȱtheirȱfeesȱorȱcomponentȱprices?ȱ x youȱ haveȱ difficultyȱ findingȱ staffȱ withȱ theȱ appropriateȱ skillsȱ andȱexperience?ȱ x itȱtakesȱlongerȱtoȱmakeȱthanȱyouȱthink?ȱ Commercial risks Theȱ processȱ ofȱ analyzingȱ commercialȱ risksȱ isȱ veryȱ similarȱ toȱ technicalȱrisks,ȱexceptȱthatȱinȱmanyȱcases,ȱtheȱmitigationȱwillȱbeȱtoȱ carryȱoutȱmoreȱextensiveȱorȱbetterȱfocusedȱmarketȱresearch.ȱThisȱisȱ thereforeȱ aȱ veryȱ importantȱ exerciseȱ asȱ itȱ allowsȱ youȱ toȱ concentrateȱ yourȱmarketingȱeffortsȱatȱtheȱaspectsȱofȱtheȱbusinessȱthatȱmostȱneedȱ itȱandȱareȱmostȱlikelyȱtoȱcreateȱproblemsȱforȱyouȱinȱtheȱfuture.ȱ Firstly,ȱ examineȱ theȱ designȱ ofȱ theȱ productȱ orȱ serviceȱ andȱ askȱ questionsȱlike:ȱȱ x doesȱitȱfullyȱsolveȱtheȱcustomersȱproblem?ȱ

4.4ȱCriticalȱsuccessȱfactorsȱȱȱȱȱ83ȱȱ

x x x

doesȱitȱdoȱanythingȱforȱtheȱcustomerȱthatȱtheyȱdon’tȱneedȱorȱ want?ȱ couldȱitȱpossiblyȱcreateȱnewȱproblemsȱforȱtheȱcustomer?ȱ areȱthereȱanyȱweaknessesȱinȱtheȱdesign?ȱ

Next,ȱturnȱtoȱyourȱknowledgeȱandȱunderstandingȱofȱtheȱmarketȱandȱ yourȱcustomers.ȱWhatȱgapsȱexistȱinȱyourȱknowledgeȱofȱtheȱmarket,ȱ whatȱ assumptionsȱ haveȱ youȱ madeȱ thatȱ youȱ haveȱ notȱ beenȱ ableȱ toȱ verify,ȱhowȱupȱtoȱdateȱisȱyourȱmarketȱdata,ȱandȱsoȱon?ȱ Next,ȱ lookȱ atȱ theȱ positioningȱ ofȱ yourȱ companyȱ andȱ offeringȱ inȱ theȱ marketȱandȱtheȱlikelyȱresponseȱofȱtheȱcompetition.ȱWhatȱif:ȱ x theȱcompetitionȱdropsȱtheirȱprice?ȱ x someoneȱtriesȱtoȱcopyȱyourȱidea?ȱ x youȱcan’tȱgainȱaȱgoodȱreputationȱinȱtheȱmarket?ȱ x customersȱfailȱtoȱtrustȱyou?ȱ x youȱcan’tȱgetȱthroughȱtoȱtheȱkeyȱopinionȱleaders,?ȱ x youȱgetȱbadȱreviews?ȱ Ifȱrelevant,ȱexamineȱtheȱintellectualȱpropertyȱrisksȱthatȱmightȱexist.ȱ Whatȱif:ȱȱ x yourȱpatentsȱareȱchallenged?ȱ x theȱlicensesȱyouȱneedȱareȱnotȱforthcoming?ȱ x youȱcan’tȱregisterȱyourȱtrademarks?ȱ x someoneȱinfringesȱyourȱrights?ȱ Theȱnextȱstepȱisȱtoȱexamineȱtheȱrisksȱassociatedȱwithȱactuallyȱsellingȱ toȱ yourȱ customers.ȱ Thisȱ isȱ aȱ largeȱ riskȱ areaȱ andȱ breaksȱ downȱ toȱ aȱ numberȱofȱitsȱownȱheadings.ȱTheȱfirstȱofȱtheseȱisȱtheȱrisksȱassociatedȱ withȱ yourȱ shopȱ front.ȱ Whetherȱ youȱ haveȱ actualȱ premisesȱ orȱ whetherȱyourȱ‘frontȱofȱhouse’ȱisȱaȱwebsite,ȱaȱbrochure,ȱaȱcontractor,ȱ youȱ yourselfȱ orȱ aȱ mixtureȱ ofȱ anyȱ ofȱ these,ȱ thereȱ areȱ manyȱ risksȱ associatedȱ withȱ theȱ impressionȱ thatȱ yourȱ appearanceȱ makes,ȱ howȱ accessibleȱitȱisȱandȱhowȱeasyȱitȱisȱtoȱfind.ȱWhatȱif:ȱȱ x youȱgetȱstoreȱlocationȱwrong?ȱ x youȱcan’tȱgetȱdistributorsȱtoȱpromoteȱyouȱproperly?ȱ

84ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

x x

theȱwebsiteȱcrashes?ȱ thereȱareȱprintingȱorȱdesignȱproblems?ȱ

Theȱ nextȱ setȱ ofȱ risksȱ relateȱ toȱ yourȱ sellingȱ mechanisms.ȱ Youȱ willȱ needȱ toȱ examineȱ theȱ risksȱ associatedȱ withȱ howȱ youȱ locate,ȱ attractȱ andȱ dealȱ withȱ yourȱ customers.ȱ Thereȱ areȱ likelyȱ toȱ beȱ risksȱ assocȬ iatedȱwithȱyourȱrelationshipsȱwithȱdistributorsȱandȱagents.ȱWhatȱif:ȱȱ x theyȱdemandȱtooȱhighȱaȱmargin?ȱ x theyȱwantȱtoȱreplaceȱyouȱwithȱaȱcompetingȱproduct?ȱȱ x youȱwantȱtoȱreplaceȱthem?ȱ Nextȱ thereȱ willȱ beȱ risksȱ associatedȱ withȱ theȱ promotionȱ ofȱ yourȱ productȱorȱservice.ȱWhatȱif:ȱȱ x youȱ struggleȱ toȱ achieveȱ theȱawarenessȱ youȱ needȱ withinȱ theȱ market?ȱ x interestȱinȱyourȱproductȱisȱlimited?ȱ x theȱtradeȱpressȱdon’tȱwantȱtoȱwriteȱaboutȱyou?ȱȱ Positiveȱoutcomesȱcanȱalsoȱcreateȱrisksȱhowever,ȱwhatȱif:ȱȱ x interestȱisȱhighȱandȱyouȱareȱoverwhelmedȱwithȱenquiries?ȱ x youȱrequireȱmoreȱdemonstratorsȱorȱstock?ȱ x youȱgetȱaȱhugeȱorderȱthatȱyouȱcan’tȱdeliver?ȱ Theȱlastȱsetȱofȱtheȱsellingȱrisksȱareȱattributedȱtoȱtheȱclosingȱofȱdealsȱ andȱsales.ȱWhatȱif:ȱȱ x customersȱtakeȱaȱlongȱtimeȱtoȱmakeȱbuyingȱdecisions?ȱ x youȱcan’tȱachieveȱtheȱpriceȱyouȱwereȱhopingȱfor?ȱ x theȱprocessȱofȱclosingȱeachȱsaleȱisȱmoreȱtimeȱconsumingȱthatȱ youȱhoped?ȱ Followingȱaȱlogicalȱroute,ȱtheȱnextȱsetȱofȱrisksȱwillȱbeȱtheȱdeliveryȱofȱ theȱproductȱorȱservice.ȱHereȱtheȱrisksȱareȱlikelyȱtoȱincludeȱproblemsȱ withȱdeliveryȱandȱtheȱrecoveryȱofȱrevenue.ȱWhatȱif:ȱȱ x productsȱgetȱdamagedȱonȱdelivery,ȱȱ x installationȱproblemsȱoccur?ȱ x ordersȱcomeȱfromȱareasȱthatȱareȱdifficultȱtoȱaccess?ȱ

4.4ȱCriticalȱsuccessȱfactorsȱȱȱȱȱ85ȱȱ

x x

paymentȱtermsȱareȱnotȱrespected?ȱ customersȱattemptȱtoȱdefraudȱorȱstealȱfromȱyou?ȱ

Finallyȱweȱneedȱtoȱlookȱatȱaspectsȱofȱcustomerȱsatisfaction.ȱWhatȱif:ȱȱ x customersȱareȱdissatisfied?ȱ x theyȱcomplainȱpublicly?ȱ x repeatȱbusinessȱisȱslow?ȱ x theyȱfindȱalternativeȱsuppliersȱforȱconsumables?ȱ x theyȱinundateȱyourȱtechnicalȱteamȱwithȱenquiriesȱandȱsuggȬ estions?ȱ Identifying the critical success factors Nowȱ thatȱ youȱ haveȱ aȱ completedȱ riskȱ analysisȱ table,ȱ takeȱ aȱ highȬ lighterȱpenȱandȱmarkȱeachȱriskȱthatȱyouȱrankedȱasȱaȱshowȬstopperȱ inȱyourȱanalysisȱofȱtheȱimpact.ȱIfȱthereȱareȱlessȱthanȱthree,ȱlookȱbackȱ atȱallȱtheȱrisksȱmarkedȱasȱhighȱimpactȱandȱpromoteȱtheȱworstȱcasesȱ toȱshowȬstoppers.ȱThisȱisȱnotȱaȱtimeȱtoȱbeȱoptimistic.ȱ Theȱ risksȱ youȱ haveȱ selectedȱ inȱ thisȱ wayȱ areȱ yourȱ criticalȱ successȱ factors.ȱ Forȱ eachȱ one,ȱ youȱ willȱ needȱ toȱ expandȱ onȱ yourȱ methodȱ ofȱ forecastingȱ theirȱ likelihoodȱ andȱ mitigatingȱ them.ȱ Inȱ developingȱ yourȱ marketingȱ strategy,ȱ concentrateȱ yourȱ effortsȱ onȱ avoidingȱ andȱ mitigatingȱtheseȱrisksȱasȱaȱpriority.ȱ Managingȱriskȱ Nowȱ thatȱ youȱ haveȱ yourȱ completedȱ riskȱ analysis,ȱ don’tȱ beȱ temptedȱtoȱthinkȱthatȱthatȱboxȱisȱticked,ȱfileȱtheȱlistȱandȱforgetȱ aboutȱ it.ȱ Itȱ isȱ aȱ goodȱ ideaȱ toȱ regularlyȱ reviewȱ yourȱ riskȱ analysis,ȱ updateȱ theirȱ likelihoodȱ toȱ occur,ȱ updateȱ anyȱ forecastingȱmethodsȱandȱcontinueȱtoȱdevelopȱyourȱmitigatingȱ strategies.ȱȱ Removeȱ anyȱ risksȱ fromȱ theȱ listȱ thatȱ youȱ haveȱ avoidedȱ orȱ completelyȱovercomeȱandȱaddȱnewȱrisksȱasȱyouȱforeseeȱthem.ȱ

86ȱȱȱȱȱȱ4ȱHowȱdoȱyouȱmarketȱyourȱproduct?ȱȱ

4.5 What should be in your marketing plan? Itȱ isȱ worthȱ writingȱ downȱ yourȱ marketingȱ planȱ evenȱ ifȱ youȱ don’tȱ needȱ itȱ toȱ impressȱ aȱ potentialȱ investorȱ orȱ bankȱ manager.ȱ Theȱ processȱ ofȱ creatingȱ itȱ willȱ helpȱ youȱ arrangeȱ yourȱ thoughtsȱ andȱ justifyȱyourȱdecisions.ȱȱ Yourȱmarketingȱplanȱshouldȱincludeȱaȱdetailedȱdescriptionȱofȱeachȱ ofȱtheȱpotentialȱmarketsȱorȱcustomerȱgroupsȱthatȱyouȱfeelȱyourȱideaȱ couldȱ beȱ soldȱ to.ȱ Forȱ eachȱ groupȱ describeȱ theȱ problemȱ youȱ solveȱ andȱ theȱ formȱ youȱ thinkȱ yourȱ ideaȱ shouldȱ takeȱ toȱ satisfyȱ theȱ customers.ȱ Forȱeachȱofȱtheseȱmarketȱopportunities,ȱfindȱoutȱasȱmuchȱasȱpossibleȱ aboutȱtheȱpotentialȱmarketȱsizeȱandȱtheȱbehaviourȱofȱtheȱmarketȱ(isȱ itȱgrowing,ȱstaticȱorȱlikelyȱtoȱchangeȱsoon).ȱȱ Next,ȱ identityȱ andȱ justifyȱ yourȱ choiceȱ forȱ yourȱ firstȱ targetȱ market.ȱ Thisȱoneȱwillȱneedȱtoȱbeȱinvestigatedȱinȱmoreȱdetail.ȱYouȱwillȱneedȱ toȱknowȱhowȱmanyȱpotentialȱcustomersȱthereȱare,ȱwhatȱtheyȱwouldȱ beȱwillingȱtoȱpayȱforȱyourȱproduct,ȱwhoȱtheyȱareȱcurrentlyȱbuyingȱ fromȱandȱasȱmuchȱasȱpossibleȱaboutȱ theȱproblemȱyouȱareȱgoingȱ toȱ solveȱforȱthem.ȱȱ Ifȱ thereȱ isȱ competitionȱ inȱ theȱ targetȱ market,ȱ startȱ aȱ fileȱ onȱ eachȱ ofȱ them.ȱ Collectȱ productȱ literature,ȱ printȱ outȱ aȱ copyȱ ofȱ theirȱ websiteȱ andȱscrutiniseȱitȱtoȱfindȱoutȱhowȱandȱwhyȱyouȱareȱgoingȱtoȱbeȱbetterȱ thenȱ them.ȱ Tryȱ toȱ imagineȱ whatȱ theyȱ mightȱ beȱ ableȱ toȱ doȱ toȱ resistȱ yourȱentryȱintoȱtheȱmarketȱandȱhowȱyouȱwillȱcopeȱwhenȱtheyȱdo.ȱȱ Startȱ toȱ collectȱ listsȱ ofȱ potentialȱ customersȱ soȱ thatȱ whenȱ theȱ timeȱ comes,ȱyouȱknowȱwhoȱtoȱcallȱandȱsee.ȱTryȱtoȱfindȱoutȱwhoȱtheȱkeyȱ opinionȱleadersȱare,ȱwhereȱtheyȱmeet,ȱevenȱwhereȱtheyȱsocialiseȱorȱ network.ȱItȱshouldȱgoȱwithoutȱsaying,ȱthatȱifȱthereȱisȱaȱnetworkingȱ event,ȱsocietyȱorȱclubȱwhereȱyourȱcustomersȱmeet,ȱthenȱyouȱshouldȱ joinȱandȱattendȱwithoutȱdelay.ȱ

4.5ȱWhatȱshouldȱbeȱinȱyourȱmarketingȱplan?ȱȱȱȱȱ87ȱȱ

Next,ȱidentifyȱtheȱnextȱfewȱmarketȱsegmentsȱandȱdescribeȱtheȱrouteȱ youȱ planȱ toȱ takeȱ toȱ breakȱ intoȱ them.ȱ Youȱ willȱ notȱ needȱ asȱ muchȱ detailȱ onȱ theseȱ sectorsȱ yet,ȱ butȱ itȱ isȱ bestȱ toȱ haveȱ atȱ leastȱ identifiedȱ themȱandȱmadeȱaȱstartȱearlyȱon.ȱ Creatingȱ thisȱ planȱ shouldȱ notȱ beȱ doneȱ inȱ isolation.ȱ Theȱ planȱ willȱ benefitȱgreatlyȱifȱtheȱwholeȱteamȱtakesȱpartȱinȱtheȱthinkingȱprocessȱ andȱdecisions.ȱIfȱthereȱareȱenoughȱofȱyouȱinvolved,ȱyouȱcouldȱevenȱ setȱ upȱ teamsȱ toȱ investigateȱ differentȱ opportunities,ȱ everyoneȱ thenȱ comingȱ backȱ togetherȱ toȱ decideȱ onȱ theȱ segmentationȱ strategy.ȱ Theȱ moreȱ youȱ involveȱ allȱ yourȱ team,ȱ theȱ moreȱ theyȱ willȱ understandȱ whereȱtheȱcompanyȱisȱgoingȱandȱbeȱinȱaȱpositionȱtoȱhelpȱachieveȱtheȱ goals.ȱMotivationȱcanȱbeȱaȱveryȱwelcomeȱbyȬproductȱofȱthisȱprocess.ȱ Onceȱ theȱ planȱ isȱ written,ȱ don’tȱ justȱ putȱ itȱ onȱ aȱ shelf,ȱ keepȱ itȱ upȱ toȱ dateȱandȱreferȱtoȱit.ȱWhenȱitȱisȱtimeȱtoȱmoveȱontoȱtheȱnextȱsegment,ȱ useȱ theȱ planȱ asȱ aȱ referenceȱ toȱ judgeȱ howȱ closelyȱ yourȱ originalȱ researchȱmatchedȱwhatȱyouȱfoundȱinȱtheȱmarket.ȱUseȱthisȱtoȱjudgeȱ howȱmuchȱworkȱyouȱneedȱtoȱdoȱtoȱunderstandȱtheȱnextȱsegment.ȱ Remember,ȱyouȱcanȱneverȱknowȱtooȱmuchȱaboutȱyourȱcustomers.ȱ ȱ

5 How do you finance your business?

Thereȱ areȱ twoȱ basicȱ waysȱ ofȱ fundingȱ yourȱ business.ȱ Theȱ firstȱ isȱ toȱ growȱ theȱ businessȱ organically;ȱ sometimesȱ thisȱ isȱ calledȱ ‘bootȱ strapping’.ȱThisȱmeansȱthatȱyouȱdon’tȱspendȱanyȱmoneyȱotherȱthanȱ yourȱ ownȱ untilȱ youȱ haveȱ madeȱ aȱ saleȱ andȱ youȱ thenȱ growȱ theȱ businessȱonlyȱbyȱinvestingȱtheȱprofitsȱthatȱyouȱhaveȱmade.ȱYouȱpickȱ theȱ businessȱ upȱ byȱ theȱ bootȱ straps.ȱ Thisȱ modelȱ worksȱ wellȱ forȱ consultancyȱandȱserviceȱbusinessesȱwhereȱthereȱareȱlittleȱorȱnoȱupȬ frontȱ costs,ȱ noȱ needȱ toȱ haveȱ expensiveȱ officesȱ orȱ equipmentȱ andȱ whereȱyouȱcanȱstartȱsellingȱimmediately.ȱȱ Theȱsecondȱwayȱofȱfundingȱyourȱ businessȱisȱtoȱbringȱcashȱintoȱtheȱ business,ȱeitherȱthroughȱtheȱsaleȱofȱequity,ȱtheȱtakingȱonȱofȱdebtsȱorȱ byȱwinningȱawardsȱandȱgrants.ȱThisȱmodelȱisȱmoreȱcommonȱwhereȱ thereȱisȱlikelyȱtoȱbeȱaȱdevelopmentalȱperiodȱbeforeȱproductsȱcanȱbeȱ soldȱorȱwhereȱtheȱbusinessȱrequiresȱexpensiveȱequipment,ȱfacilitiesȱ orȱpremises.ȱȱ Whichȱ everȱ ofȱ theseȱ twoȱ modelsȱ youȱ intendȱ toȱ follow,ȱ itȱ isȱ worthȱ havingȱanȱunderstandingȱofȱtheȱdifferentȱsourcesȱofȱfunding.ȱEvenȱ ifȱ youȱ intendȱ toȱ growȱ yourȱ businessȱ organically,ȱ itȱ mightȱ beȱ necessaryȱ toȱ raiseȱ fundsȱ inȱ theȱ futureȱ toȱ provideȱ fasterȱ growthȱ orȱ takeȱonȱdebtȱtoȱdealȱwithȱcashȱflowȱissues.ȱ

5.1 Cash flow Ruleȱnumberȱoneȱinȱrunningȱaȱbusinessȱisȱneverȱrunȱoutȱofȱcash.ȱAȱ businessȱ withȱ insufficientȱ cashȱ toȱ meetȱ itsȱ immediateȱ needsȱ isȱ insolventȱwithȱallȱthatȱthatȱentails.ȱȱ

90ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

Cashȱflowȱisȱveryȱimportantȱforȱallȱtypesȱandȱsizesȱofȱbusinessȱbutȱisȱ perhapsȱmostȱcriticalȱtoȱsmallȱandȱgrowingȱcompanies.ȱFastȱgrowthȱ companiesȱ haveȱ particularȱ problemsȱ asȱ theȱ followingȱ tablesȱ illustrate.ȱ Letsȱ lookȱ atȱ aȱ fewȱ examples.ȱ Inȱ eachȱ ofȱ theȱ followingȱ cases,ȱ aȱ productȱisȱsoldȱforȱ$100ȱandȱcostsȱ$75ȱtoȱmake.ȱ Inȱ theȱ firstȱ example,ȱ paymentȱ ofȱ costsȱ andȱ receiptȱ ofȱ revenueȱ areȱ simultaneousȱandȱthereȱisȱnoȱmarketȱgrowth.ȱ Tableȱ5.1.ȱAlignedȱrevenueȱandȱcostsȱ Monthȱ UnitȱSalesȱȱ Revenueȱ Costsȱ Earningsȱ Cashȱ Balanceȱ

1ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 250ȱ

2ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 500ȱ

3ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 750ȱ

4ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 1,000ȱ

5ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 1,250ȱ

6ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 1,500ȱ

ȱ 1600 1400 1200 1000 800 600 400 200 0 1

2

3

4

5

6

ȱ

Fig.ȱ5.1.ȱCashȱflowȱwithȱalignedȱrevenuesȱandȱcostsȱ

Theȱcashȱflowȱshowsȱaȱhealthyȱgrowthȱandȱthereȱareȱnoȱproblems.ȱ Ifȱweȱdelayȱtheȱreceiptȱofȱrevenuesȱbyȱaȱmonthȱbyȱgivingȱcustomersȱ 30ȱdaysȱtoȱpay,ȱtheȱbusinessȱneedsȱtoȱfundȱtheȱshortfallȱinȱcashȱflowȱ untilȱtheȱprofitsȱcanȱcatchȱup,ȱasȱinȱtheȱnextȱexample.ȱ

5.1ȱCashȱflowȱȱȱȱȱȱ91ȱ Tableȱ5.2.ȱEffectsȱofȱdelayedȱrevenueȱȱ Monthȱ UnitȱSalesȱȱ Revenueȱ Costsȱ Earningsȱ Cashȱ Balanceȱ

1ȱ 10ȱ 0ȱ 750ȱ Ȭ750ȱ Ȭ750ȱ

2ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ Ȭ500ȱ

3ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ Ȭ250ȱ

4ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 0ȱ

5ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 250ȱ

6ȱ 10ȱ 1,000ȱ 750ȱ 250ȱ 500ȱ

ȱ 600 400 200 0 1

2

3

4

5

6

-200 -400 -600 -800 -1000

ȱ

Fig.ȱ5.2.ȱCashȱflowȱwithȱdelayedȱrevenueȱȱ

Theȱ cashȱflowȱgrowsȱatȱtheȱsameȱrateȱbutȱmustȱ beȱsupportedȱwithȱ workingȱcapitalȱtoȱcoverȱtheȱinitialȱdebt.ȱ Ifȱ theȱ salesȱ areȱ growing,ȱ theȱ timeȱ takenȱ toȱ recoverȱ theȱ cashȱ flowȱ takesȱ longerȱ asȱ eachȱ monthȱ yourȱ costsȱ goȱ upȱ butȱ theȱ increaseȱ inȱ revenuesȱfromȱtheȱincreasedȱsalesȱareȱdelayed.ȱInȱtheȱnextȱexampleȱ salesȱareȱgrowingȱatȱ20%.ȱ Tableȱ5.3.ȱDelayedȱrevenueȱandȱmodestȱgrowthȱ Monthȱ UnitȱSalesȱȱ Revenueȱ Costsȱ Earningsȱ Cashȱ Balanceȱ

ȱ

1ȱ 10ȱ 0ȱ 750ȱ Ȭ750ȱ Ȭ750ȱ

2ȱ 12ȱ 1,000ȱ 900ȱ 100ȱ Ȭ650ȱ

3ȱ 14ȱ 1,200ȱ 1,050ȱ 150ȱ Ȭ500ȱ

4ȱ 17ȱ 1,400ȱ 1,275ȱ 125ȱ Ȭ375ȱ

5ȱ 20ȱ 1,700ȱ 1,500ȱ 200ȱ Ȭ175ȱ

6ȱ 24ȱ 2,000ȱ 1,800ȱ 200ȱ 25ȱ

92ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ 100 0 -100

1

2

3

4

5

6

-200 -300 -400 -500 -600 -700 -800

ȱ

Fig.ȱ5.3.ȱCashȱflowȱwithȱdelayedȱrevenueȱandȱmodestȱgrowthȱ

Itȱ takesȱ longerȱ toȱ recoverȱ butȱ eventuallyȱ theȱ cashȱ balanceȱbecomesȱ positiveȱandȱsubsequentlyȱcontinuesȱtoȱgrowȱnicely.ȱ Ifȱtheȱsalesȱgrowthȱoccursȱatȱaȱfasterȱrateȱhowever,ȱtheȱeffectȱcanȱbeȱ disastrous.ȱ Inȱ theȱ finalȱ exampleȱ salesȱ growthȱ isȱ increasedȱ toȱ 40%,ȱ howeverȱtheȱsameȱeffectȱcanȱbeȱseenȱwithȱlowerȱgrowthȱratesȱifȱtheȱ paymentȱgapȱisȱextendedȱbyȱhavingȱtoȱpayȱsuppliersȱinȱadvance.ȱ Tableȱ5.4.ȱDelayedȱrevenueȱandȱrapidȱgrowthȱ Monthȱ UnitȱSalesȱȱ Revenueȱ Costsȱ Earningsȱ Cashȱ Balanceȱ

1ȱ 10ȱ 0ȱ 750ȱ Ȭ750ȱ Ȭ750ȱ

2ȱ 14ȱ 1,000ȱ 1,050ȱ Ȭ50ȱ Ȭ800ȱ

3ȱ 20ȱ 1,400ȱ 1,500ȱ Ȭ100ȱ Ȭ900ȱ

4ȱ 28ȱ 2,000ȱ 2,100ȱ Ȭ100ȱ Ȭ1,000ȱ

5ȱ 39ȱ 2,800ȱ 2,925ȱ Ȭ125ȱ Ȭ1,125ȱ

ȱ 0 1

2

3

4

5

6

-200 -400 -600 -800 -1000 -1200 -1400 -1600

ȱ

Fig.ȱ5.4.ȱCashȱflowȱwithȱdelayedȱrevenueȱandȱhighȱgrowthȱ

6ȱ 55ȱ 3,900ȱ 4,125ȱ Ȭ225ȱ Ȭ1,350ȱ

5.2ȱSourcesȱofȱfinanceȱȱȱȱȱȱ93ȱ

Inȱthisȱscenarioȱtheȱcashȱbalanceȱgetsȱincreasingȱworseȱeachȱmonthȱ evenȱthoughȱsalesȱandȱrevenueȱareȱgrowing.ȱAnȱoverdraftȱisȱnoȱuseȱ inȱthisȱsituation,ȱfactoringȱorȱfindingȱaȱmeansȱofȱreducingȱtheȱtimeȱ betweenȱincurringȱcostsȱandȱreceiptȱofȱrevenueȱisȱtheȱonlyȱwayȱthisȱ businessȱcanȱsurvive.ȱȱ Managementȱaccountsȱshouldȱbeȱpreparedȱeveryȱmonthȱsoȱthatȱyouȱ canȱ forecastȱ yourȱ incomeȱ andȱ outgoingsȱ toȱ avoidȱ runningȱ outȱ ofȱ cash.ȱ

5.2 Sources of finance Theȱ threeȱ basicȱ sourcesȱ ofȱ fundsȱ forȱ startȬupȱ businessesȱ areȱ theȱ winningȱofȱgrants,ȱtheȱtakingȱonȱofȱdebtȱandȱtheȱsaleȱofȱequity.ȱȱ Grantsȱ areȱ inȱ someȱ waysȱ freeȱ money,ȱ theyȱ bringȱ cashȱ intoȱ theȱ businessȱ thatȱ doesȱ notȱ needȱ toȱ beȱ repaidȱ andȱ thatȱ doesȱnotȱreduceȱ yourȱownershipȱinȱtheȱcompany.ȱThereȱwillȱhoweverȱbeȱtermsȱandȱ conditionsȱattachedȱtoȱtheȱgrantȱthatȱyouȱmustȱadhereȱto.ȱ Debtȱ canȱ takeȱ veryȱ manyȱ forms,ȱ notȱ justȱ loansȱ andȱ overdraftȱ facilities.ȱTheyȱallȱgenerallyȱrequireȱrepaymentȱandȱtheȱpaymentȱofȱ interest.ȱ Loansȱ providedȱ toȱ startȬupȱ companiesȱ mayȱ requireȱ theȱ Directorsȱtoȱputȱupȱguarantees.ȱLoansȱstandȱbeforeȱshareholders,ȱsoȱ ifȱtheȱcompanyȱfails,ȱtheȱloanȱwillȱbeȱrepaidȱbeforeȱtheȱshareholdersȱ receiveȱanyȱresidualȱvalue.ȱȱ Equityȱ investmentȱ isȱ aȱ commonȱ meansȱ ofȱ raisingȱ financeȱ forȱ businessesȱofȱallȱsizes.ȱTheȱbasicȱprincipleȱbeingȱthatȱyouȱsellȱsomeȱ ofȱtheȱequityȱofȱyourȱcompanyȱtoȱanȱinvestor.ȱTheȱmoneyȱraisedȱisȱ usedȱbyȱtheȱcompanyȱtoȱgrow.ȱTheȱinvestorȱwillȱhopeȱtoȱseeȱaȱgoodȱ returnȱ onȱ theirȱ investmentȱ butȱ ifȱ theȱ companyȱ fails,ȱ theȱ investorȱ loosesȱtheirȱmoney.ȱ

94ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

Grants Mostȱ ofȱ theȱ world’sȱ industrialȱ economiesȱ haveȱ agreedȱ toȱ tryȱ toȱ maintainȱ aȱ fairȱ competitiveȱ landscapeȱ forȱ businessesȱ byȱ avoidingȱ stateȱ interferenceȱ andȱ assistanceȱ withinȱ individualȱ sectorsȱ orȱ companies.ȱ Someȱ ofȱ theȱ rulesȱ regardingȱ assistanceȱ areȱ monitoredȱ andȱ enforcedȱ byȱ theȱ Worldȱ Tradeȱ Organisation.ȱ Othersȱ areȱ governedȱ atȱ federalȱ orȱ nationalȱ level.ȱ Withinȱ theȱ Europeanȱ Union,ȱ theȱrulesȱonȱ‘stateȱaid’ȱareȱstrictȱandȱstartȱfromȱtheȱpremiseȱthatȱallȱ stateȱinterferenceȱandȱaidȱtoȱcompaniesȱisȱprohibited.ȱProvisionsȱareȱ thenȱ madeȱ toȱ allowȱ limitedȱ exceptionsȱ toȱ thisȱ ban.ȱ Theȱ exceptionsȱ typicallyȱ allowȱ individualȱ states,ȱ andȱ indeedȱ theȱ Europeanȱ Unionȱ itself,ȱ toȱ provideȱ assistanceȱ toȱ companiesȱ workingȱ inȱ certainȱ geographicȱareasȱandȱwithȱcertainȱeconomicȱactivities.ȱ Practically,ȱ thisȱ meansȱ thatȱ governmentsȱ areȱ allowedȱ toȱ offerȱ companiesȱ workingȱ inȱ recognisedȱ deprivedȱ areas,ȱ financialȱ andȱ practicalȱ assistanceȱ inȱ orderȱ toȱ stimulateȱ theȱ creationȱ ofȱ employȬ ment.ȱ Itȱ alsoȱ meansȱ thatȱ governmentsȱ canȱ provideȱ grantsȱ toȱ helpȱ companiesȱandȱsectorsȱdevelopȱnewȱtechnologiesȱandȱprocesses.ȱAȱ multitudeȱ ofȱ grantȱ schemes,ȱ rangingȱ fromȱ hundredsȱ toȱ millionsȱ ofȱ dollars,ȱ haveȱ thereforeȱ beenȱ createdȱ toȱ provideȱ strategicȱ assistanceȱ toȱ companies.ȱ Someȱ grantsȱ areȱ availableȱ toȱ singleȱ organisations,ȱ othersȱ requireȱ groupsȱ ofȱ companiesȱ toȱ workȱ collaboratively,ȱ eitherȱ withȱ otherȱ companiesȱ orȱ withȱ researchȱ institutionsȱ suchȱ asȱ universities.ȱȱ Inȱallȱbutȱaȱveryȱfewȱindustrialȱgrantȱschemes,ȱtheȱsupportȱwillȱbeȱaȱ contributionȱ towardsȱ theȱ totalȱ costȱ ofȱ theȱ project.ȱ Forȱ exampleȱ aȱ grantȱ mayȱ payȱ 50%ȱ towardsȱ aȱ project’sȱ cost.ȱ Thisȱ meansȱ thatȱ theȱ companyȱwillȱhaveȱtoȱmatchȱthisȱfundingȱandȱspendȱitsȱownȱmoneyȱ toȱ provideȱ theȱ remainingȱ 50%.ȱ Toȱ avoidȱ fraud,ȱ mostȱ schemesȱ thatȱ provideȱfundingȱtoȱcompaniesȱmakeȱtheirȱgrantȱpaymentsȱinȱarrearsȱ againstȱauditedȱstatementsȱofȱprojectȱexpenditure.ȱȱ

5.2ȱSourcesȱofȱfinanceȱȱȱȱȱȱ95ȱ

Manyȱ grantsȱ thatȱ supportȱ theȱ developmentȱ ofȱ newȱ technologyȱ orȱ productsȱareȱcollaborative.ȱThisȱmeansȱthatȱaȱnumberȱofȱcompaniesȱ comeȱtogetherȱtoȱcarryȱoutȱaȱjointȱprojectȱandȱshareȱtheȱresultsȱthatȱ areȱ achieved.ȱ Projectsȱ likeȱ thisȱ canȱ beȱ aȱ veryȱ powerfulȱ wayȱ ofȱ formingȱ lastingȱ partnershipsȱ withȱ suppliersȱ andȱ customers.ȱ Youȱ willȱhowever,ȱneedȱtoȱmakeȱsureȱthatȱtheȱlegalȱagreementsȱthatȱareȱ putȱ intoȱ placeȱ toȱ manageȱ theȱ project,ȱ andȱ theȱ subsequentȱ exploitationȱofȱtheȱresults,ȱareȱfairȱandȱdeliverȱsufficientȱbenefitȱforȱ yourȱ contributionȱ toȱ theȱ project.ȱ Oftenȱ calledȱ aȱ collaborationȱ agreement,ȱthisȱdocumentȱcanȱtakeȱjustȱasȱlongȱtoȱagreeȱasȱtheȱgrantȱ applicationȱprocessȱitself.ȱ Usingȱ grantsȱ toȱ bringȱ fundingȱ intoȱ yourȱ businessȱ hasȱ manyȱ advantages.ȱComparedȱtoȱotherȱapproaches,ȱtheȱprocessȱofȱapplyingȱ forȱ grantsȱ isȱ straightȱ forward.ȱ Theȱ rulesȱ andȱ eligibilityȱ criteriaȱ areȱ alwaysȱ publishedȱ andȱ inȱ manyȱ cases,ȱ thereȱ isȱ plentyȱ ofȱ adviceȱ availableȱ toȱ helpȱ youȱ apply.ȱ Thereȱ isȱ littleȱ interferenceȱ fromȱ theȱ grantȱbodyȱinȱtheȱdayȱtoȱdayȱrunningȱofȱyourȱbusinessȱandȱasȱlongȱ asȱyouȱadhereȱtoȱtheȱtermsȱofȱtheȱgrantȱaward,ȱyouȱwillȱnotȱneedȱtoȱ repayȱtheȱmoney.ȱ Theȱdisadvantagesȱofȱgrantsȱareȱthatȱoftenȱtheȱapplicationȱprocessȱisȱ timeȱ consumingȱ andȱ canȱ takeȱ manyȱ monthsȱ toȱ achieve,ȱ yearsȱ inȱ someȱcases.ȱIfȱpaymentsȱareȱmadeȱinȱarrears,ȱyouȱmayȱstillȱrequireȱ assistanceȱ toȱ maintainȱ aȱ healthyȱ cashȱ flowȱ whileȱ waitingȱ forȱ grantȱ claimsȱtoȱbeȱpaid.ȱInȱsomeȱcases,ȱifȱyourȱbusinessȱdirectionȱchangesȱ andȱyouȱfailȱtoȱadhereȱtoȱtheȱtermsȱofȱtheȱgrantȱoffer,ȱyouȱmayȱneedȱ toȱ repayȱ theȱ grant.ȱ Forȱ example,ȱ manyȱ grantsȱ withinȱ Europeȱ stipulateȱ thatȱ exploitationȱ ofȱ theȱ resultsȱ shouldȱ beȱ carriedȱ outȱ withinȱEuropeȱforȱsomeȱyearsȱafterȱtheȱprojectȱfinishes.ȱIfȱtheȱmarketȱ changesȱandȱyouȱareȱforcedȱtoȱlicenseȱtheȱtechnologyȱtoȱanȱoverseasȱ companyȱ outsideȱ Europe,ȱ youȱ mayȱ beȱ inȱ breachȱ ofȱ theȱ grantȱ andȱ haveȱtoȱrepayȱit.ȱ Onȱ balanceȱ however,ȱ grantsȱ areȱ anȱ excellentȱ sourceȱ ofȱ fundsȱ forȱ startȬupȱ businessesȱ andȱ inȱ additionȱ toȱ providingȱ fundsȱ canȱ addȱ

96ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

valueȱ inȱ termsȱ ofȱ formingȱ valuableȱ collaborations,ȱ providingȱ prestigeȱ andȱ publicityȱ forȱ theȱ businessȱ andȱ demonstratingȱ toȱ potentialȱ futureȱ investorsȱ thatȱ otherȱ peopleȱ thinkȱ yourȱ ideasȱ areȱ worthȱfundingȱtoo.ȱȱ Yourȱ companyȱ mayȱ beȱeligibleȱ toȱ applyȱ forȱ manyȱ differentȱ grants.ȱ Toȱ findȱ outȱ whatȱ mightȱ beȱ available,ȱ contactȱ yourȱ localȱ businessȱ adviceȱcentreȱorȱaȱrelevantȱtradeȱassociation.ȱȱ Debt Theȱ simplestȱ formȱ ofȱ debtȱ isȱ aȱ loan.ȱ Loansȱ canȱ beȱ providedȱ byȱ anyoneȱ fromȱ aȱ friendȱ toȱ aȱ bank.ȱ Inȱ allȱ cases,ȱ theȱ fundamentalȱ componentsȱ ofȱ theȱ loanȱ areȱ thatȱ youȱ haveȱ toȱ repayȱ theȱ capital,ȱ theȱ amountȱ youȱ borrow,ȱ andȱ inȱ additionȱ compensateȱ theȱ lenderȱ forȱ deprivingȱ themȱ ofȱ theirȱ moneyȱ forȱ thatȱ periodȱ ofȱ time.ȱ Thisȱ compensationȱ normallyȱ takesȱ theȱ formȱ ofȱ interestȱ paymentsȱ calculatedȱ atȱ anȱ agreedȱ rate,ȱ butȱ itȱ couldȱ takeȱ theȱ formȱ ofȱ barterȱ whereȱ youȱ provideȱ theȱ lenderȱ withȱ someȱ serviceȱ orȱ accessȱ toȱ yourȱ facilities.ȱ Mostȱ commercialȱ lenders,ȱ suchȱ asȱ banks,ȱ doȱ notȱ likeȱ toȱ provideȱ loansȱ ifȱ thereȱ isȱ aȱ riskȱ thatȱ theyȱ couldȱ loseȱ theirȱ money.ȱ Beforeȱ enteringȱintoȱtheȱloan,ȱtheyȱwillȱwantȱtoȱseeȱaȱfinancialȱplanȱofȱhowȱ youȱintentȱtoȱmakeȱgoodȱonȱtheȱrepayments.ȱOftenȱtheyȱwillȱrequireȱ someȱ sortȱ ofȱ securityȱ onȱ theȱ loan.ȱ Thisȱ way,ȱ ifȱ youȱ areȱ unableȱ toȱ repayȱtheȱloan,ȱtheyȱcanȱtakeȱownershipȱofȱsomeȱcapitalȱasset,ȱeitherȱ belongingȱtoȱtheȱcompanyȱorȱputȱupȱbyȱtheȱDirectorsȱasȱsecurityȱforȱ theȱloan.ȱ Notȱ surprisingly,ȱ mostȱ Directorsȱ areȱ unhappyȱ aboutȱ puttingȱ upȱ theirȱhousesȱasȱsecurityȱagainstȱtheirȱcompany’sȱdebtsȱandȱnegotiateȱ stronglyȱ toȱ avoidȱ theseȱ situations.ȱ Manyȱ countriesȱ offerȱ loanȱ guaranteeȱschemesȱtoȱsmallȱcompaniesȱwherebyȱtheȱstateȱprovidesȱ theȱ securityȱ forȱ theȱ loan.ȱ Suchȱ schemesȱ areȱ normallyȱ organisedȱ

5.2ȱSourcesȱofȱfinanceȱȱȱȱȱȱ97ȱ

throughȱ theȱ bank,ȱ soȱ askȱ theȱ managerȱ forȱ detailsȱ ofȱ schemesȱ youȱ couldȱuseȱtoȱsecureȱanyȱloansȱyourȱbusinessȱneeds.ȱ Aȱ lessȱ obviousȱ formȱ ofȱ debtȱ isȱ assetȱ finance.ȱ Thisȱ includesȱ hireȱ purchaseȱ andȱ leasingȱ arrangements.ȱ Althoughȱ theȱ eventualȱ costȱ ofȱ leasingȱequipmentȱorȱfacilitiesȱoverȱaȱlongȱperiodȱofȱtimeȱisȱgreaterȱ thanȱtheȱcostȱofȱpurchasingȱitȱoutright,ȱtheȱleasingȱoptionȱallowsȱtheȱ costȱtoȱspreadȱoutȱoverȱmanyȱyears.ȱȱ Asȱdescribedȱearlier,ȱcashȱflowȱisȱessentiallyȱyourȱdayȱtoȱdayȱbankȱ balance.ȱ Ifȱ yourȱ businessȱ makesȱ orȱ sellsȱ productsȱ ofȱ anyȱ type,ȱ youȱ willȱ haveȱ outgoingsȱ forȱ partsȱ orȱ componentsȱ thatȱ youȱ haveȱ toȱ payȱ for.ȱWhenȱyouȱsellȱtheȱproduct,ȱyourȱcustomersȱpayȱyou.ȱIfȱthereȱisȱ aȱ gapȱ betweenȱ theseȱ twoȱ transactions,ȱ inȱ otherȱ wordsȱ ifȱ youȱ payȱ yourȱsuppliersȱbeforeȱyouȱgetȱpaid,ȱthenȱyouȱneedȱtoȱfindȱaȱwayȱtoȱ bridgeȱthisȱgap.ȱTheȱsameȱisȱtrueȱifȱyouȱprovideȱaȱservice,ȱveryȱoftenȱ youȱ invoiceȱ theȱ customerȱ afterȱ theȱ serviceȱ hasȱ beenȱ deliveredȱ andȱ yourȱ costsȱ haveȱ beenȱ incurred.ȱ Youȱ canȱ ofȱ courseȱ maintainȱ aȱ healthyȱ floatȱ inȱ yourȱ accountȱ toȱ bridgeȱ theȱ gap,ȱ thisȱ isȱ calledȱ workingȱ capital,ȱ orȱ useȱ anȱ overdraftȱ facility,ȱ butȱ sometimesȱ youȱ mightȱneedȱaȱlittleȱmoreȱhelp.ȱ Factoringȱorȱinvoiceȱdiscountingȱisȱoneȱformȱofȱdebtȱfinanceȱthatȱisȱ designedȱ toȱ helpȱ companiesȱ overcomeȱ cashȱ flowȱ issuesȱ suchȱ asȱ these.ȱ Factoringȱ isȱ essentiallyȱ sellingȱ yourȱ debtȱ (whatȱ customersȱ oweȱ you)ȱ forȱ immediateȱ payment.ȱ Imagineȱ thatȱ yourȱ businessȱ involvesȱyouȱissuingȱinvoicesȱtoȱyourȱcustomersȱandȱthatȱtheyȱhaveȱ thirtyȱ daysȱ inȱ whichȱ toȱ pay.ȱ Factoringȱ meansȱ thatȱ youȱ sellȱ theȱ invoiceȱ toȱ aȱ thirdȱ company,ȱ normallyȱ aȱ bankȱ orȱ financialȱ servicesȱ company.ȱThisȱcompanyȱgivesȱyouȱcashȱimmediatelyȱforȱtheȱinvoiceȱ butȱ atȱ aȱ discountedȱ rate.ȱ Theyȱ mightȱ forȱ exampleȱ giveȱ youȱ 95cȱ forȱ everyȱ$1ȱtheȱinvoiceȱisȱworth.ȱ Usingȱ debtȱ toȱ fundȱ aspectsȱ ofȱ yourȱ businessȱ mayȱ beȱ essentialȱ andȱ fortunatelyȱhasȱmanyȱadvantages.ȱInȱgeneralȱthereȱisȱlittleȱorȱnoȱdayȱ toȱ dayȱ interferenceȱ inȱ yourȱ companyȱ fromȱ theȱ lender.ȱ Debtȱ isȱ aȱ

98ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

relativelyȱcheapȱformȱofȱfundsȱasȱitȱdoesȱnotȱinvolveȱpartingȱwithȱaȱ shareȱ ofȱ yourȱ businessȱ equityȱ andȱ theȱ documentationȱ isȱ normallyȱ simple.ȱȱ Thereȱ areȱ howeverȱ someȱ disadvantagesȱ toȱ debtȱ finance.ȱ Inȱ someȱ cases,ȱlendersȱwillȱimposeȱcovenantsȱonȱyourȱbusinessȱthatȱpreventȱ youȱ fromȱ goingȱ toȱ otherȱ lendersȱ orȱ usingȱ otherȱ fundingȱ mechanisms.ȱTheyȱdoȱthisȱtoȱprotectȱtheirȱpositionȱbutȱtheseȱcouldȱ beȱ restrictive.ȱ Theȱ mainȱ disadvantageȱ ofȱ debtȱ howeverȱ isȱ that,ȱ inȱ timesȱ ofȱ difficulty,ȱ lendersȱ suchȱ asȱ banksȱ areȱ moreȱ interestedȱ inȱ theirȱ capitalȱ thanȱ theȱ continuationȱ ofȱ theȱ businessȱ andȱ willȱ notȱ hesitateȱtoȱcloseȱtheȱbusinessȱifȱtheyȱseeȱaȱriskȱofȱlosingȱtheirȱcapital.ȱ Inȱ balance,ȱ mostȱ businessesȱ useȱ debtȱ inȱ someȱ formȱ orȱ otherȱ throughoutȱ theirȱ lifeȱ andȱ itȱ isȱ oftenȱ theȱ mostȱ appropriateȱ toolȱ inȱ managingȱcashȱflow.ȱȱ Equity Equityȱfundingȱisȱtheȱprocessȱofȱsellingȱaȱshareȱofȱyourȱcompanyȱtoȱ raiseȱ moneyȱ thatȱ theȱ companyȱ usesȱ toȱ grow.ȱ Theȱ investorȱ takesȱ aȱ shareȱofȱtheȱownershipȱofȱtheȱcompanyȱandȱthereforeȱwillȱshareȱinȱ theȱprofitsȱandȱtheȱeventualȱvalueȱofȱtheȱcompanyȱinȱtheȱfuture.ȱInȱ mostȱ casesȱ theȱ moneyȱ isȱ notȱ repaidȱ andȱ ifȱ theȱ companyȱ fails,ȱ theȱ investorȱlosesȱtheirȱinvestment.ȱȱ Ofȱtheseȱtwoȱpotentialȱreturnsȱforȱtheȱinvestor,ȱfirstlyȱaȱshareȱofȱtheȱ profitsȱ andȱ secondlyȱ theȱ capitalȱ uplift,ȱ mostȱ investorsȱ inȱ startȬupȱ businessesȱ areȱ mainlyȱ interestedȱ inȱ theȱ capitalȱ growthȱ ofȱ theirȱ investment.ȱ Theyȱ wantȱ toȱ investȱ inȱ yourȱ businessȱ todayȱ whenȱ theȱ sharesȱareȱworthȱ$1ȱandȱsellȱthemȱinȱfiveȱyearsȱtimeȱwhenȱtheyȱareȱ worthȱ$5ȱorȱmore.ȱȱ Inȱ theory,ȱ youȱ canȱ sellȱ sharesȱ inȱ yourȱ companyȱ toȱ almostȱ anyoneȱ butȱ thereȱ areȱ legalȱ constraintsȱ thatȱ youȱ needȱ toȱ beȱ awareȱ of.ȱ Allȱ companiesȱ areȱ requiredȱ toȱ maintainȱ aȱ registerȱ ofȱ shareholdersȱ andȱ

5.2ȱSourcesȱofȱfinanceȱȱȱȱȱȱ99ȱ

notifyȱ theȱ companyȱ registrationȱ authoritiesȱ ofȱ theȱ list.ȱ Mostȱ countriesȱ setȱ limitsȱ onȱ theȱ numberȱ ofȱ shareholdersȱ aȱ limitedȱ companyȱisȱallowedȱtoȱhaveȱbeforeȱrequiringȱitȱtoȱbecomeȱaȱPublicȱ LimitedȱCompanyȱorȱPLC.ȱTheȱregulationsȱandȱreportingȱdemandsȱ onȱ PLC’sȱ areȱ moreȱ arduousȱ thanȱ forȱ limitedȱ companies.ȱ Otherȱ regulationsȱareȱdesignedȱtoȱpreventȱmoneyȱlaunderingȱandȱprotectȱ nonȬsophisticatedȱinvestors.ȱ Dependingȱ onȱ theȱ amountȱ ofȱ investmentȱ youȱ require,ȱ thereȱ areȱ manyȱpotentialȱgroupsȱofȱequityȱinvestors.ȱForȱsmallȱamountsȱofȱupȱ toȱ perhapsȱ $10,000,ȱ youȱ areȱ unlikelyȱ toȱ attractȱ aȱ professionalȱ investor,ȱ theȱ amountsȱ doȱ notȱ justifyȱ theȱ effortȱ ofȱ examiningȱ theȱ potentialȱ ofȱ yourȱ company.ȱ Youȱ wouldȱ needȱ toȱ sellȱ sharesȱ toȱ yourself,ȱyourȱfellowȱdirectors,ȱfamilyȱandȱfriends.ȱȱ Businessȱ Angelsȱ investȱ betweenȱ $5,000ȱ andȱ $250,000.ȱ Aȱ typicalȱ businessȱ angelȱ isȱ aȱ businesspersonȱ whoȱ hasȱ madeȱ moneyȱ andȱ isȱ lookingȱ toȱ investȱ itȱ inȱ aȱ smallȱ companyȱ thatȱ theyȱ canȱ getȱ involvedȱ withȱ andȱ evenȱ workȱ inȱ onȱ aȱ partȱ timeȱ basis.ȱ Aȱ businessȱ angelȱ thereforeȱ isȱ aȱ sourceȱ ofȱ expertiseȱ asȱ wellȱ asȱ cash.ȱ Manyȱ businessȱ angelȱ networksȱ haveȱ beenȱ formedȱ toȱ allowȱ themȱ toȱ workȱ togetherȱ andȱraiseȱsubstantialȱfundsȱforȱexcitingȱcompanyȱinvestments.ȱ Ventureȱ capitalȱ investmentȱ startsȱ atȱ aboutȱ $100,000ȱ andȱ goesȱ throughȱ toȱ severalȱ millions.ȱ Ventureȱ capitalȱ companiesȱ areȱ lookedȱ atȱ inȱ someȱ detailȱ inȱ theȱ nextȱ sectionȱ butȱ essentiallyȱ theyȱ areȱ professionallyȱ runȱ organisationsȱ thatȱ investȱ inȱ highȱ growthȱ potentialȱ businessesȱ inȱ orderȱ toȱ makeȱ aȱ capitalȱ return.ȱ Ventureȱ capitalȱorganisationsȱoftenȱspecialiseȱinȱtheirȱinvestments,ȱsomeȱbyȱ sizeȱ ofȱ investment,ȱ othersȱ byȱ industryȱ sector.ȱ Betweenȱ them,ȱ theyȱ investȱ inȱ startȬups,ȱ buyȬouts,ȱ mergersȱ andȱ acquisitionsȱ andȱ expansionȱprojects.ȱȱ Theȱfinalȱmechanismȱforȱequityȱfundingȱisȱtoȱfloatȱtheȱcompanyȱonȱaȱ publiclyȱtradedȱmarketȱorȱstockȱexchange.ȱTheȱprincipleȱisȱthatȱyouȱ offerȱ partȱ ofȱ theȱ equityȱ ofȱ yourȱ companyȱ toȱ theȱ publicȱ andȱ allowȱ

100ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

thoseȱ sharesȱ toȱ beȱ tradedȱ freely.ȱ Theȱ floatationȱ processȱ isȱ complexȱ andȱ timeȱ consumingȱ butȱ veryȱ goodȱ resultsȱ canȱ beȱ achieved.ȱ Theȱ firstȱ stepȱ isȱ toȱ findȱ anȱ investmentȱ bankȱ willingȱ toȱ handleȱ theȱ process.ȱTheyȱwillȱbeȱrecommendingȱyourȱsharesȱtoȱtheirȱclientsȱsoȱ willȱlookȱveryȱcloselyȱatȱwhatȱyouȱhaveȱtoȱofferȱbeforeȱdecidingȱtoȱ workȱwithȱyou.ȱTogetherȱyouȱwillȱthenȱcreateȱaȱprospectusȱandȱtheyȱ willȱstartȱsellingȱtheȱshares.ȱThisȱwillȱinvolveȱaȱlotȱofȱworkȱforȱyouȱ andȱ yourȱ teamȱ carryingȱ outȱ presentationsȱ toȱ fundȱ managersȱ andȱ otherȱpotentialȱinvestors.ȱOnceȱtheȱsharesȱareȱtrading,ȱyouȱwillȱhaveȱ toȱ workȱ equallyȱ hardȱ toȱ keepȱ theȱ shareȱ priceȱ goingȱ up.ȱ Thereȱ areȱ alsoȱ additionalȱ reportingȱ mechanismsȱ thatȱ youȱ mustȱ adhereȱ toȱ inȱ orderȱ toȱ keepȱ theȱ marketȱ informedȱ ofȱ yourȱ commercialȱ results.ȱ Raisingȱ fundsȱ thisȱ wayȱ isȱ veryȱ expensiveȱ inȱ termsȱ ofȱ feesȱ andȱ managementȱ time.ȱ Figȱ 5.5ȱ summarisesȱ theȱ equityȱ fundingȱ optionsȱ availableȱdependingȱonȱtheȱamountsȱinvolved.ȱ

ȱ Fig.ȱ5.5.ȱEquityȱfundingȱoptionsȱ

Stockȱ marketȱ floatationsȱ canȱ alsoȱ beȱ usedȱ toȱ allowȱ existingȱ shareholdersȱtoȱsellȱtheirȱsharesȱandȱtakeȱtheirȱcapitalȱgrowth.ȱOnceȱ theȱsharesȱareȱtrading,ȱexistingȱshareholdersȱcanȱsellȱtheirȱsharesȱatȱ theȱmarketȱrate.ȱ Theȱ obviousȱ advantageȱ withȱ equityȱ investmentsȱ isȱ thatȱ thereȱ isȱ noȱ capitalȱ orȱ interestȱ repayment.ȱ Inȱ manyȱ cases,ȱ aȱ handsȬonȱ investorȱ

5.3ȱHowȱdoesȱventureȱcapitalȱwork?ȱȱȱȱȱȱ101ȱ

suchȱasȱaȱbusinessȱangelȱorȱaȱventureȱcapitalȱorganisationȱwillȱalsoȱ addȱvalueȱinȱtermsȱofȱexpertise,ȱexperienceȱandȱcontacts.ȱȱ Thereȱ areȱ howeverȱ disadvantagesȱ includingȱ theȱ dilutionȱ ofȱ yourȱ originalȱownershipȱofȱtheȱbusinessȱandȱtheȱlossȱofȱflexibilityȱifȱnewȱ shareholdersȱ exertȱ anyȱ controlȱ onȱ theȱ business.ȱ Theȱ otherȱ disȬ advantagesȱofȱraisingȱmoneyȱthroughȱequityȱsaleȱareȱtheȱlegalȱfeesȱ andȱmanagementȱtime.ȱ

5.3 How does venture capital work? Manyȱ startȬupȱ companies,ȱ particularlyȱ companiesȱ thatȱ areȱ formedȱ toȱexploitȱaȱnewȱtechnologyȱorȱtoȱexploitȱaȱnewȱmarketȱopportunityȱ willȱ atȱ someȱ stageȱ requireȱ equityȱ investment.ȱ Ventureȱ capitalȱ isȱ aȱ commonȱ choiceȱ andȱ soȱ itȱ isȱ worthȱ understandingȱ notȱ onlyȱ theȱ processȱ ofȱ thisȱ formȱ ofȱ investment,ȱ butȱ alsoȱ theȱ anatomyȱ ofȱ theȱ ventureȱcapitalȱbusinessȱitselfȱandȱwhatȱdrivesȱit.ȱ Theȱ vastȱ majorityȱ ofȱ ventureȱ capitalȱ organisationsȱ areȱ notȱ theȱ playȱ thingsȱ ofȱ incrediblyȱ wealthyȱ businessȱ peopleȱ buildingȱ empiresȱ inȱ trueȱ Hollywoodȱ fashion,ȱ butȱ businessesȱ offeringȱ aȱ serviceȱ toȱ theirȱ customers,ȱjustȱlikeȱyou.ȱȱ Theȱ typicalȱ VCȱ firmȱ isȱ aȱ businessȱ thatȱ offersȱ aȱ goodȱ returnȱ onȱ investmentȱ toȱ largeȱ fundȱ managersȱ suchȱ asȱ pensionȱ fundsȱ andȱ trusts.ȱTheseȱfundȱmanagersȱspreadȱtheirȱinvestmentsȱbetweenȱtheȱ moneyȱ markets,ȱ sharesȱ andȱ otherȱ vehicles.ȱ Theȱ VCȱ firmȱ buildsȱ aȱ fundȱ byȱ essentiallyȱ sellingȱ sharesȱ inȱ itȱ toȱ theseȱ customersȱ withȱ theȱ promiseȱtoȱrepayȱthemȱwithȱveryȱhighȱratesȱofȱreturnȱwhenȱtheȱfundȱ closesȱ inȱ sayȱ tenȱ years.ȱ Theȱ bestȱ VCȱ firmsȱ canȱ provideȱ returnsȱ ofȱ 40%ȱperȱannumȱofȱmore.ȱ Havingȱbuiltȱaȱfund,ȱtheȱVCȱfirmȱthenȱlooksȱforȱcompaniesȱtoȱinvestȱ theȱmoneyȱinȱthatȱwillȱprovideȱenoughȱcapitalȱgrowthȱtoȱmakeȱgoodȱ onȱtheirȱpromisesȱandȱtakeȱtheirȱfee.ȱInȱorderȱtoȱprovideȱthisȱlevelȱofȱ

102ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

growth,ȱ theȱ VCȱ firmȱ looksȱ forȱ investmentsȱ thatȱ willȱ provideȱ exceptionalȱreturnsȱbutȱtheseȱareȱalsoȱtypicallyȱrisky.ȱȱ Investmentȱ statisticsȱ suggestȱ thatȱ forȱ everyȱ fiveȱ investmentsȱ thatȱ aȱ VCȱ firmȱ makes,ȱ twoȱ willȱ failȱ completely,ȱ twoȱ willȱ notȱ liveȱ upȱ toȱ expectationȱ andȱ justȱ oneȱ willȱ achieveȱ whatȱ itȱ promised.ȱ Theȱ onesȱ thatȱdon’tȱliveȱupȱtoȱexpectation,ȱoftenȱcalledȱtheȱ‘livingȱdead’,ȱareȱ ofȱ noȱ realȱ valueȱ andȱ difficultȱ toȱ sell,ȱ soȱ itȱ isȱ leftȱ toȱ theȱ singleȱ achievingȱcompanyȱtoȱprovideȱallȱtheȱvalueȱtoȱtheȱfund.ȱTheȱtermsȱ ofȱ theȱ dealsȱ thatȱ VCȱ firmsȱ makeȱ areȱ premisedȱ aroundȱ thisȱ assumptionȱ andȱ areȱ thereforeȱ oftenȱ veryȱ expensiveȱ inȱ termsȱ ofȱ theȱ equityȱshareȱtheyȱdemandȱforȱtheirȱinvestment.ȱ Atȱ theȱ endȱ ofȱ theȱ VCȱ fundsȱ life,ȱ theȱ capitalȱ needsȱ toȱ beȱ extractedȱ fromȱtheȱinvestmentsȱsoȱthatȱtheȱfund’sȱcustomersȱcanȱbeȱrepaid.ȱAllȱ VCȱdealsȱthereforeȱincludeȱconsiderationȱforȱhowȱtheȱfundsȱcanȱbeȱ released.ȱThisȱisȱknownȱasȱtheȱexitȱstrategy.ȱȱ What are venture capitalists looking for? Evenȱ thoughȱ atȱ firstȱ sight,ȱ ventureȱ capitalȱ dealsȱ canȱ beȱ aȱ veryȱ expensiveȱsourceȱofȱfunds,ȱthereȱisȱnoȱshortageȱofȱdemandȱandȱVCȱ firmsȱareȱoftenȱinundatedȱwithȱbusinessȱplansȱfromȱpeopleȱlookingȱ forȱinvestment.ȱAȱtypicalȱfirmȱmightȱinvestȱinȱoneȱinȱaȱhundredȱofȱ theȱcompaniesȱitȱlooksȱat.ȱToȱstandȱanyȱchanceȱofȱsuccessȱyouȱneedȱ toȱ understandȱ whatȱ theyȱ areȱ lookingȱ forȱ andȱ howȱ toȱ approachȱ them.ȱ Thereȱ areȱ manyȱ criteriaȱ thatȱ VCȱ firmsȱ useȱ toȱ targetȱ theirȱ investments.ȱ Theyȱ lookȱ forȱ aȱ committedȱ andȱ competentȱ manageȬ mentȱteam,ȱtheyȱlookȱforȱaȱsharedȱriskȱandȱreward,ȱtheyȱlookȱforȱaȱ businessȱplanȱthatȱisȱunderstandableȱandȱrealisticȱandȱtheyȱlookȱforȱ anȱopportunityȱthatȱisȱdifferentȱandȱuniqueȱbutȱthatȱhasȱpotential.ȱ Withinȱ theȱ managementȱ teamȱ theyȱ wantȱ toȱ seeȱ visionȱ andȱ enthȬ usiasmȱ temperedȱ byȱ experienceȱ andȱ capability.ȱ Theyȱ needȱ toȱ seeȱ

5.3ȱHowȱdoesȱventureȱcapitalȱwork?ȱȱȱȱȱȱ103ȱ

thatȱ theȱ teamȱ isȱ entirelyȱ committedȱ toȱ theȱ ventureȱ andȱ isȱ realisticȱ aboutȱwhatȱtheyȱcanȱachieve.ȱ Theȱriskȱandȱrewardȱofȱtheȱinvestmentȱneedsȱtoȱbeȱsharedȱbetweenȱ theȱVCȱfirmȱandȱtheȱmanagementȱteam.ȱAlthoughȱinȱrealityȱtheȱVCȱ firmȱ willȱ putȱ upȱ mostȱ ofȱ theȱ money,ȱ theyȱ likeȱ toȱ seeȱ thatȱ theȱ managementȱteamȱareȱinvestingȱsomethingȱtoo.ȱEvenȱifȱitȱisȱaȱtokenȱ gesture,ȱ thisȱ levelȱ ofȱ commitmentȱ goesȱ aȱ longȱ wayȱ toȱ addingȱ confidence.ȱ Theyȱ alsoȱ wantȱ toȱ seeȱ thatȱ theȱ managementȱ teamȱ areȱ incentivisedȱ toȱ deliverȱ theȱ plan.ȱ Ifȱ theȱ businessȱ isȱ aȱ greatȱ success,ȱ theyȱwillȱbenefitȱfinanciallyȱtoo.ȱȱ Theȱbusinessȱpropositionȱneedsȱtoȱbeȱclearȱandȱunderstandable.ȱTheȱ investmentȱ needsȱ toȱ beȱ appropriateȱ forȱ theȱ VCȱ firm,ȱ itȱ isȱ inȱ theirȱ areaȱ ofȱ expertiseȱ andȱ ofȱ theȱ rightȱ scale.ȱ Theȱ ideaȱ needsȱ toȱ beȱ appealing,ȱlogicalȱandȱrealistic.ȱ Inȱmostȱcasesȱtheȱmarketȱthatȱtheȱcompanyȱwillȱexploitȱneedsȱtoȱbeȱ growingȱtooȱinȱorderȱtoȱsupportȱtheȱgrowthȱinȱvalue.ȱ Toȱ generateȱ sufficientȱ growthȱ however,ȱ theȱ businessȱ opportunityȱ needsȱtoȱbeȱuniqueȱandȱdifferent.ȱAȱ‘meȱtoo’ȱproductȱthatȱisȱmerelyȱ joiningȱaȱtrendȱofȱsimilarȱideasȱisȱveryȱunlikelyȱtoȱachieveȱtheȱscaleȱ ofȱrewardȱtheyȱareȱlookingȱfor.ȱThisȱsuggestsȱthatȱtheȱideaȱneedsȱtoȱ beȱ protectedȱ throughȱ patentsȱ orȱ otherȱ appropriateȱ mechanismsȱ toȱ safeguardȱagainstȱcompetitionȱinȱtheȱmarket.ȱȱ Putȱinȱpriorityȱorder;ȱtheȱfirstȱthingȱtheyȱlookȱatȱisȱtheȱmanagement;ȱ secondlyȱ theyȱ lookȱ atȱ theȱ management;ȱ thirdlyȱ theyȱ lookȱ atȱ theȱ management;ȱ fourthlyȱ theyȱ lookȱ atȱ theȱ marketȱ toȱ ensureȱ itȱ canȱ sustainȱtheȱrequiredȱgrowth;ȱandȱfinallyȱtheyȱlookȱatȱtheȱproduct.ȱ

104ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

ȱ Fig.ȱ5.6.ȱInvestmentȱdecisionȱprioritiesȱ

ApproachingȱaȱVCȱfirmȱ GivenȱthatȱaȱVCȱfirmȱwillȱinvestȱinȱperhapsȱoneȱinȱaȱhundredȱ businessȱ plansȱ itȱ sees,ȱ catchingȱ theirȱ attentionȱ canȱ beȱ veryȱ difficult.ȱTheȱfirstȱthingȱtoȱnoteȱisȱthatȱjustȱsendingȱyourȱplanȱ inȱtheȱpostȱandȱwaitingȱforȱthemȱtoȱcallȱwillȱalmostȱcertainlyȱ leadȱtoȱfailure.ȱ Atȱ theȱ veryȱ minimum,ȱ youȱ needȱ toȱ researchȱ theȱ marketȱ andȱ narrowȱdownȱyourȱtargetȱVCsȱbasedȱonȱtheȱsectorȱyouȱareȱinȱ andȱ theȱ typeȱ ofȱ investmentȱ youȱ need.ȱ Onceȱ youȱ haveȱ doneȱ thatȱ youȱ shouldȱ callȱ themȱ andȱ talkȱ aboutȱ yourȱ opportunityȱ andȱ needsȱ andȱ askȱ whoȱ toȱ sendȱ aȱ planȱ to.ȱ Youȱ thenȱ haveȱ someoneȱ toȱ followȱ upȱ withȱ andȱ withȱ whomȱ toȱ arrangeȱ aȱ presentationȱandȱsoȱon.ȱ Evenȱthisȱcanȱbeȱdifficult.ȱAȱbetterȱapproachȱisȱtoȱbeȱrecommȬ endedȱ byȱ someoneȱ theyȱ knowȱ orȱ byȱ someoneȱ withinȱ theȱ industryȱthatȱhasȱaȱpositionȱtheyȱrespect.ȱThisȱisȱwhereȱhavingȱ goodȱ nonȬexecutiveȱ directorsȱ andȱ mentorsȱ isȱ reallyȱ worthwhile.ȱ Theirȱ standingȱ inȱ theȱ businessȱ worldȱ andȱ involvementȱ withȱ yourȱ companyȱ raisesȱ yourȱ profileȱ makingȱ investorsȱ moreȱ likelyȱ toȱ listenȱ toȱ whatȱ youȱ haveȱ toȱ offer.ȱ Professionalȱ advisers,ȱ evenȱ bankȱ managersȱ canȱ alsoȱ makeȱ introductionsȱonȱyourȱbehalf.ȱȱ

5.3ȱHowȱdoesȱventureȱcapitalȱwork?ȱȱȱȱȱȱ105ȱ

Beforeȱyouȱstartȱhowever,ȱmakeȱsureȱthatȱyourȱbusinessȱplanȱ isȱ readyȱ toȱ beȱ sentȱ outȱ andȱ thatȱ youȱ areȱ readyȱ toȱ makeȱ presentations.ȱIfȱtheyȱdoȱbite,ȱyouȱwantȱtoȱbeȱinȱaȱpositionȱtoȱ respondȱasȱquicklyȱasȱpossible.ȱ Putȱ anotherȱ way,ȱ aȱ VCȱ firmȱ isȱ moreȱ likelyȱ toȱ investȱ inȱ anȱ Aȱ classȱ managementȱ teamȱ withȱ aȱ Bȱ classȱ idea,ȱ thanȱaȱ Bȱ classȱ managementȱ teamȱwithȱanȱAȱclassȱidea.ȱ Due diligence Beforeȱ anyȱ potentialȱ investorȱ handsȱ overȱ theirȱ money,ȱ theyȱ willȱ wantȱtoȱtakeȱaȱgoodȱlookȱatȱyourȱbusinessȱandȱtestȱtheȱassumptionsȱ thatȱyouȱareȱclaiming.ȱTheȱdepthȱofȱthisȱdueȱdiligenceȱexerciseȱwillȱ varyȱdependingȱonȱtheȱscaleȱofȱtheȱinvestment.ȱAȱrelativeȱputtingȱinȱ aȱ fewȱ thousandȱ dollarsȱ mayȱ wantȱ toȱ seeȱ theȱ planȱ andȱ haveȱ aȱ chatȱ withȱ youȱ overȱ aȱ drinkȱ orȱ meal.ȱ Aȱ VCȱ firmȱ willȱ haveȱ somethingȱ aȱ littleȱmoreȱarduousȱinȱmind.ȱ Aȱtypicalȱdueȱdiligenceȱinvestigationȱwillȱlookȱatȱatȱleastȱfourȱmainȱ areasȱofȱtheȱbusiness;ȱtheȱfinances;ȱtheȱmanagement;ȱtheȱmarketȱandȱ theȱproduct.ȱ Theȱ financialȱ dueȱ diligenceȱ isȱ likelyȱ toȱ involveȱ aȱ reviewȱ ofȱ theȱ historicȱaccountsȱtoȱensureȱthatȱtheyȱareȱaccurateȱandȱthatȱthereȱareȱ noȱ contentiousȱ issues.ȱ Itȱ willȱ includeȱ aȱ reviewȱ ofȱ theȱ financialȱ controlsȱ withinȱ theȱ businessȱ andȱ theȱ managementȱ accountingȱ methodsȱused.ȱTheȱforecastsȱwithinȱtheȱbusinessȱplanȱtogetherȱwithȱ theȱassumptionsȱusedȱwillȱbeȱtestedȱandȱchecked.ȱFinallyȱtheȱstatusȱ andȱcommitmentȱofȱtheȱotherȱshareholdersȱandȱpotentialȱcoȬfundersȱ willȱbeȱlookedȱinto.ȱ Theȱ managementȱ teamȱ areȱ likelyȱ toȱ beȱ subjectȱ toȱ interviews,ȱ referencesȱ mayȱ beȱ takenȱ upȱ andȱ otherȱ checksȱ mayȱ beȱ carriedȱ outȱ includingȱpersonalȱcreditȱhistories,ȱevenȱcriminalȱrecords.ȱForȱlargeȱ investments,ȱitȱisȱnotȱunknownȱforȱprivateȱinvestigatorsȱtoȱbeȱhiredȱ

106ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

toȱcheckȱtoȱseeȱthatȱallȱtheȱdirectorsȱareȱwhoȱandȱwhatȱtheyȱsayȱtheyȱ are.ȱ Theȱmarketȱanalysisȱcouldȱreplicateȱyourȱownȱstudiesȱtoȱconfirmȱtheȱ competitiveȱadvantageȱyouȱclaim,ȱmeasureȱtheȱsizeȱofȱtheȱpotentialȱ marketȱ andȱ makeȱ forecastsȱ ofȱ theȱ futureȱ potentialȱ growth.ȱ Aȱ commonȱ approachȱ isȱ toȱ examineȱ similarȱ companiesȱ inȱ theȱ sectorȱ andȱuseȱthemȱasȱaȱbenchmarkȱforȱyourȱpotential.ȱȱ Theȱproductȱorȱserviceȱyouȱplanȱtoȱprovideȱwillȱalsoȱbeȱscrutinised.ȱ Anyȱintellectualȱpropertyȱrightsȱwillȱbeȱcheckedȱandȱresearchȱonȱtheȱ competitionȱwillȱbeȱcarriedȱout.ȱInȱmanyȱcases,ȱindependentȱexpertsȱ areȱbroughtȱinȱtoȱexamineȱanyȱnewȱtechnologyȱandȱcommentȱonȱitsȱ value.ȱ Preparingȱforȱdueȱdiligenceȱ Dueȱdiligenceȱcanȱtakeȱaȱlotȱofȱmanagementȱtimeȱbutȱsomeȱofȱ timeȱ canȱ beȱ savedȱ byȱ carefulȱ preparationȱ fromȱ theȱ veryȱ firstȱ dayȱyouȱstartȱworkȱonȱyourȱbusiness.ȱȱ Somethingȱasȱsimpleȱasȱaȱfileȱwhichȱcontainsȱcopiesȱofȱallȱtheȱ relevantȱdocumentsȱandȱinformationȱconcerningȱtheȱbusinessȱ canȱ makeȱ theȱ processȱ considerablyȱ easier.ȱ Youȱ shouldȱ startȱ thisȱdueȱdiligenceȱfileȱasȱsoonȱasȱyouȱstartȱyourȱbusinessȱandȱ putȱinȱit,ȱcopiesȱofȱitemsȱsuchȱas:ȱ ȬȱȱȱMemorandumȱandȱarticlesȱofȱassociationȱ ȬȱȱȱScheduleȱofȱshareholdersȱ ȬȱȱȱCertificatesȱofȱincorporationȱandȱnovationsȱ(changesȱofȱ ȱȱȱȱname)ȱ ȬȱȱȱYearlyȱaccountsȱ ȬȱȱȱPropertyȱownershipȱpapersȱorȱleasesȱ ȬȱȱȱEmploymentȱarrangementsȱincludingȱorganisationȱcharts,ȱ ȱȱȱȱȱstaffȱlistsȱandȱbenefitȱschemesȱ ȬȱȱȱDirectorsȱandȱseniorȱmanagementȱcontractsȱandȱCVsȱ ȬȱȱȱPatentȱfilingsȱandȱproofȱofȱotherȱintellectualȱpropertyȱrightsȱ

5.3ȱHowȱdoesȱventureȱcapitalȱwork?ȱȱȱȱȱȱ107ȱ

ȬȱȱȱLicenseȱagreementsȱ ȬȱȱȱContractsȱwithȱsuppliers,ȱdistributorsȱandȱlargeȱcustomersȱ ȬȱȱȱCommissionedȱmarketȱresearchȱreportsȱ ȬȱȱȱDebtsȱandȱborrowingsȱ ȬȱȱȱInsurancesȱ ȬȱȱȱRegulatoryȱapprovalȱcertificatesȱ Byȱkeepingȱsuchȱaȱfileȱupȱtoȱdate,ȱyouȱwillȱnotȱonlyȱsaveȱtimeȱ laterȱon,ȱbutȱalsoȱbeȱableȱtoȱdemonstrateȱyourȱprofessionalismȱ toȱanyȱinterestȱparty.ȱ

How do they structure a deal? Itȱ isȱ relativelyȱ rareȱ forȱ VCȱ firmsȱ toȱ buyȱ ordinaryȱ sharesȱ inȱ aȱ company.ȱ Sinceȱ theyȱ areȱ normallyȱ puttingȱ inȱ theȱ vastȱ majorityȱ ofȱ theȱfunds,ȱsuchȱanȱapproachȱwouldȱdiluteȱtheȱexistingȱshareholdersȱ andȱ managementȱ almostȱ outȱ ofȱ existence.ȱ Theȱ resultȱ ofȱ whichȱ wouldȱnotȱprovideȱtheȱteamȱmotivationȱtheyȱneedȱandȱwouldȱalsoȱ leaveȱthemȱwithȱtooȱmuchȱcontrolȱoverȱtheȱbusiness.ȱ Itȱ isȱ muchȱ moreȱ commonȱ forȱ VCȱ firmsȱ toȱ spreadȱ theirȱ investmentȱ acrossȱaȱnumberȱofȱshareȱtypesȱandȱevenȱloansȱinȱorderȱtoȱarriveȱatȱaȱ solutionȱwhereȱtheȱfoundersȱandȱmanagementȱareȱincentivised,ȱtheyȱ canȱ makeȱ theirȱ returnȱ andȱ toȱ someȱ extentȱ theȱ investmentȱ isȱ protected.ȱTheȱuseȱofȱpreferenceȱshares,ȱconvertibleȱloansȱandȱsoȱonȱ areȱcommonȱinȱthisȱprocess.ȱ Itȱisȱalsoȱpossibleȱbuildȱoptionsȱforȱtheȱcompanyȱtoȱbuyȱbackȱsharesȱ fromȱ theȱ VCȱ firmȱ asȱ milestonesȱ areȱ metȱ andȱ risksȱ reduced.ȱ Redeemableȱsharesȱareȱusedȱforȱthisȱpurpose.ȱ Theȱ processȱ ofȱ structuringȱ theȱ dealȱ isȱ aȱ negotiation,ȱ soȱ doȱ notȱ beȱ afraidȱtoȱhaggleȱwithȱthem.ȱAtȱtheȱendȱofȱtheȱday,ȱeverybodyȱneedsȱ toȱbeȱhappyȱwithȱtheȱdealȱasȱyouȱallȱhaveȱtoȱworkȱtogetherȱandȱbeȱ motivatedȱtoȱsucceed.ȱ

108ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

How do you value your company? Valuingȱ yourȱ companyȱ isȱ importantȱ whenȱ raisingȱ fundsȱ throughȱ equityȱasȱitȱsetsȱtheȱpriceȱforȱeachȱshareȱyouȱsell.ȱTheȱimplicationȱofȱ thisȱ valuationȱ canȱ haveȱ aȱ bigȱ effectȱ onȱ theȱ ownershipȱ ofȱ theȱ company.ȱ Imagineȱ youȱ needȱ toȱ raiseȱ $100,000.ȱ Ifȱ yourȱ companyȱ isȱ valuedȱatȱ$200,000ȱpostȱinvestment,ȱyouȱwillȱneedȱtoȱsellȱ50%ȱofȱtheȱ companyȱtoȱraiseȱtheȱfunds.ȱHowever,ȱifȱyourȱcompanyȱisȱvaluedȱatȱ $250,000ȱ postȱ investment,ȱ youȱ onlyȱ needȱ toȱ handȱ overȱ 40%ȱ ofȱ it.ȱ Obviouslyȱ theȱ existingȱ ownersȱ wouldȱ preferȱ theȱ higherȱ valuation,ȱ theȱnewȱinvestorsȱwouldȱpreferȱtheȱlowerȱone.ȱ Valuingȱcompaniesȱisȱmoreȱofȱanȱartȱthanȱaȱscience.ȱItȱisȱaȱsimplerȱ processȱ ifȱ yourȱ companyȱ isȱ establishedȱ andȱ hasȱ aȱ tradingȱ historyȱ becauseȱtheȱrealȱprofitsȱyouȱhaveȱgeneratedȱcanȱbeȱusedȱasȱaȱguide.ȱ Ifȱyouȱareȱjustȱstartingȱandȱyourȱprofitsȱareȱinȱtheȱformȱofȱforecasts,ȱ hopesȱ andȱ dreamsȱ thereȱ isȱ lessȱ realȱ evidenceȱ onȱ whichȱ toȱ baseȱ aȱ valuation.ȱ Ifȱ youȱ haveȱ aȱ tradingȱ businessȱ thatȱ lastȱ yearȱ madeȱ aȱ profitȱ ofȱ $100,000,ȱthenȱaȱsimpleȱvaluationȱmethodȱisȱtoȱcompareȱthatȱprofitȱ toȱinterestȱthatȱyouȱcouldȱreceiveȱfromȱaȱsavingȱaccount.ȱHowȱmuchȱ wouldȱ youȱ haveȱ toȱ investȱ inȱ anȱ accountȱ toȱ receiveȱ interestȱ ofȱ $100,000.ȱTheȱamountȱisȱequivalentȱtoȱtheȱvalueȱofȱtheȱcompany.ȱSoȱ ifȱyouȱcouldȱgetȱ5%ȱinterestȱelsewhere,ȱtheȱequivalentȱvalueȱwouldȱ beȱ $2m.ȱ Anotherȱ wayȱ toȱ lookȱ atȱ thisȱ outcomeȱ isȱ thatȱ theȱ valueȱ isȱ equalȱ toȱ 20ȱ timesȱ theȱ profit.ȱ Thisȱ multiplierȱ isȱ calledȱ aȱ priceȱ –ȱ earningsȱorȱPEȱratio.ȱ Theȱinvestorȱmayȱhoweverȱconsiderȱthatȱtheirȱmoneyȱisȱfarȱsaferȱinȱ aȱsavingsȱaccountȱthanȱinȱyourȱcompanyȱandȱsoȱwouldȱwantȱtoȱseeȱ aȱ biggerȱ interestȱ rateȱ appliedȱ toȱ makeȱ upȱ forȱ thisȱ risk.ȱ Theyȱ mayȱ considerȱ thatȱ 10%ȱ wasȱ aȱ fairerȱ figureȱ toȱ use.ȱ Thisȱ wouldȱ valueȱ theȱ companyȱatȱ$1mȱorȱ10ȱtimesȱtheȱprofit.ȱ Toȱ settleȱ onȱ aȱ particularȱ PEȱ ratioȱ withȱ yourȱ investorsȱ isȱ againȱ aȱ processȱofȱnegotiationȱbutȱthereȱareȱbenchmarksȱthatȱyouȱcanȱuse.ȱIfȱ

5.3ȱHowȱdoesȱventureȱcapitalȱwork?ȱȱȱȱȱȱ109ȱ

similarȱcompaniesȱinȱtheȱsectorȱareȱachievingȱPEsȱofȱ12,ȱthenȱthatȱisȱ aȱsensibleȱstartingȱpoint.ȱ Ifȱ youȱ areȱ notȱ yetȱ inȱ theȱ positionȱ ofȱ makingȱ profits,ȱ butȱ areȱ forecastingȱtoȱdoȱsoȱinȱtheȱfutureȱthenȱthereȱareȱotherȱmethodsȱyouȱ canȱ apply.ȱ Economistsȱ callȱ thisȱ aȱ Netȱ Presentȱ Valueȱ calculation,ȱ itȱ canȱ getȱ quiteȱ complexȱ butȱ theȱ exampleȱ belowȱ providesȱ theȱ basicȱ principles.ȱ Ifȱ youȱ areȱ forecastingȱ toȱ makeȱ aȱ profitȱ ofȱ $100,000ȱ nextȱ yearȱ thenȱ usingȱ aȱ PEȱ ofȱ 15ȱ yourȱ valueȱ nextȱ yearȱ willȱ beȱ $1.5m.ȱ Valueȱ inȱ theȱ futureȱ isȱ howeverȱ worthȱ lessȱ thanȱ valueȱ today.ȱ Ifȱ Iȱ offeredȱ youȱ aȱ choiceȱ betweenȱ $100ȱ todayȱ andȱ $100ȱ inȱ aȱ year’sȱ timeȱ youȱ wouldȱ probablyȱtakeȱtheȱmoneyȱtoday.ȱIfȱIȱofferedȱyouȱ$90ȱtodayȱorȱ$100ȱinȱ aȱ yearȱ youȱ mightȱ thinkȱ aboutȱ it.ȱ Whatȱ amountȱ wouldȱ Iȱ needȱ toȱ reduceȱtoday’sȱofferȱtoȱinȱorderȱforȱyouȱtoȱdecideȱtoȱwait?ȱLetȱusȱsayȱ thatȱitȱisȱ$80.ȱThroughȱthisȱprocessȱyouȱhaveȱdecidedȱthatȱ$100ȱinȱaȱ year’sȱtimeȱisȱworthȱ$80ȱtodayȱorȱputȱanotherȱwayȱyouȱareȱpreparedȱ toȱwaitȱaȱyearȱinȱreturnȱforȱ25%ȱmoreȱvalueȱ(i.e.ȱ$80ȱ+ȱ25%ȱ=ȱ$100).ȱ Theȱ percentageȱ rateȱ isȱ knownȱ asȱ aȱ discountȱ rateȱ andȱ isȱ appliedȱ toȱ theȱfutureȱvalueȱofȱcompaniesȱtoȱderiveȱtheirȱvalueȱtoday.ȱ Applyingȱaȱdiscountȱrateȱ Toȱ applyȱ aȱdiscountȱ rateȱ toȱaȱ futureȱ value,ȱ useȱ theȱ followingȱ equation:ȱ Valueȱtodayȱ=ȱvalueȱinȱtheȱfutureȱ÷ȱ(1ȱ+ȱdiscountȱrate)ȱ Applyingȱ thisȱ 25%ȱ discountȱ rateȱ toȱ yourȱ futureȱ valueȱ ofȱ $1.5m,ȱtheȱvalueȱofȱtheȱcompanyȱtodayȱbecomesȱ$1.25mȱȱ $1.5mȱ÷ȱ(1+25%)ȱ=ȱ$1.25ȱ Whenȱ theȱ profitȱ isȱ notȱ forecastȱ untilȱ twoȱ yearsȱ inȱ theȱ future,ȱ theȱequationȱbecomesȱȱ Valueȱtodayȱ=ȱvalueȱinȱyearȱ2ȱ÷ȱ(1ȱ+ȱdiscountȱrate)ȱ2ȱ $1.5mȱ÷ȱ(1+25%)2ȱ=ȱ$0.96mȱ

110ȱȱȱȱȱȱ5ȱHowȱdoȱyouȱfinanceȱyourȱbusiness?ȱȱ

ifȱtheȱprofitȱisȱthreeȱyearsȱoutȱitȱbecomesȱȱ Valueȱtodayȱ=ȱvalueȱinȱyearȱ3ȱ÷ȱ(1ȱ+ȱdiscountȱrate)ȱ3ȱ $1.5mȱ÷ȱ(1+25%)3ȱ=ȱ$0.77mȱ andȱsoȱon.ȱ Theȱsumsȱinvolvedȱinȱvaluingȱyourȱcompanyȱareȱveryȱsimpleȱonceȱ youȱ haveȱ decidedȱ onȱ suitableȱ PEȱ ratiosȱ andȱ discountȱ rates.ȱ Economistsȱ andȱ financialȱ analystsȱ useȱ complexȱ formulaeȱ toȱ deriveȱ theseȱvaluesȱbutȱatȱtheȱendȱofȱtheȱdayȱtheȱcorrectȱvalueȱisȱoneȱthatȱ investorsȱ areȱ preparedȱ toȱ payȱ andȱ thatȱ ownersȱ areȱ preparedȱ toȱ accept.ȱ Exit strategies Thereȱ areȱ threeȱ basicȱ exitȱ strategiesȱ available,ȱ allȱ ofȱ whichȱ haveȱ aȱ profoundȱ effectȱ onȱ theȱ companyȱ andȱ theȱ founders.ȱ Theȱ preferredȱ exitȱstrategyȱisȱforȱtheȱcompanyȱtoȱbeȱsoldȱinȱtheȱformȱofȱaȱtradeȱsaleȱ toȱaȱlargerȱcompany.ȱȱ Aȱ tradeȱ saleȱ obviouslyȱ involvesȱ theȱ directorsȱ andȱ otherȱ shareȬ holdersȱ havingȱ toȱ giveȱ upȱ theȱ company.ȱ Ifȱ theyȱ wouldȱ ratherȱ theȱ companyȱ remainedȱ independent,ȱ thenȱ theȱ secondȱ optionȱ isȱ forȱ aȱ buyȬout.ȱ Inȱ thisȱ scenario,ȱ theȱ managementȱ orȱ otherȱ shareholdersȱ raiseȱfundsȱelsewhereȱtoȱbuyȱtheȱVCȱfirm’sȱsharesȱfromȱthemȱatȱanȱ agreedȱprice.ȱSometimesȱtheȱfundsȱcomeȱfromȱanotherȱVCȱfirm;ȱthisȱ isȱtermedȱ‘refinancing’.ȱ Theȱ thirdȱ optionȱ isȱ forȱ theȱ companyȱ toȱ floatȱ onȱ aȱ stockȱ market.ȱ Inȱ thisȱwayȱtheȱsharesȱbecomeȱtradableȱandȱtheȱVCȱsimplyȱsellsȱthemȱ onȱtheȱmarket.ȱThisȱisȱoftenȱnotȱasȱsimpleȱasȱitȱsoundsȱhowever,ȱasȱ theȱ marketȱ doesn’tȱ likeȱ toȱ seeȱ originalȱ investorsȱ sellingȱ largeȱ quantitiesȱ ofȱ shares,ȱ thisȱ oftenȱ drivesȱ theȱ priceȱ down.ȱ Forȱ thisȱ reason,ȱ tradeȱ salesȱ areȱ aȱ commonȱ exitȱ strategyȱ forȱ ventureȱ capitalȱ investments.ȱ

5.3ȱHowȱdoesȱventureȱcapitalȱwork?ȱȱȱȱȱȱ111ȱ

Whenȱenteringȱintoȱanyȱkindȱofȱfundraisingȱyouȱneedȱtoȱrememberȱ whyȱyouȱsetȱtheȱbusinessȱupȱandȱwhatȱyourȱpersonalȱplansȱareȱforȱ theȱfuture.ȱYourȱfundraisingȱstrategyȱshouldȱtakeȱthisȱintoȱaccount.ȱ

6 How do you create a financial model?

Youȱwillȱneedȱaȱfinancialȱplanȱforȱyourȱbusinessȱevenȱifȱyouȱdoȱnotȱ needȱtoȱborrowȱmoneyȱorȱsellȱequityȱinȱyourȱcompany.ȱTheȱprocessȱ ofȱ creatingȱ aȱ financialȱ modelȱ isȱ reallyȱ aboutȱ planningȱ andȱ understandingȱ theȱ detailȱ ofȱ howȱ yourȱ businessȱ willȱ workȱ andȱ operate.ȱWithoutȱaȱfinancialȱmodelȱyouȱcannotȱknowȱwhatȱyouȱcanȱ affordȱtoȱspend,ȱwhatȱyouȱwillȱneedȱtoȱsellȱyourȱproductsȱfor,ȱhowȱ muchȱyouȱcanȱpayȱyourselfȱandȱyourȱteamȱorȱevenȱifȱyourȱbusinessȱ hasȱanyȱchanceȱofȱremainingȱsolvent.ȱ Theȱ firstȱ thingȱ toȱ understandȱ aboutȱ creatingȱ aȱ financialȱ modelȱ isȱ thatȱitȱisȱaȱteamȱeffortȱinvolvingȱeverybodyȱthatȱwillȱbeȱinvolvedȱinȱ theȱ runningȱ ofȱ theȱ business.ȱ Ifȱ youȱ createȱ itȱ inȱ isolationȱ fromȱ yourȱ team,ȱtheyȱwillȱnotȱunderstandȱtheȱassumptionsȱyouȱhaveȱmadeȱandȱ feelȱthatȱyouȱareȱimposingȱtargetsȱandȱrestrictionsȱonȱthemȱwithoutȱ consultingȱ them.ȱ Worseȱ still,ȱ ifȱ youȱ leaveȱ itȱ toȱ anȱ accountantȱ toȱ createȱaȱplanȱforȱyou,ȱyouȱwillȱnotȱunderstandȱitȱeither.ȱItȱisȱessentialȱ thatȱyouȱandȱyourȱteamȱcanȱbuyȱintoȱtheȱplan,ȱitsȱassumptionsȱandȱ areasȱofȱcriticality.ȱȱ Fortunately,ȱ creatingȱ aȱ financialȱ modelȱ isȱ actuallyȱ aȱ veryȱ exciting,ȱ creativeȱ andȱ stimulatingȱ experience.ȱ Inȱ workingȱ throughȱ theȱ process,ȱyouȱwillȱhaveȱmanyȱdebatesȱandȱtakeȱmanyȱdecisionsȱthatȱ affectȱtheȱshapeȱofȱyourȱbusinessȱandȱhowȱitȱwillȱoperate.ȱ Byȱ farȱ theȱ bestȱ wayȱ toȱ createȱ theȱ planȱ isȱ toȱ assembleȱ theȱ teamȱ (ensuringȱ thatȱ theyȱ haveȱ enoughȱ teaȱ andȱ chocolateȱ biscuitsȱ forȱ theȱ task),ȱ projectȱ theȱ computerȱ displayȱ soȱ thatȱ everybodyȱ canȱ seeȱ it,ȱ thenȱ eitherȱ usingȱ aȱ preȬpreparedȱ spreadsheetȱ templateȱ orȱ businessȱ planningȱtool,ȱworkȱthroughȱtheȱprocessȱinȱanȱorderlyȱfashion.ȱTheȱ

114ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

resultȱ willȱ beȱ aȱ planȱ thatȱ theȱ wholeȱ teamȱ understands,ȱ believesȱ isȱ achievableȱandȱisȱcommittedȱto.ȱ

6.1 The basic structure Aȱ financialȱ modelȱ consistsȱ ofȱ aȱ balanceȱ betweenȱ incomeȱ andȱ expenditure.ȱ Theȱ incomeȱ needsȱ toȱ beȱ largeȱ enoughȱ toȱ coverȱ theȱ expenditureȱrequiredȱtoȱgenerateȱitȱandȱleaveȱsomeȱresidualȱprofit,ȱ eitherȱforȱfutureȱinvestmentȱorȱdistributionȱtoȱtheȱshareholders.ȱȱ Theȱ incomeȱ sideȱ ofȱ theȱ equationȱ consistsȱ ofȱ salesȱ ofȱ productsȱ andȱ servicesȱ andȱ anyȱ otherȱ incomeȱ youȱ canȱ generate,ȱ suchȱ asȱ fromȱ licensesȱ thatȱ youȱ haveȱ sold.ȱ Theȱ totalȱ ofȱ thisȱ incomeȱ isȱ knownȱ asȱ turnover.ȱ Theȱ complexityȱ ofȱ thisȱ sideȱ ofȱ theȱ equationȱ comesȱ inȱ forecastingȱwhatȱyourȱfutureȱsalesȱareȱlikelyȱtoȱbeȱandȱwhatȱpricesȱ youȱcanȱcharge.ȱȱ Theȱfirstȱelementȱofȱtheȱexpenditureȱsideȱofȱtheȱequationȱisȱtheȱcostȱ ofȱ sales.ȱ Thisȱ isȱ theȱ costȱ toȱ youȱ ofȱ makingȱ andȱ deliveringȱ theȱ product,ȱ orȱ ofȱ providingȱ theȱ service.ȱ Thisȱ shouldȱ onlyȱ includeȱ theȱ directȱ costȱ ofȱ providingȱ theȱ productȱ orȱ serviceȱ andȱ asȱ suchȱ couldȱ includeȱyourȱmanufacturingȱcostsȱincludingȱtheȱshopȱfloorȱsalaries,ȱ butȱ shouldȱ notȱ includeȱ yourȱ salesȱ andȱ advertisingȱ costsȱ orȱ theȱ salariesȱ ofȱ salesmen.ȱ Theȱ turnoverȱ minusȱ theȱ costȱ ofȱ salesȱ isȱ yourȱ grossȱmargin.ȱȱ Ifȱyouȱlookȱatȱyourȱgrossȱmarginȱasȱaȱpercentageȱofȱyourȱturnover,ȱ youȱ canȱ quicklyȱ gainȱ anȱ appreciationȱ forȱ theȱ potentialȱ healthȱ ofȱ yourȱbusiness.ȱIfȱtheȱgrossȱmarginȱisȱlow,ȱsayȱlessȱthanȱ10%,ȱyouȱareȱ notȱmakingȱmuchȱmoneyȱfromȱeachȱsaleȱandȱyouȱwillȱeitherȱhaveȱtoȱ sellȱhighȱvolumesȱorȱtheȱrestȱofȱyourȱbusinessȱwillȱneedȱtoȱbeȱveryȱ efficientȱ toȱ allowȱ goodȱ profitsȱ toȱ beȱ made.ȱ Aȱ highȱ grossȱ marginȱ isȱ muchȱ moreȱ likelyȱ toȱ leadȱ toȱ aȱ profitableȱ business,ȱ providingȱ youȱ canȱsellȱenoughȱofȱthemȱatȱthatȱprice.ȱ

6.1ȱTheȱbasicȱstructureȱȱȱȱȱȱ115ȱ

Theȱ secondȱ aspectȱ ofȱ theȱ expenditureȱ sideȱ ofȱ theȱ equationȱ isȱ theȱ operatingȱexpensesȱofȱtheȱbusiness.ȱMostȱofȱthisȱexpenseȱisȱnormallyȱ dividedȱ intoȱ departmentalȱ headingsȱ suchȱ asȱ Generalȱ &ȱ AdminȬ istrative,ȱSalesȱ&ȱMarketing,ȱResearchȱ&ȱDevelopmentȱandȱsoȱon.ȱInȱ additionȱ though,ȱ thereȱ mayȱ alsoȱ beȱ itemsȱ ofȱ capitalȱ expenses,ȱ premisesȱcostsȱandȱthirdȱpartyȱservices.ȱ Theȱturnover,ȱminusȱtheȱcostȱofȱsales,ȱminusȱtheȱoperatingȱexpensesȱ isȱ theȱ profitȱ (orȱ loss).ȱ Manyȱ termsȱ areȱ usedȱ toȱ describeȱ thisȱ value:ȱ Profit,ȱ Earnings,ȱ Earningsȱ beforeȱ Interestȱ andȱ Taxȱ (EBIT),ȱ evenȱ Earningsȱ beforeȱ Interest,ȱ Tax,ȱ Depreciationȱ andȱ Amortisationȱ (EBITDA)ȱbutȱprofitȱisȱwhatȱweȱareȱreallyȱtalkingȱabout.ȱȱ Whenȱ allȱ theseȱ valuesȱ areȱ presentedȱ inȱ aȱ wayȱ thatȱ showsȱ yourȱ incomeȱandȱexpenses,ȱresultingȱinȱaȱprofitȱorȱloss,ȱtheȱresultingȱtableȱ isȱknownȱasȱaȱProfitȱ&ȱLossȱstatementȱorȱP&Lȱforȱshort.ȱTheȱtableȱonȱ theȱ followingȱ pageȱ showsȱ aȱ typicalȱ exampleȱ ofȱ aȱ 5ȱ yearȱ P&Lȱ forȱ aȱ startȬupȱtechnologyȱbusiness.ȱ Aȱ P&Lȱ accountȱ likeȱ thisȱ showsȱ youȱ howȱ profitableȱ theȱ businessȱ isȱ goingȱtoȱbe,ȱbutȱitȱassumesȱthatȱtheȱrevenueȱandȱexpenditureȱoccurȱ atȱtheȱsameȱtime,ȱinȱotherȱwordsȱitȱdoesn’tȱtellȱyouȱwhatȱyourȱcashȱ flowȱisȱgoingȱtoȱbe.ȱȱ ȱ

116ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ Tableȱ6.1.ȱExampleȱprofitȱandȱlossȱaccountȱ P & L Account

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

$000's

Unit Sales

0

0

11

24

48

Sales Revenue

0

0

340

679

1,267

Services Revenue

0

210

270

440

590

Turnover

0

210

621

1,143

1,905

Cost of Sales

0

42

40

153

195

Gross Margin

0

Gross Margin (%)

168

570

966

1,662

80%

92%

85%

87%

G&A

22

93

125

235

310

Sales & Mark.

12

110

210

256

459

R&D

45

68

168

179

254

Total Expenses

79

271

503

670

1,023

(79)

(103)

67

296

639

Profit/(Loss)

ȱ Toȱdoȱthat,ȱfinancialȱmodelsȱalsoȱincludeȱaȱcashȱflowȱstatement.ȱToȱ provideȱ aȱ veryȱ crudeȱ example,ȱ theȱ tableȱ belowȱ showsȱ theȱ yearlyȱ cashȱflowȱforȱtheȱP&Lȱexampleȱabove.ȱ Tableȱ6.2.ȱExampleȱcashȱflowȱstatementȱ Cash Flow Forecast

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

Profit/(Loss)

(79)

(103)

67

296

639

Balance brought forward

0

(79)

(182)

(115)

181

Cash Balance

(79)

(182)

(115)

181

820

$000's

ȱȱ

6.2ȱBusinessȱplanningȱtoolsȱȱȱȱȱȱ117ȱ

Theȱaffectȱofȱthisȱisȱdramaticȱandȱshowsȱthatȱthisȱbusiness,ȱalthoughȱ makingȱ aȱ profitȱ inȱ yearȱ 3,ȱ doesȱ notȱ provideȱ aȱ positiveȱ returnȱ untilȱ yearȱ 4.ȱ Itȱ alsoȱ showsȱ thatȱ theȱ businessȱ needsȱ toȱ borrowȱ orȱ raiseȱ investmentȱofȱnearlyȱ$200kȱtoȱremainȱsolvent.ȱ Balanceȱ sheetsȱ areȱ alsoȱ aȱ commonȱ financialȱ toolȱ forȱ reportingȱ andȱ examiningȱaȱcompany’sȱhealth.ȱAȱbalanceȱsheetȱisȱdifferentȱfromȱtheȱ P&Lȱ andȱ Cashȱ Flowȱ asȱ itȱ providesȱ aȱ snapȱ shotȱ ofȱ theȱ company’sȱ financialȱpositionȱatȱaȱspecificȱpointȱinȱtime.ȱTheȱspecificsȱofȱbalanceȱ sheetȱreadingȱareȱbeyondȱtheȱscopeȱofȱthisȱbook,ȱbutȱputȱsimply,ȱitȱ showsȱwhatȱtheȱcompanyȱownsȱ(assets)ȱandȱwhatȱitȱowesȱ(liabilitiesȱ andȱ netȱ worth).ȱ Theȱ bottomȱ lineȱ ofȱ theȱ balanceȱ sheetȱ mustȱ alwaysȱ balanceȱ soȱ thatȱ theȱ assetsȱ exactlyȱ equalȱ theȱ liabilitiesȱ andȱ worth.ȱ Balanceȱ sheetsȱ canȱ beȱ usedȱ toȱ examineȱ howȱ theȱ companyȱ usesȱ itsȱ assets,ȱhowȱmuchȱvalueȱisȱtiedȱupȱinȱstock,ȱhowȱwellȱtheȱcompanyȱ collectsȱitsȱrevenuesȱandȱwhetherȱtheȱcompanyȱisȱsolvent.ȱȱ

6.2 Business planning tools Althoughȱthereȱareȱmanyȱsoftwareȱpackagesȱavailableȱforȱbusinessȱ planning,ȱ aȱ commonȱ spreadsheetȱ toolȱ isȱ moreȱ thanȱ adequateȱ forȱ buildingȱyourȱfinancialȱmodel.ȱYouȱareȱlikelyȱtoȱfindȱbuildingȱyourȱ ownȱ modelȱ withȱ aȱ spreadsheetȱ muchȱ moreȱ enlighteningȱ asȱ youȱ haveȱaccessȱtoȱallȱtheȱcalculationsȱandȱmethods.ȱȱȱ TheȱworkedȱexampleȱthatȱfollowsȱusesȱanȱMSȱExcelȱtemplateȱwhichȱ isȱavailableȱatȱwww.hiȬconsulting.com.ȱByȱusingȱaȱtemplateȱlikeȱthisȱ one,ȱ youȱ canȱ startȱ planningȱ yourȱ businessȱ straightȱ awayȱ butȱ onceȱ youȱhaveȱgainedȱexperience,ȱyouȱcanȱadaptȱandȱgrowȱitȱtoȱsuitȱyourȱ needs.ȱAlternativelyȱyouȱcanȱcreateȱyourȱownȱmodel,ȱbasedȱonȱtheȱ sameȱprinciplesȱdescribedȱhere.ȱ ȱ ȱ

118ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

Masteringȱspreadsheetsȱ Ifȱ youȱ areȱ notȱ anȱ experiencedȱ spreadsheetȱ user,ȱ youȱ shouldȱ considerȱ usingȱ thisȱ financialȱ modellingȱ exerciseȱ toȱ becomeȱ moreȱcompetent.ȱAsȱaȱbusinessȱpersonȱyouȱwillȱfindȱthatȱyouȱ startȱ usingȱ spreadsheetsȱ almostȱ asȱ muchȱ asȱ youȱ useȱ aȱ wordȱ processorȱorȱpresentationȱpackage.ȱ Itȱ mayȱ evenȱ beȱ worthȱ consideringȱ aȱ courseȱ orȱ goodȱ tutorialȱ bookȱ toȱ getȱ youȱ started.ȱ Onceȱ mastered,ȱ spreadsheetsȱ willȱ helpȱ youȱ calculateȱ andȱ modelȱ allȱ sortsȱ ofȱ businessȱ situationsȱ fromȱaccountsȱtoȱsalesȱforecastingȱandȱmuchȱmore.ȱȱ Theȱ modelȱ consistsȱ ofȱ aȱ profitȱ andȱ lossȱ accountȱ andȱ cashȱ flowȱ statement.ȱ Theȱ dataȱ forȱ theseȱ sheetsȱ comesȱ fromȱ tenȱ additionalȱ sheetsȱ thatȱ areȱ usedȱ toȱ calculateȱ costsȱ forȱ differentȱ partsȱ ofȱ theȱ businessȱmodel.ȱTheȱtenȱdetailedȱsheetsȱare:ȱ x Salesȱ Summaryȱ –ȱ usedȱ toȱ calculateȱ aȱ salesȱ forecastȱ andȱ futureȱturnover.ȱ x Costȱ ofȱ Salesȱ –ȱ usedȱ toȱ calculateȱ theȱ costsȱ ofȱ fulfillingȱ theȱ sales.ȱ x Generalȱ &ȱ Administrativeȱ –ȱ usedȱ toȱ calculateȱ theȱ generalȱ andȱmanagementȱcostsȱofȱtheȱbusiness.ȱ x Salesȱ &ȱ Marketingȱ –ȱ usedȱ toȱ calculateȱ theȱ costsȱ ofȱ theȱ salesȱ andȱmarketingȱdepartment.ȱ x Researchȱ&ȱDevelopmentȱ–ȱusedȱtoȱcalculateȱtheȱcostsȱofȱtheȱ R&Dȱdepartment.ȱ x Operationsȱ–ȱthisȱsheetȱcontributesȱtowardsȱtheȱcostȱofȱsalesȱ andȱ consistsȱ ofȱ theȱ manufacturingȱ orȱ serviceȱ deliveryȱ department.ȱ x Headcountȱ –ȱ usedȱ toȱ enterȱ employeesȱ intoȱ theȱ businessȱ model.ȱ x Salariesȱ–ȱusedȱtoȱsetȱtheȱsalaryȱlevelȱforȱallȱtheȱemployees.ȱ x CapitalȱExpensesȱ–ȱusedȱtoȱcalculateȱtheȱcostsȱofȱequipmentȱ purchasedȱbyȱtheȱcompany.ȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ119ȱ

x

Facilitiesȱ–ȱusedȱtoȱcalculateȱtheȱcostsȱofȱofficesȱandȱpremisesȱ forȱtheȱcompany.ȱ

6.3 Building the model Thisȱ sectionȱ willȱ takeȱ youȱ throughȱ theȱ processȱ ofȱ buildingȱ aȱ financialȱ modelȱ inȱ aȱ logicalȱ andȱ stepȱ byȱ stepȱ process.ȱ Toȱ workȱ throughȱthisȱprocessȱweȱneedȱaȱfictitiousȱexampleȱbusiness.ȱȱ NewCoȱLtd.ȱisȱaȱstartȬupȱcompanyȱwithȱaȱnewȱpatentedȱtechnologyȱ forȱ usingȱ gammaȱ wavesȱ toȱ inspectingȱ cannedȱ foodȱ products.ȱ Theȱ newȱtechnologyȱwasȱdevelopedȱbyȱaȱuniversityȱresearcherȱwhoȱhasȱ decidedȱ toȱ formȱ aȱ companyȱ toȱ exploitȱ theȱ idea.ȱ Aȱ workingȱ protoȬ typeȱ existsȱ butȱ aȱ furtherȱ yearȱ ofȱ researchȱ andȱ developmentȱ isȱ requiredȱbeforeȱtheȱproductȱcanȱbeȱlaunched.ȱ Theȱnewȱgammaȱtechnologyȱisȱcapableȱofȱdetectingȱsmallȱobjectsȱinȱ cannedȱ foodȱ suchȱ asȱ piecesȱ ofȱ bone,ȱ glass,ȱ nails,ȱ andȱ evenȱ smallȱ congealedȱ lumpsȱ withinȱ theȱ foodȱ mix.ȱ Theȱ newȱ productȱ willȱ competeȱwithȱxȬrayȱandȱmagneticȱdetectionȱmachinesȱbutȱdueȱtoȱtheȱ lowerȱ powerȱ requirements,ȱ willȱ beȱ smallerȱ andȱ saferȱ thanȱ xȬrayȱ machinesȱandȱmoreȱaccurateȱthanȱmagneticȱdetectors.ȱ Currentlyȱ xȬrayȱ inspectionȱ machinesȱ sellȱ forȱ $50kȱ andȱ magneticȱ machinesȱsellȱforȱ$20k.ȱTheȱmanufacturingȱcostȱofȱtheȱnewȱmachineȱ isȱestimatedȱtoȱbeȱ$10k.ȱ TheȱUKȱhasȱbeenȱselectedȱasȱtheȱfirstȱtargetȱmarketȱopportunityȱdueȱ toȱ newȱ legislationȱ whichȱ willȱ forceȱ foodȱ manufacturersȱ toȱ inspectȱ everyȱcannedȱproductȱforȱhumanȱconsumption.ȱWithinȱtheȱUK,ȱtheȱ companyȱ hasȱ identifiedȱ babyȱ food,ȱ cannedȱ soupȱ andȱ cannedȱ preservesȱ asȱ keyȱ launchȱ markets.ȱ Withinȱ theseȱ niches,ȱ theȱ totalȱ potentialȱmarketȱsizeȱisȱ10,000ȱunits.ȱThisȱtotalȱconsistsȱofȱ1,000ȱforȱ babyȱ food,ȱ 3,000ȱ forȱ soupȱ andȱ 6,000ȱ forȱ preserves.ȱ Similarȱ marketsȱ existȱinȱmainlandȱEuropeȱtotallingȱ100,000ȱunits.ȱ

120ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

Theȱdirectorsȱthinkȱthatȱventureȱcapitalȱwillȱbeȱrequiredȱtoȱpayȱforȱ theȱdevelopmentȱandȱsustainȱtheȱcompanyȱuntilȱsalesȱcanȱbeȱmade.ȱ Theyȱ don’tȱ howeverȱ knowȱ howȱ muchȱ investmentȱ theyȱ needȱ orȱ whatȱtheȱreturnȱonȱinvestmentȱisȱlikelyȱtoȱbe.ȱTheyȱneedȱaȱfinancialȱ model.ȱ Forecasting sales Theȱ veryȱ firstȱ partȱ ofȱ theȱ processȱ isȱ toȱ estimateȱ theȱ salesȱ thatȱ areȱ likelyȱtoȱbeȱmadeȱandȱoverȱwhatȱtimeȱperiodȱtheyȱcanȱbeȱachieved.ȱ Ratherȱthanȱsimplyȱguess,ȱvariousȱmethodsȱhaveȱbeenȱdevelopedȱtoȱ applyȱsomeȱlogicȱtoȱtheȱprocess.ȱȱ

ȱ Fig.ȱ6.1.ȱTheȱAIDAȱmodelȱ

OneȱsuchȱmethodȱisȱtheȱAIDAȱmodel.ȱAIDAȱisȱanȱabbreviationȱof:ȱ x x x x

Awareȱ–ȱwhatȱproportionȱofȱtheȱmarketȱcanȱyouȱmakeȱawareȱ ofȱyourȱproduct.ȱ Interestȱ–ȱofȱthese,ȱhowȱmanyȱwillȱbeȱinterestedȱinȱit.ȱ Decideȱ–ȱofȱthese,ȱhowȱmanyȱwillȱdecideȱtoȱbuyȱfromȱyou.ȱ Achieveȱ –ȱ ofȱ these,ȱ howȱ manyȱ willȱ youȱ actuallyȱ achieveȱ aȱ saleȱfrom.ȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ121ȱ

Forȱ eachȱ ofȱ theȱ componentsȱ ofȱ theȱ AIDAȱ modelȱ youȱ provideȱ aȱ percentageȱ basedȱ onȱ yourȱ feelingsȱ aboutȱ theȱ marketȱ needȱ andȱ theȱ strengthȱofȱyourȱproduct.ȱȱ Theȱ tableȱ belowȱ showsȱ howȱ theȱ AIDAȱ modelȱ isȱ appliedȱ toȱ ourȱ marketȱ sizes.ȱ Theȱ awarenessȱ dropsȱ asȱ theȱ targetȱ marketȱ sizesȱ getȱ largerȱasȱitȱwillȱbeȱmoreȱdifficultȱtoȱgetȱtheȱmessageȱoutȱtoȱtheȱlargerȱ groups.ȱ Theȱ interestȱ alsoȱ changesȱ betweenȱ theȱ groupsȱ dueȱ toȱ theȱ severityȱ ofȱ theȱ needȱ dropping.ȱ Itȱ isȱ moreȱ seriousȱ toȱ findȱ aȱ contaminantȱinȱaȱcanȱofȱbabyȱfoodȱthanȱinȱaȱjarȱofȱjam.ȱTheȱdecideȱ factorȱisȱhighȱinȱallȱcasesȱasȱweȱareȱconvincedȱofȱtheȱadvantagesȱofȱ theȱ productȱ overȱ theȱ competition.ȱ Theȱ achieveȱ factorȱ isȱ veryȱ highȱ becauseȱtheȱcustomersȱareȱlargelyȱprivateȱcompaniesȱwithȱresourcesȱ (whenȱsellingȱintoȱmarketsȱthatȱrequireȱcommitteeȱdecisionsȱsuchȱasȱ publicȱservices,ȱthisȱfactorȱwillȱbeȱlower).ȱ Tableȱ6.3.ȱUsingȱtheȱAIDAȱmodelȱtoȱpredictȱsalesȱforȱtheȱfirstȱtwoȱproductsȱ Baby Food Market Size

Soup

1,000

Preserves

3,000

6,000

Aware %

50%

500

50%

1,500

40%

2,400

Interest %

50%

250

40%

600

30%

720

Decide %

75%

188

75%

450

75%

540

Achieve %

90%

169

90%

405

90%

486

Total Sales

169

405

486

Theȱ resultȱ isȱ initiallyȱ surprising,ȱ ofȱ theȱ totalȱ marketȱ sizeȱ ofȱ 1,000ȱ babyȱfoodȱunits,ȱtheȱcompanyȱwillȱsellȱjustȱ169ȱofȱthem.ȱNoteȱthatȱinȱ theȱ largestȱ marketȱ theȱ shareȱ isȱ lessȱ thanȱ halfȱ thisȱ level.ȱ Achievingȱ largeȱsharesȱofȱlargeȱmarketsȱisȱextremelyȱdifficult.ȱ Weȱ nowȱ knowȱ howȱ manyȱ productsȱ weȱ areȱ likelyȱ toȱ sell,ȱ butȱ theseȱ salesȱwillȱbeȱspreadȱoutȱoverȱaȱperiodȱofȱsomeȱyears.ȱTheȱnextȱtaskȱ isȱ toȱ decideȱ onȱ anȱ adoptionȱ curveȱ whichȱ willȱ showȱ usȱ whenȱ theseȱ salesȱoccur.ȱ Inȱ theȱ followingȱ tableȱ aȱ fairlyȱ smoothȱ adoptionȱ curveȱ isȱ usedȱ toȱ spreadȱtheȱsalesȱoverȱaȱfiveȱyearȱperiod.ȱ

122ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ Tableȱ6.4.ȱSalesȱpenetrationȱandȱforecastingȱ Year 1

Year 2

Year 3

Year 4

Year 5

Sales Rate

15%

22%

26%

22%

15%

Baby Food

25

37

44

37

25

Soup

61

89

105

89

61

Preserves

73

107

126

107

73

Weȱnowȱhaveȱanȱestimateȱofȱhowȱmanyȱofȱeachȱproductȱweȱwillȱsellȱ intoȱeachȱmarketȱoverȱaȱfiveȱyearȱperiodȱfromȱtheirȱlaunch.ȱ Theȱ lastȱ thingȱ toȱ decideȱ beforeȱ weȱ canȱ putȱ theseȱ salesȱ intoȱ theȱ financialȱ modelȱ isȱ toȱ decideȱ whenȱ theȱ variousȱ productsȱ areȱ toȱ beȱ launched.ȱ Weȱ knowȱ theȱ firstȱ yearȱ willȱ beȱ takenȱ upȱ developingȱ theȱ product,ȱsoȱadoptingȱaȱstrategyȱofȱlaunchingȱwithinȱoneȱmarketȱatȱaȱ time,ȱ weȱ decideȱ toȱ launchȱ withinȱ theȱ babyȱ foodȱ marketȱ inȱ yearȱ 2,ȱ soupȱinȱyearȱ3ȱandȱpreservesȱinȱyearȱ4.ȱȱ Theȱfollowingȱtableȱshowsȱtheȱresultingȱsalesȱforecast.ȱ Tableȱ6.5.ȱSalesȱforecastsȱ Yr. 1

Yr. 2

Yr. 3

Yr. 4

Yr. 5

Baby Food

0

25

37

44

37

Soup

0

0

61

89

105

Unit Sales

Preserves

0

0

0

73

107

Total Sales

0

25

98

206

249

Weȱnowȱhaveȱaȱsalesȱforecastȱforȱtheȱbusiness.ȱWeȱcanȱnowȱuseȱthisȱ toȱ createȱ aȱ revenueȱ forecastȱ byȱ settingȱ aȱ priceȱ forȱ theȱ product.ȱ Settingȱtheȱpriceȱshouldȱnotȱsimplyȱbeȱaȱprocessȱofȱaddingȱaȱfactorȱ toȱtheȱcostȱofȱmanufacture,ȱratherȱaȱprocessȱofȱsettingȱaȱpriceȱwhichȱ theȱmarketȱwillȱbeȱpreparedȱtoȱpay.ȱInȱ thisȱcaseȱweȱcanȱsetȱaȱpriceȱ higherȱ thanȱ theȱ magneticȱ machinesȱ becauseȱ weȱ offerȱ superiorȱ performance,ȱ butȱ lowerȱ thanȱ theȱ xȬrayȱ machinesȱ toȱ provideȱ anȱ incentiveȱ forȱ ourȱ customers.ȱ Let’sȱ sayȱ weȱ willȱ chargeȱ $30kȱ forȱ theȱ firstȱproductȱwithinȱtheȱbabyȱfoodȱmarket.ȱWeȱwillȱalsoȱsetȱpricesȱofȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ123ȱ

$27kȱandȱ25Kȱinȱtheȱnextȱtwoȱmarketsȱsinceȱtheȱneedȱisȱlessȱandȱweȱ needȱtoȱimproveȱtheirȱincentiveȱtoȱbuyȱfromȱus.ȱ Settingȱtheȱpriceȱ Decidingȱ whatȱ toȱ chargeȱ forȱ yourȱ productȱ orȱ serviceȱ isȱ notȱ simplyȱ aboutȱ addingȱ aȱ marginȱ toȱ yourȱ costs,ȱ althoughȱ youȱ needȱtoȱensureȱthatȱyourȱcostsȱareȱcovered.ȱSettingȱtheȱpriceȱisȱ aboutȱfindingȱaȱvalueȱthatȱyourȱcustomersȱareȱwillingȱtoȱpay.ȱ Toȱ findȱ thisȱ number,ȱ youȱ couldȱ putȱ aȱ valueȱ onȱ theȱ problemȱ youȱareȱsolving,ȱsetȱyourȱpriceȱaccordingȱtoȱtheȱcompetitionȱorȱ similarȱ productsȱ onȱ theȱ market,ȱ orȱ simplyȱ askingȱ themȱ whatȱ theyȱ wouldȱ beȱ preparedȱ toȱ payȱ whileȱ youȱ areȱ doingȱ yourȱ marketȱresearch.ȱ Inȱ thisȱ exampleȱ weȱ haveȱ setȱ differentȱ pricesȱ forȱ differentȱ markets,ȱthisȱisȱeasyȱtoȱdoȱwhereȱtheȱproductȱisȱtailoredȱtoȱsuitȱ eachȱ market,ȱ youȱ canȱ useȱ differentȱ modelȱ numbersȱ forȱ exampleȱ toȱ differentiateȱ them.ȱ Thisȱbecomesȱ moreȱ difficultȱ ifȱ theȱproductȱisȱcommonȱbetweenȱtheȱmarkets.ȱ Theȱ resultȱ isȱ theȱ revenueȱ orȱ turnoverȱ forecastȱ forȱ theȱ businessȱ shownȱbelow.ȱ Tableȱ6.6.ȱSalesȱrevenueȱforecastȱ Yr. 1

Yr. 2

Yr. 3

Yr. 4

Yr 5

Baby Food

0

759

1,114

1,316

1,114

Soup

0

0

1,640

2,406

2,843

Preserves

0

0

0

1,823

2,673

Turnover

0

759

2,754

5,544

6,630

Revenue

Theȱ followingȱ screenȱ shotȱ illustratesȱ thisȱ dataȱ enteredȱ intoȱ aȱ spreadsheet.ȱ

124ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

ȱ Fig.ȱ6.2.ȱSalesȱsummaryȱ

Forecastingȱservicesȱsalesȱ Ifȱ yourȱ businessȱ isȱ deliveringȱ aȱ serviceȱ ratherȱ thanȱ manufacȬ turingȱaȱproduct,ȱyouȱcanȱtreatȱserviceȱprovisionsȱinȱtheȱsameȱ wayȱasȱproductsȱhaveȱbeenȱforecastȱhere.ȱȱ Oneȱapproachȱisȱtoȱtreatȱtheȱdeliveryȱofȱaȱserviceȱasȱaȱpackageȱ ofȱwork.ȱThereȱmightȱbeȱaȱrangeȱofȱservicesȱthatȱyouȱofferȱorȱ thereȱmightȱbeȱdifferentȱsizesȱofȱcontractsȱthatȱyouȱcouldȱwin.ȱ Groupȱ themȱ intoȱ categoriesȱ ofȱ work,ȱ suchȱ asȱ small,ȱ mediumȱ andȱ largeȱ andȱ agreeȱ onȱ anȱ averageȱ priceȱ andȱ costȱ forȱ eachȱ category.ȱ Thereȱisȱaȱmarketȱsizeȱforȱtheȱnumberȱofȱcustomersȱwhoȱmightȱ requireȱeachȱcategoryȱofȱservice.ȱYouȱcanȱnowȱuseȱtheȱAIDAȱ modelȱtoȱcalculateȱhowȱmanyȱtimesȱyouȱwillȱsellȱeachȱserviceȱ categoryȱandȱhowȱtheseȱsalesȱwillȱspreadȱoverȱtime,ȱasȱifȱtheyȱ wereȱaȱproduct.ȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ125ȱ

Usingȱ theȱ averageȱ priceȱ forȱ eachȱ category,ȱ youȱ canȱ forecastȱ yourȱ salesȱ andȱ turnoverȱ inȱ theȱ sameȱ wayȱ asȱ forȱ aȱ productȱ basedȱcompany.ȱ

Cost of sales Nowȱthatȱweȱhaveȱaȱsalesȱforecastȱitȱisȱpossibleȱtoȱbuildȱtheȱcostȱofȱ providingȱ thoseȱ salesȱ intoȱ theȱ model.ȱ Theȱ firstȱ thingȱ toȱ considerȱ isȱ theȱ manufacturingȱ cost.ȱ Theȱ estimateȱ isȱ thatȱ unitsȱ canȱ beȱ manuȬ facturedȱforȱ$10k.ȱWeȱcouldȱsetȱthisȱvalueȱacrossȱallȱthreeȱproductsȱ orȱweȱcouldȱanticipateȱthatȱcostsȱareȱlikelyȱtoȱfallȱasȱtheȱvolumesȱgoȱ up.ȱ Forȱ nowȱ weȱ willȱ errȱ onȱ theȱ sideȱ ofȱ cautionȱ andȱ keepȱ theȱ costsȱ constant.ȱ Inȱ additionȱ toȱ theȱ manufacturingȱ costs,ȱ theȱ productȱ needsȱ toȱ beȱ deliveredȱ andȱ installed.ȱ Weȱ estimateȱ thatȱ thisȱ willȱ costȱ $2,000ȱ perȱ unit.ȱ Applyingȱ bothȱ theseȱ costs,ȱ weȱ canȱ deriveȱ theȱ forecastȱ costȱ ofȱ manufactureȱandȱinstallation,ȱasȱillustratedȱinȱtheȱfollowingȱtable.ȱ Tableȱ6.7.ȱCompletedȱcostȱofȱsalesȱ Year 1

Year 2

Year 3

Year 4

Year 5

$000's

$000's

$000's

$000's

$000's

Baby Food

0

253

371

439

371

Soup

0

0

608

891

1,053

Preserves

0

0

0

729

1,069

Baby Food

0

51

74

88

74

Soup

0

0

122

178

211

Preserves

0

0

0

146

214

Total Costs

0

304

1,175

2,471

2,992

Build Costs

Installation/delivery

ȱ

126ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

Inȱ additionȱ toȱ theseȱ rawȱ costsȱ weȱ shouldȱ addȱ someȱ provisionȱ forȱ warranteeȱ work.ȱ Thisȱ isȱ appliedȱ asȱ aȱ percentageȱ ofȱ salesȱ revenueȱ andȱisȱanȱestimateȱofȱtheȱcostȱofȱmendingȱproductsȱwhenȱtheyȱfailȱinȱ service.ȱItȱisȱofȱcourseȱpossibleȱtoȱaddȱaȱsalesȱlineȱtoȱshowȱtheȱsaleȱofȱ extendedȱ warranteeȱ packagesȱ asȱ anotherȱ product.ȱ Ifȱ youȱ doȱ this,ȱ rememberȱ toȱ applyȱ theȱ AIDAȱ modelȱ toȱ thisȱ salesȱ lineȱ too.ȱ Howȱ manyȱcustomersȱwillȱbeȱaware,ȱinterested,ȱdecideȱandȱactuallyȱbuyȱ theȱ warranteeȱ package.ȱ Weȱ willȱ assumeȱ aȱ warranteeȱ costȱ ofȱ 2%ȱ ofȱ salesȱrevenue.ȱ Anotherȱ commonȱ elementȱ withinȱ theȱ costȱ ofȱ salesȱ calculationȱ isȱ royaltyȱ paymentsȱ forȱ intellectualȱ propertyȱ belongingȱ toȱ thirdȱ parties.ȱ Letȱ usȱ assumeȱ thatȱ inȱ thisȱ case,ȱ theȱ Universityȱ retainsȱ theȱ intellectualȱpropertyȱbehindȱtheȱGammaȱtechnologyȱandȱlicensesȱitȱ toȱ NewCoȱ inȱ returnȱ forȱ aȱ royaltyȱ ofȱ 2.5%ȱ ofȱ sales.ȱ Thisȱ costȱ lineȱ wouldȱalsoȱappearȱinȱtheȱcostȱofȱsalesȱsheet.ȱ Theȱ remainingȱ elementȱ withinȱ theȱ costȱ ofȱ salesȱ calculationȱ isȱ theȱ runningȱofȱtheȱmanufacturingȱdepartmentȱtogetherȱwithȱtheȱsalariesȱ ofȱtheȱworkȱforceȱrequiredȱtoȱbuildȱandȱinstallȱtheȱproduct.ȱȱ Toȱ startȱ buildingȱ theseȱ costs,ȱ itȱ isȱ necessaryȱ toȱ firstȱ considerȱ theȱ headcountȱofȱtheȱmanufacturingȱdepartment.ȱTheȱdepartmentȱisȱtoȱ beȱ runȱ byȱ aȱ Directorȱ ofȱ Operationsȱ andȱ inȱ additionȱ willȱ requireȱ engineersȱandȱqualityȱmanagers.ȱExaminingȱtheȱsalesȱsummary,ȱweȱ couldȱ agreeȱ thatȱ weȱ needȱ toȱ staffȱ theȱ departmentȱ asȱ shownȱ inȱ theȱ followingȱ table.ȱ Theseȱ numbersȱ areȱ enteredȱ intoȱ theȱ headcountȱ sheetȱofȱtheȱmodel.ȱ Tableȱ6.8.ȱManufacturingȱheadȬcountȱ Headcount

Year 1

Year 2

Year 3

Year 4

Year 5

Manufacturing Dir. of Operations

1

1

1

1

1

Quality Manager

0

0

1

1

2

Engineers

0

1

2

4

6

Total

1

2

4

6

9

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ127ȱ

Nowȱweȱknowȱtheȱnumbersȱofȱpeopleȱweȱneed,ȱweȱneedȱtoȱdecideȱ whatȱ toȱ payȱ them.ȱ Ifȱ weȱ payȱ theȱ Directorȱ ofȱ Operationsȱ $60k,ȱ theȱ Qualityȱ Managersȱ $40kȱ andȱ theȱ Engineersȱ $30kȱ perȱ year,ȱ theȱ costsȱ willȱ beȱ thoseȱ inȱ theȱ nextȱ table.ȱ Theseȱ salaryȱ levelsȱ areȱ enteredȱ intoȱ theȱSalariesȱsheetȱofȱtheȱmodel.ȱ Tableȱ6.9.ȱManufacturingȱsalaryȱcostsȱ Salaries

Year 1

Year 2

Year 3

Year 4

Year 5

$000's

$000's

$000's

$000's

$000's

Manufacturing Dir. of Operations

60

60

60

60

60

Quality Manager

0

0

40

40

80

Engineers

0

30

60

120

180

Total

60

90

160

220

320

Weȱnowȱneedȱtoȱturnȱourȱattentionȱtoȱtheȱrestȱofȱtheȱmanufacturingȱ department’sȱ costs.ȱ Inȱ additionȱ toȱ theȱ rawȱ salaryȱ costs,ȱ thereȱ areȱ likelyȱ toȱ beȱ employer’sȱ tax,ȱ pensionȱ schemeȱ contributions,ȱ lifeȱ andȱ medicalȱ insuranceȱ premiumsȱ andȱrecruitmentȱcosts.ȱ Onceȱallȱ theseȱ areȱaddedȱtheȱcostsȱjumpȱconsiderablyȱasȱillustratedȱbelow.ȱ Tableȱ6.10.ȱManufacturingȱstaffȱcostsȱ

Staff Costs

ȱ

Year 1

Year 2

Year 3

Year 4

Year 5

$000’s

$000’s

$000’s

$000’s

$000’s

Headcount

1

2

4

6

9

Salaries

60

90

160

220

320

Employment Tax

7

10

18

24

35

Pension

5

7

12

17

24

Life Insurance

1

5

10

13

19

Private health

2

4

7

11

16

Recruitment

0

5

10

10

15

Total

74

121

216

295

430

128ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

Estimatesȱ canȱ alsoȱ beȱ madeȱ aboutȱ theȱ travelȱ andȱ subsistenceȱ costsȱ thatȱtheseȱemployeesȱwillȱgenerateȱinȱtheȱcourseȱofȱtheirȱjob.ȱ Inȱ additionȱ toȱ theȱ humanȱ resourcesȱ requiredȱ toȱ manufactureȱ theȱ products,ȱ theȱ departmentȱ isȱ likelyȱ toȱ requireȱ budgetsȱ forȱ systemsȱ development,ȱconsumablesȱandȱevenȱproductionȱconsultants.ȱTheseȱ shouldȱalsoȱbeȱaddedȱtoȱtheȱManufacturingȱsheet.ȱȱ Knowingȱ exactlyȱ whatȱ toȱ addȱ hereȱ isȱ aȱ perfectȱ exampleȱ ofȱ howȱ difficultȱcreatingȱsuchȱaȱplanȱinȱisolationȱbecomes.ȱIfȱyouȱworkȱasȱaȱ team,ȱtheȱDirectorȱofȱOperationsȱwillȱbeȱableȱtoȱtellȱeverybodyȱwhatȱ isȱneededȱandȱjustifyȱtheȱestimates.ȱTheȱresultingȱmodelȱscreenȱshotȱ showsȱtheȱfinalȱresultȱforȱtheȱManufacturingȱsheet.ȱ

ȱ Fig.ȱ6.3.ȱManufacturingȱdepartmentȱcostsȱ

TheȱCostȱofȱSalesȱsideȱofȱtheȱmodelȱisȱnowȱcomplete.ȱTheȱfollowingȱ screenȱshotȱshowsȱtheȱcompleteȱCostȱofȱSalesȱsheet.ȱȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ129ȱ

ȱ Fig.ȱ6.4.ȱCostȱofȱsalesȱ

Salesȱandȱmarketingȱ Theȱ nextȱ logicalȱ thingȱ toȱ lookȱ atȱ isȱ theȱ salesȱ andȱ marketingȱ effortȱ andȱ resourcesȱ thatȱ willȱ beȱ requiredȱ toȱ achieveȱ theseȱ sales.ȱ Inȱ estimatingȱ theseȱ resourcesȱ weȱ needȱ toȱ remindȱ ourselvesȱ ofȱ theȱ AIDAȱ valuesȱ weȱ usedȱ inȱ estimatingȱ theȱ sales.ȱ Weȱ nowȱ needȱ toȱ createȱaȱteamȱthatȱisȱcapableȱofȱdeliveringȱtheseȱpercentages.ȱ Theȱprocessȱisȱveryȱsimilarȱtoȱourȱestimationȱofȱtheȱmanufacturingȱ department’sȱcosts.ȱFirstȱweȱneedȱtoȱlookȱatȱtheȱsalesȱandȱmarketingȱ headcount.ȱ Theȱ departmentȱ isȱ toȱ runȱ byȱ aȱ Directorȱ ofȱ Marketingȱ andȱcontainȱsalesȱmanagers,ȱsalesȱpersonsȱandȱsalesȱadministrators.ȱ Enteringȱ theȱ numbersȱ andȱ salariesȱ intoȱ theȱ headcountȱ andȱ salariesȱ sheets,ȱtheȱmodelȱcreatesȱtheȱemploymentȱcostsȱshownȱinȱtheȱtableȱ below.ȱ ȱ ȱ ȱ

130ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ Tableȱ6.11.ȱSalesȱandȱmarketingȱstaffȱcostsȱ

Sales & Marketing

Year 1

Year 2

Year 3

Year 4

Year 5

$000's

$000's

$000's

$000's

$000's

Staff Costs Headcount

1

2

4

5

8

Salaries

60

100

160

195

295

Employment Tax

7

11

18

21

32

Pension

5

8

12

15

22

Life Insurance

1

6

10

12

18

Private health

2

4

7

9

14

Recruitment costs

0

5

10

5

15

Total

74

133

216

257

397

Itȱ isȱ oftenȱ theȱ caseȱ thatȱ salesȱ staffȱ areȱ paidȱ aȱ relativelyȱ lowȱ salaryȱ whichȱ isȱ supplementedȱ byȱ commissionȱ onȱ sales.ȱ Aȱ goodȱ spreadȬ sheetȱ modelȱ willȱ allowȱ youȱ toȱ doȱ this,ȱ butȱ forȱ simplicityȱ weȱ willȱ simplyȱpayȱaȱsalaryȱforȱnow.ȱ Theȱdepartmentȱisȱalsoȱgoingȱtoȱrequireȱmarketingȱbudgetsȱforȱpromotingȱ theȱcompanyȱandȱitsȱproducts.ȱThisȱcouldȱincludeȱprovisionȱofȱaȱwebsite,ȱ advertisingȱspend,ȱattendingȱexhibitionsȱandȱclientȱentertainment.ȱ

Research & Development TheȱResearchȱandȱDevelopmentȱdepartmentȱisȱtheȱnextȱlogicalȱstep.ȱ Theȱprocessȱisȱexactlyȱtheȱsameȱasȱforȱtheȱmanufacturingȱandȱsalesȱ andȱmarketingȱdepartments,ȱfirstȱweȱdecideȱonȱtheȱstaffingȱrequiredȱ toȱ developȱ andȱ continueȱ toȱ improveȱ theȱ product,ȱ andȱ thenȱ addȱ additionalȱ costsȱ suchȱ asȱ projectȱ budgets,ȱ advisoryȱ panelȱ charges,ȱ consultancyȱcostsȱandȱprototypeȱtrialȱexpenses.ȱ Theȱ resultingȱ screenȱ shotȱ showsȱ theȱ completedȱ Researchȱ andȱ Developmentȱsheet.ȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ131ȱ

ȱ Fig.ȱ6.5.ȱResearchȱandȱdevelopmentȱ

General and administrative costs TheȱGeneralȱandȱAdministrativeȱdepartmentȱcostsȱareȱtheȱlastȱofȱtheȱ headcountȱdepartmentsȱtoȱaddȱbecauseȱitȱisȱonlyȱnowȱthatȱweȱhaveȱ definedȱ theȱ operationalȱ partsȱ ofȱ theȱ businessȱ thatȱ weȱ canȱ estimateȱ whatȱwillȱbeȱrequiredȱtoȱrunȱtheȱcompany.ȱȱ Again,ȱ weȱ startȱ withȱ theȱ headcount.ȱ Thisȱ timeȱ weȱ areȱ lookingȱ toȱ includeȱseniorȱmanagementȱpositionsȱsuchȱasȱaȱManagingȱDirectorȱ andȱ Financeȱ Director.ȱ Weȱ willȱ alsoȱ needȱ toȱ considerȱ resourceȱ forȱ bookȱkeeping,ȱgeneralȱadministrationȱandȱpersonalȱassistants.ȱȱ Upȱ toȱ thisȱ pointȱ theȱ headcountȱ isȱ setȱ toȱ startȱ atȱ 4ȱ andȱ growȱ toȱ 21ȱ peopleȱ inȱ yearȱ 5.ȱ Weȱ needȱ aȱ Marketingȱ Directorȱ straightȱ awayȱ butȱ canȱ probablyȱ waitȱ untilȱ yearȱ 4ȱ untilȱ weȱ needȱ toȱ recruitȱ aȱ Financeȱ Director.ȱWithȱjustȱ4ȱmembersȱofȱstaffȱweȱcouldȱalsoȱdoȱwithoutȱanȱ administratorȱuntilȱyearȱ2ȱandȱcouldȱprobablyȱcopeȱwithȱaȱpartȱtimeȱ bookȱ keeperȱ untilȱ yearȱ 2ȱ asȱ well.ȱ Asȱ forȱ aȱ PAȱ forȱ theȱ Managingȱ Director,ȱlet’sȱassumeȱtheyȱcanȱwaitȱuntilȱyearȱ5ȱbeforeȱneedingȱthatȱ

132ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

levelȱ ofȱ support.ȱ Theȱ resultingȱ totalȱ companyȱ headcountȱ isȱ shownȱ inȱtheȱtableȱbelow.ȱ Theȱ Generalȱ andȱ Administrativeȱ salaryȱ costsȱ areȱ broughtȱ intoȱ theȱ G&Aȱsheetȱinȱtheȱsameȱwayȱasȱtheȱotherȱdepartments.ȱȱ Tableȱ6.12.ȱTotalȱcompanyȱheadcountȱ Year 1

Year 2

Year 3

Year 4

Year 5

General & Admin. Managing Director

1

1

1

1

1

Finance Director

0

0

0

1

1

Book Keeper

0.2

0.5

1

1

1

Administrator

0

1

1

1

1

MD's PA

0

0

0

0

1

Total

1.2

2.5

3

4

5

1

1

1

1

1

Sales & Marketing Marketing Director Sales Manager

0

1

1

1

2

Sales Persons

0

0

1

2

3

Administrator

0

0

1

1

2

Total

1

2

4

5

8

1

1

1

1

1

Research & Dev. Technical Director Senior Engineers

1

1

1

1

1

Design Engineers

0

1

1

2

2

Total

2

3

3

4

4

1

1

1

1

1

Manufacturing Dir. of Operations Quality Manager

0

0

1

1

2

Engineers

0

1

2

4

6

Total

1

2

4

6

9

Headcount Total

5.2

9.5

14

19

26

Theȱ additionalȱ expendituresȱ thatȱ areȱ requiredȱ inȱ thisȱ departmentȱ includeȱallȱtheȱgeneralȱbusinessȱexpensesȱincluding:ȱ x Commercial,ȱproductȱandȱliabilityȱinsurances.ȱ x Stationaryȱandȱprintingȱcosts.ȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ133ȱ

x x x

Postage,ȱ telecoms,ȱ informationȱ technologyȱ andȱ sundryȱ equipmentȱsuchȱasȱstaplers,ȱprintersȱandȱsoȱon.ȱ Legalȱandȱaccountancyȱfees.ȱ FeesȱforȱnonȬexecutiveȱdirectors.ȱ

Someȱ ofȱ theseȱ canȱ beȱ estimatedȱ onȱ aȱ costȱ perȱ employeeȱ basis.ȱ Forȱ exampleȱ youȱ mightȱ estimateȱ thatȱ eachȱ employeeȱ willȱ makeȱ $500ȱ worthȱ ofȱ phoneȱ callsȱ eachȱ year.ȱ Theȱ modelȱ canȱ automaticallyȱ calculateȱthisȱbasedȱonȱtheȱheadcount.ȱ Premisesȱ costsȱ alsoȱ needȱ toȱ beȱ includedȱ inȱ theȱ generalȱ andȱ administrativeȱ costsȱ sheet.ȱ StartȬupȱ businessesȱ sometimesȱ findȱ difficultyȱsecuringȱpremisesȱasȱpropertyȱownersȱoftenȱrequireȱlargeȱ depositsȱ andȱ referencesȱ fromȱ newȱ tenants.ȱ Thereȱ isȱ alsoȱ theȱ potentialȱ problemȱ ofȱ securingȱ enoughȱ spaceȱ toȱ growȱ intoȱ butȱ notȱ makingȱuseȱofȱitȱallȱinȱtheȱearlyȱyears.ȱManagedȱofficesȱcanȱbeȱaȱveryȱ goodȱ solutionȱ toȱ thisȱ problem.ȱ Inȱ thisȱ scenario,ȱ theȱ companyȱ canȱ takeȱ oftenȱ veryȱ smartȱ officeȱ spaceȱ onȱ aȱ perȱ deskȱ basis.ȱ Asȱ theȱ companyȱ grows,ȱ orȱ shrinks,ȱ spaceȱ canȱ beȱ addedȱ orȱ released.ȱ Managedȱ officesȱ alsoȱ provideȱ servicesȱ suchȱ asȱ aȱ frontȱ deskȱ reception,ȱ telephoneȱ answeringȱ andȱ useȱ ofȱ meetingȱ roomsȱ whichȱ canȱbeȱveryȱusefulȱforȱstartȬupȱcompanies.ȱȱ Forȱ thisȱ exampleȱ weȱ willȱ assumeȱ theȱ companyȱ takesȱ managedȱ officesȱ consistingȱ aȱ mixȱ ofȱ cleanȱ officeȱ andȱ smallȱ manufacturingȱ spaceȱatȱaȱcostȱofȱ$5,000ȱperȱemployeeȱperȱyear.ȱ Capital expenditure Theȱlastȱsheetȱweȱneedȱtoȱcompleteȱbeforeȱtheȱmodelȱisȱcompleteȱisȱ theȱCapitalȱExpenditureȱsheet.ȱInȱthisȱsheetȱweȱenterȱcostsȱforȱallȱtheȱ equipment,ȱ toolingȱ andȱ otherȱ fixedȱ assetsȱ thatȱ theȱ companyȱ willȱ buy.ȱȱ Thisȱ expenditureȱ isȱ normallyȱ keptȱ onȱ aȱ separateȱ sheetȱ ratherȱ thanȱ mixedȱ inȱ withȱ theȱ departmentalȱ costsȱ becauseȱ whenȱ youȱ calculateȱ

134ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

yourȱprofitȱforȱtaxȱpurposes,ȱtheseȱitemsȱcannotȱbeȱcountedȱagainstȱ yourȱincomeȱinȱoneȱgo.ȱTheyȱneedȱtoȱbeȱdepreciatedȱoverȱaȱperiodȱ ofȱ years.ȱ Yourȱ accountantsȱ willȱ helpȱ youȱ calculateȱ depreciationȱ whenȱtheyȱprepareȱyourȱannualȱaccounts.ȱ Theȱcostȱestimatesȱareȱenteredȱintoȱtheȱsheetȱinȱtheȱnormalȱway.ȱTheȱ followingȱscreenȱshotȱillustratesȱtheȱcompletedȱsheet.ȱ

ȱ Fig.ȱ6.6.ȱCapitalȱexpenditureȱ

Profit and loss Nowȱthatȱallȱtheȱestimatesȱareȱmade,ȱweȱcanȱtakeȱaȱlookȱatȱtheȱprofitȱ andȱlossȱaccountȱandȱseeȱhowȱourȱbusinessȱisȱshapingȱup.ȱ Theȱfollowingȱscreenshotȱshowsȱtheȱresultsȱsoȱfar.ȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ135ȱ

ȱ Fig.ȱ6.7.ȱProfitȱandȱlossȱ

Theȱresultsȱareȱencouraging,ȱtheȱbusinessȱbecomesȱprofitableȱinȱtheȱ thirdȱyearȱandȱgoesȱonȱtoȱmakeȱstrongȱprofitsȱafterȱthatȱpoint.ȱȱ Cash flow Nowȱforȱtheȱscaryȱbit,ȱlet’sȱtakeȱaȱlookȱatȱtheȱcashȱflowȱtoȱseeȱwhatȱ kindȱofȱinvestmentȱisȱrequiredȱtoȱgetȱthisȱbusinessȱoffȱtheȱground.ȱȱ Figureȱ 6.8ȱ showsȱ theȱ cashȱ flowȱ sheetsȱ beforeȱ anyȱ investmentȱ isȱ added.ȱȱ Theȱcashȱflowȱshowsȱaȱnegativeȱbankȱbalanceȱallȱtheȱwayȱthroughȱtoȱ yearȱ 4,ȱ withȱ aȱ lowȱ pointȱ ofȱ overȱ $1.3mȱ inȱ yearȱ 2.ȱ Thisȱ givesȱ usȱ anȱ ideaȱofȱtheȱinvestmentȱtheȱcompanyȱwillȱneed.ȱ Rememberingȱthatȱthereȱisȱaȱcostȱassociatedȱwithȱraisingȱfinanceȱofȱ upȱtoȱ5%ȱwhichȱisȱneededȱforȱlegalȱfeesȱandȱdueȱdiligenceȱwork,ȱifȱ weȱraiseȱ$1.4mȱthatȱwillȱkeepȱtheȱbankȱbalanceȱpositiveȱthroughoutȱ theȱlifeȱofȱtheȱplanȱasȱcanȱbeȱseenȱinȱFigureȱ6.9.ȱ ȱ

136ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

ȱ Fig.ȱ6.8.ȱCashȱflowȱ

ȱ Fig.ȱ6.9.ȱRevisedȱcashȱflowȱ

Theȱ businessȱ modelȱ worksȱ butȱ nowȱ weȱ canȱ useȱ itȱ toȱ developȱ differentȱscenariosȱandȱoptimiseȱourȱstrategy.ȱ

6.3ȱBuildingȱtheȱmodelȱȱȱȱȱȱ137ȱ

Balancing the equation Atȱ thisȱ stageȱ itȱ isȱ absolutelyȱ imperativeȱ toȱ bringȱ theȱ teamȱ togetherȱ forȱtheȱdiscussion.ȱWeȱareȱgoingȱtoȱlookȱatȱtheȱbusinessȱpropositionȱ toȱ seeȱ ifȱ itȱ deliversȱ whatȱ anȱ investorȱ wouldȱ expectȱ andȱ thenȱ makeȱ adjustmentsȱ toȱ ourȱ strategyȱ toȱ tryȱ toȱ improveȱ theȱ model.ȱ Ifȱ newȱ assumptionsȱ areȱ madeȱ thatȱ theȱ teamȱ doȱ notȱ agreeȱ with,ȱ itȱ willȱ beȱ veryȱdifficultȱtoȱkeepȱeveryoneȱmotivatedȱandȱboughtȱintoȱtheȱplan.ȱ Lookingȱatȱtheȱvalueȱfirst,ȱusingȱtheȱvaluationȱtechniquesȱdescribedȱ inȱtheȱpreviousȱchapter,ȱtheȱcompanyȱwillȱhaveȱaȱvalueȱinȱyearȱ5ȱofȱ $5.3mȱandȱaȱdiscountedȱvalueȱtodayȱofȱ$3.1m.ȱThisȱisȱaȱcapitalȱupliftȱ ofȱ1.7ȱtimes.ȱ Toȱraiseȱ$1.4mȱtodayȱwouldȱrequireȱsellingȱ45%ȱofȱtheȱequity.ȱThisȱ mightȱbeȱreasonableȱbutȱtheȱcapitalȱupliftȱisȱlikelyȱtoȱbeȱtooȱsmallȱtoȱ attractȱaȱventureȱcapitalist.ȱ Theȱproblemȱisȱthatȱtheȱcompanyȱappearsȱtoȱstopȱgrowingȱinȱyearȱ5.ȱ Thisȱ isȱ causedȱ byȱ theȱ firstȱ twoȱ marketsȱ startingȱ toȱ declineȱ andȱ notȱ beingȱreplacedȱbyȱtheȱcompanyȱenteringȱnewerȱlargerȱmarkets.ȱȱ RememberȱthatȱinȱadditionȱtoȱtheȱUKȱopportunity,ȱthereȱwasȱalsoȱaȱ mainlandȱEuropeanȱmarket.ȱPerhapsȱtheȱcompanyȱneedsȱtoȱplanȱtoȱ enterȱthisȱmarketȱinȱyearȱ4ȱorȱ5ȱinsteadȱofȱtheȱjamȱjarȱmarketȱinȱtheȱ UK?ȱȱ Lookingȱagainȱatȱtheȱsalesȱsummary,ȱifȱweȱswapȱtheȱUKȱpreservesȱ marketȱforȱtheȱEuropeanȱbabyȱfoodȱmarketȱwhichȱhasȱaȱmarketȱsizeȱ ofȱ 10,000,ȱ evenȱ ifȱ weȱ maintainȱ slightlyȱ pessimisticȱ AIDAȱ factorsȱ comparedȱ toȱ theȱ UKȱ market,ȱ theȱ turnoverȱ inȱ yearsȱ 4ȱ andȱ 5ȱ growsȱ substantially.ȱȱ Butȱweȱcan’tȱjustȱgoȱchangingȱsalesȱlikeȱthisȱwithoutȱconsideringȱtheȱ impactȱ onȱ theȱ manufacturingȱ andȱ salesȱ andȱ marketingȱ teams.ȱ Weȱ needȱ toȱ balanceȱ theȱ changeȱ withȱ increasesȱ inȱ resourcesȱ toȱ allowȱ themȱtoȱachieveȱtheseȱnewȱtargets.ȱ

138ȱȱȱȱȱȱ6ȱHowȱdoȱyouȱcreateȱaȱfinancialȱmodel?ȱȱ

Afterȱtheȱnecessaryȱchanges,ȱtheȱnewȱprofitȱandȱlossȱaccountȱlooksȱ likeȱtheȱnextȱscreenȱshot.ȱ

ȱ Fig.ȱ6.10.ȱRevisedȱprofitȱandȱlossȱ

Theȱ valueȱ ofȱ theȱ requiredȱ investmentȱ hasȱ remainedȱ theȱ sameȱ atȱ $1.4mȱ asȱ theȱ additionalȱ costsȱ areȱ committedȱ duringȱ yearȱ fourȱ andȱ fundedȱ fromȱ theȱ profitsȱ madeȱ then.ȱ Theȱ valueȱ ofȱ theȱ companyȱ atȱ yearȱ5ȱhasȱhoweverȱgrownȱtoȱ$12m.ȱȱ Theȱdiscountedȱvalueȱofȱtheȱcompanyȱtodayȱhasȱalsoȱrisenȱtoȱ$6.8m.ȱ Toȱ raiseȱ theȱ fundsȱ theȱ companyȱ requiresȱ wouldȱ nowȱ requireȱ justȱ 21%ȱofȱtheȱshares.ȱHoweverȱifȱaȱventureȱcapitalistȱwantedȱtoȱmakeȱaȱ returnȱofȱ4ȱtimesȱtheirȱinvestment,ȱtheyȱwouldȱbeȱlookingȱtoȱacquireȱ 47%ȱofȱtheȱcompany.ȱȱ Nowȱ itȱ isȱ aȱ matterȱ ofȱ negotiation,ȱ butȱ nowȱ theȱ directorsȱ ofȱ theȱ companyȱ understandȱ howȱ muchȱ moneyȱ theyȱ needȱ andȱ whatȱ theȱ potentialȱreturnsȱcouldȱbe.ȱTheyȱhaveȱallȱcontributedȱtoȱdevelopingȱ theȱ planȱ andȱ knowȱ whatȱ eachȱ ofȱ themȱ hasȱ toȱ achieveȱ toȱ deliverȱ itȱ andȱwithȱwhatȱresources.ȱ

7 How do you write a business plan?

Ifȱ youȱ don’tȱ knowȱ whereȱ youȱ areȱ going,ȱ anyȱ roadȱ willȱ takeȱ youȱ there.ȱ Whenȱ peopleȱ talkȱ aboutȱ businessȱ plans,ȱ generallyȱ theyȱ areȱ referringȱtoȱspecificȱdocumentsȱthatȱareȱusedȱtoȱconvinceȱinvestorsȱ orȱ bankersȱ toȱ putȱ resourcesȱ intoȱ theȱ business.ȱ Thisȱ isȱ certainlyȱ oneȱ useȱofȱaȱbusinessȱplan,ȱbutȱnotȱtheȱonlyȱuse.ȱBusinessȱplansȱcanȱbeȱ usedȱtoȱattractȱkeyȱemployeesȱorȱtoȱapplyȱforȱregionalȱdevelopmentȱ supportȱ forȱ example.ȱ Theȱ fundamentalȱ reasonȱ forȱ creatingȱ aȱ planȱ though,ȱisȱtoȱfollowȱitȱtoȱyourȱintendedȱgoal.ȱ Thisȱmayȱseemȱanȱobviousȱstatementȱtoȱmake,ȱbutȱtooȱmanyȱplansȱ areȱ created,ȱ usedȱ toȱ raiseȱ financeȱ andȱ areȱ thenȱ storedȱ onȱ aȱ shelf,ȱ neverȱtoȱbeȱlookedȱatȱagain.ȱYourȱbusinessȱplanȱshouldȱsetȱoutȱtheȱ routeȱfromȱtodayȱtoȱwhereȱyouȱwantȱyourȱbusinessȱtoȱbeȱinȱthreeȱtoȱ fiveȱ yearsȱ time.ȱ Moreȱ importantly,ȱ itȱ saysȱ howȱ youȱ areȱ goingȱ toȱ achieveȱitȱandȱsetsȱoutȱmilestonesȱbyȱwhichȱyouȱcanȱmeasureȱyourȱ performanceȱ alongȱ theȱ way.ȱ Aȱ goodȱ businessȱ planȱ therefore,ȱ becomesȱessentialȱandȱcontinuousȱreadingȱasȱtheȱbusinessȱunfolds.ȱ Itȱdoesȱnotȱremainȱstatic,ȱitȱisȱaȱlivingȱdocumentȱthatȱisȱcontinuouslyȱ updatedȱ asȱ yourȱ knowledgeȱ ofȱ theȱ marketȱ growsȱ andȱ theȱ opportunitiesȱunfold.ȱ Whenȱisȱaȱbusinessȱplanȱnotȱaȱbusinessȱplan?ȱ Whenȱ youȱ createȱ aȱ businessȱ planȱ andȱ circulateȱ itȱ toȱ raiseȱ investmentȱ interest,ȱ youȱ needȱ toȱ beȱ veryȱ carefulȱ thatȱ theȱ documentȱ doesȱ notȱ unwittinglyȱ becomeȱ aȱ prospectus.ȱ Aȱ Prospectusȱ isȱ aȱ legalȱ definitionȱ ofȱ aȱ documentȱ thatȱ offersȱ investmentȱ opportunities.ȱ Inȱ orderȱ toȱ protectȱ theȱ generalȱ publicȱfromȱfraudulentȱorȱmisleadingȱinvitationsȱtoȱinvest,ȱtheȱ

140ȱȱȱȱȱȱ7ȱHowȱdoȱyouȱwriteȱaȱbusinessȱplan?ȱȱ

lawȱ setsȱ downȱ rulesȱ andȱ safeguardsȱ toȱ controlȱ whatȱ theseȱ documentsȱ contain.ȱ Ifȱ youȱ circulateȱ yourȱ businessȱ planȱ toȱ moreȱ thanȱ aȱ fewȱ peopleȱ itȱ couldȱ becomeȱ aȱ prospectusȱ inȱ theȱ eyesȱofȱtheȱlaw.ȱ Variousȱrequirementsȱareȱmadeȱofȱaȱprospectusȱandȱinvestorsȱ canȱ sueȱ authorsȱ ifȱ theyȱ loseȱ moneyȱ andȱ findȱ thatȱ statementsȱ madeȱinȱtheȱdocumentȱwereȱunȬjustified.ȱIssuingȱaȱprospectusȱ thatȱdoesȱnotȱcomplyȱ withȱtheȱlawȱisȱalsoȱaȱcriminalȱoffence.ȱ Askȱyourȱlawyerȱforȱadviceȱaboutȱtheȱlocalȱlawȱforȱinvestmentȱ documents.ȱ Theseȱissuesȱdoȱnotȱaffectȱyouȱifȱyouȱareȱonlyȱsendingȱcopiesȱ ofȱ yourȱ planȱ toȱ banksȱ andȱ financialȱ institutions.ȱ Ifȱ however,ȱ youȱ sendȱ copiesȱ toȱ accountantsȱ orȱ financialȱ intermediaries,ȱ theyȱmayȱpassȱthemȱonȱtoȱtheirȱclients.ȱMakeȱsureȱyouȱknowȱ andȱ restrictȱ theȱ useȱ ofȱ yourȱ documentȱ unlessȱ youȱ areȱ happyȱ thatȱitȱcompliesȱwithȱtheȱlegalȱrequirements.ȱ Numberȱeachȱcopyȱofȱyourȱdocumentȱandȱdoȱnotȱcreateȱlargeȱ numbersȱ ofȱ them.ȱ Instructȱ theȱ recipientȱ andȱ printȱ inȱ theȱ documentȱ aȱ statementȱ prohibitingȱ itsȱ copyingȱ andȱ furtherȱ distribution.ȱ Makeȱitȱclearȱonȱtheȱfrontȱofȱtheȱdocumentȱthatȱitȱisȱaȱbusinessȱ planȱ orȱ informationȱ memorandumȱ andȱ notȱ anȱ invitationȱ toȱ invest.ȱ Actuallyȱ sayȱ thatȱ potentialȱ investorsȱ shouldȱ takeȱ professionalȱ adviceȱ andȱ areȱ expectedȱ toȱ makeȱ furtherȱ enqȬ uiries.ȱ Finally,ȱ don’tȱ setȱ outȱ aȱ clearȱ priceȱ forȱ sharesȱ orȱ includeȱ aȱ subscriptionȱform.ȱ Writingȱ theȱ businessȱ plan,ȱ likeȱ creatingȱ yourȱ financialȱ model,ȱ shouldȱbeȱaȱteamȱeffort.ȱTheȱplanȱcanȱonlyȱbeȱachievedȱifȱtheȱteamȱ believesȱinȱitȱandȱisȱcommittedȱtoȱitsȱsuccess.ȱByȱnecessity,ȱsomeoneȱ willȱneedȱtoȱtakeȱchargeȱinȱitsȱproduction,ȱbutȱitȱshouldȱbeȱ‘owned’ȱ byȱtheȱwholeȱteam.ȱ

7.1ȱWhatȱshouldȱyourȱbusinessȱplanȱcontain?ȱȱȱȱȱȱ141ȱ

7.1 What should your business plan contain? Veryȱ manyȱ books,ȱ pamphletsȱ andȱ websitesȱ areȱ availableȱ thatȱ suggestȱstructuresȱandȱlayoutsȱforȱbusinessȱplanȱdocuments.ȱThereȱ areȱsomeȱaspectsȱthatȱareȱdesirableȱandȱothersȱthatȱareȱoptional,ȱbutȱ actuallyȱthereȱareȱnoȱhardȱandȱfastȱrules.ȱTheȱbestȱsetȱofȱheadingsȱisȱ theȱ oneȱ thatȱ bestȱ tellsȱ theȱ storyȱ ofȱ yourȱ business.ȱ Theȱ planȱ shouldȱ flowȱnaturallyȱandȱleadȱtheȱreaderȱthroughȱyourȱassumptionsȱtoȱitsȱ logicalȱconclusion.ȱȱ Asȱ aȱ generalȱ guide,ȱ mostȱ businessȱ planȱ documentȱ willȱ containȱ theȱ followingȱcoreȱsections:ȱ x Executiveȱsummaryȱ x Theȱmarketȱ x Theȱproductȱorȱserviceȱ x Theȱmanagementȱteamȱ x Theȱbusinessȱoperationsȱ x Financialȱprojectionsȱ x Financialȱrequirementsȱ x Appendicesȱ Theȱorderȱinȱwhichȱtheyȱappearȱwillȱvaryȱfromȱoneȱbusinessȱtoȱtheȱ next.ȱ Inȱ someȱ situationsȱ itȱ mayȱ makeȱ moreȱ senseȱ toȱ describeȱ theȱ marketȱ beforeȱ theȱ product,ȱ inȱ others,ȱ theȱ logicalȱ orderȱ isȱ theȱ opposite.ȱ Thinkȱ aboutȱ howȱ youȱ structureȱ yourȱ argumentsȱ whenȱ youȱ areȱ tellingȱ someoneȱ aboutȱ yourȱ business,ȱ theȱ orderȱ withȱ inȱ whichȱyouȱexplainȱyourȱopportunityȱverballyȱcouldȱbeȱmatchedȱinȱ theȱtextȱofȱyourȱplan.ȱ The market Youȱneedȱtoȱsetȱoutȱtheȱrealȱcommercialȱopportunityȱthatȱyouȱhaveȱ identifiedȱ forȱ yourȱ business.ȱ Asȱ aȱ startȬup,ȱ typicallyȱ youȱ willȱ notȱ haveȱaȱtrackȱrecordȱofȱmarketȱsalesȱtoȱdescribe,ȱbutȱyouȱcanȱsetȱoutȱ theȱ marketȱ conditionsȱ youȱ expectȱ andȱ howȱ youȱ areȱ differentȱ fromȱ theȱexistingȱincumbents.ȱYouȱwillȱdrawȱonȱaȱlotȱofȱtheȱanswersȱyouȱ

142ȱȱȱȱȱȱ7ȱHowȱdoȱyouȱwriteȱaȱbusinessȱplan?ȱȱ

developedȱ whenȱ analysingȱ yourȱ businessȱ opportunityȱ backȱ inȱ chapterȱ one.ȱ Makeȱ sureȱ theȱ readerȱ understandsȱ theȱ problemȱ thatȱ yourȱcompanyȱisȱgoingȱtoȱsolveȱforȱyourȱcustomers.ȱ Defineȱ theȱ marketȱ sectorȱ inȱ termsȱ ofȱ itsȱ size,ȱ itsȱ performanceȱ andȱ characteristics.ȱ Describeȱ theȱ customerȱ groupsȱ youȱ haveȱ identifiedȱ andȱ setȱ outȱ theȱ scaleȱ ofȱ theȱ opportunity.ȱ Describeȱ theȱ industryȱ characteristicsȱtoo,ȱwhoȱareȱtheȱcompetition,ȱhowȱyouȱwillȱcompeteȱ withȱthemȱandȱwhatȱtheȱmainȱbarriersȱtoȱentryȱare.ȱȱ Finallyȱdescribeȱyourȱmarketingȱapproachȱandȱstrategy.ȱIfȱyouȱhaveȱ segmentedȱ theȱ market,ȱ describeȱ theȱ firstȱ fewȱ segmentsȱ andȱ brieflyȱ justifyȱtheirȱchoiceȱandȱorder.ȱȱ Asȱyouȱdescribeȱtheȱmarket,ȱyouȱmayȱwantȱtoȱreferȱtoȱdocumentedȱ evidenceȱorȱplansȱyouȱhaveȱcreated.ȱCopiesȱofȱtheseȱcanȱbeȱincludedȱ inȱtheȱdocumentȱappendices.ȱȱ The product or service Describeȱ yourȱ solutionȱ toȱ yourȱ customers’ȱ problemȱ inȱ clearȱ andȱ plainȱ language,ȱ beingȱ carefulȱ notȱ toȱ overȬhypeȱ yourȱ description.ȱ Youȱ shouldȱ howeverȱ emphasiseȱ theȱ uniqueȱ sellingȱ pointsȱ andȱ theȱ competitiveȱedgeȱyouȱexpectȱtoȱachieve.ȱIfȱtheȱofferingȱisȱtechnicallyȱ orientated,ȱthisȱwillȱbeȱessentialȱasȱtheȱreadersȱareȱlikelyȱtoȱbeȱnonȬ specialists.ȱDescribeȱtheȱcurrentȱstateȱofȱtheȱoffering,ȱitȱmayȱbeȱthatȱ youȱ haveȱ aȱ prototype,ȱ someȱ earlyȱ versionsȱ inȱ trialȱ orȱ thatȱ youȱ areȱ readyȱtoȱgoȱtoȱmanufacture.ȱȱ Describeȱwhatȱintellectualȱpropertyȱrightsȱmightȱexistȱandȱanyȱthatȱ areȱalreadyȱsecured.ȱIfȱyouȱhaveȱpatentsȱorȱtradeȱmarks,ȱincludeȱtheȱ documentsȱinȱtheȱappendixȱandȱreferȱtoȱthem.ȱȱ Youȱshouldȱalsoȱdescribeȱyourȱpricingȱstrategy.ȱHowȱmuchȱdoesȱitȱ costȱyouȱtoȱmakeȱandȱprovideȱtheȱofferingȱandȱwhatȱdoȱyouȱintentȱ toȱ chargeȱ forȱ it.ȱ Ifȱ thereȱ areȱ futureȱ revenuesȱ fromȱ consumables,ȱ

7.1ȱWhatȱshouldȱyourȱbusinessȱplanȱcontain?ȱȱȱȱȱȱ143ȱ

serviceȱ packagesȱ orȱ upgrades,ȱ describeȱ theȱ costsȱ andȱ earningsȱ youȱ anticipate.ȱ Yourȱ approachȱ toȱ futureȱ productȱ developmentȱ canȱ alsoȱ beȱ describedȱhere.ȱThisȱmightȱincludeȱyourȱvulnerabilityȱtoȱcompetingȱ technologyȱ andȱ howȱ youȱ willȱ protectȱ yourȱ position.ȱ Itȱ mightȱ alsoȱ includeȱ theȱ developmentȱ ofȱ yourȱ ownȱ technologyȱ toȱ createȱ secondȱ generationȱproductsȱorȱotherȱapplications.ȱ The management Asȱ youȱ know,ȱ theȱ managementȱ teamȱ isȱ anȱ essentialȱ partȱ ofȱ anyȱ investmentȱ decisionȱ andȱ isȱ criticalȱ toȱ yourȱ business’ȱ chancesȱ ofȱ success.ȱThisȱsectionȱofȱtheȱplanȱisȱusedȱtoȱconvinceȱtheȱreaderȱthatȱ youȱhaveȱtheȱrightȱteamȱtoȱconvertȱtheȱplanȱintoȱreality.ȱThisȱmightȱ includeȱ descriptionsȱ ofȱ bothȱ theȱ boardȱ andȱ theȱ executiveȱ manageȬ mentȱteam.ȱ Eachȱ keyȱ memberȱ ofȱ theȱ teamȱ shouldȱ beȱ introducedȱ inȱ theȱ planȱ documentȱ withȱ aȱ paragraphȱ describingȱ theirȱ skills,ȱ experienceȱ andȱ responsibilitiesȱ withinȱ theȱ company.ȱ Tryȱ toȱ keepȱ theȱ descriptionsȱ conciseȱ withinȱ theȱ mainȱ documentȱ butȱ includeȱ fullȱ CVsȱ inȱ theȱ appendix.ȱAnȱorganisationalȱplanȱisȱaȱgoodȱwayȱofȱquicklyȱshowingȱ theȱstructureȱofȱtheȱmanagementȱteam.ȱȱ Ifȱyouȱhaveȱgapsȱinȱtheȱteam,ȱdescribeȱtheȱroleȱandȱyourȱstrategyȱtoȱ fillȱtheȱpost.ȱItȱmayȱbeȱthatȱyouȱdon’tȱneedȱtheȱpositionȱfilledȱuntilȱ otherȱmilestonesȱareȱreached,ȱthereȱisȱnoȱharmȱinȱshowingȱhowȱtheȱ managementȱwillȱgrowȱasȱtheȱcompanyȱdevelops.ȱ Describingȱ yourȱ teamȱ shouldȱ alsoȱ includeȱ thoseȱ outsideȱ theȱ organisationȱthatȱyouȱrelyȱon.ȱYouȱshouldȱlistȱyourȱadvisersȱsuchȱasȱ yourȱ auditorsȱ andȱ accountants,ȱ lawyers,ȱ intellectualȱ propertyȱ agents,ȱevenȱyourȱbankers.ȱ

144ȱȱȱȱȱȱ7ȱHowȱdoȱyouȱwriteȱaȱbusinessȱplan?ȱȱ

The business operations Thisȱsectionȱdescribesȱhowȱyourȱbusinessȱwillȱoperate.ȱHowȱitȱwillȱ makeȱ theȱ productsȱ orȱ provideȱ theȱ service.ȱ Theseȱ shouldȱ beȱ describedȱ brieflyȱ atȱ firstȱ toȱ provideȱ anȱ overviewȱ thenȱ pointȱ theȱ readerȱtoȱfurtherȱdetailsȱinȱtheȱappendix.ȱ Describeȱanyȱqualityȱsystemsȱthatȱareȱinȱplaceȱorȱplannedȱandȱwhatȱ certificationsȱareȱrequiredȱforȱtheȱproductȱorȱservice.ȱȱ Ifȱ youȱ haveȱ notȱ alreadyȱ explainedȱ itȱ elsewhere,ȱ describeȱ theȱ company’sȱ approachȱ toȱ researchȱ andȱ developmentȱ andȱ howȱ impȬ rovementsȱwillȱbeȱmadeȱtoȱtheȱofferingȱinȱtheȱfuture.ȱ Theȱ corporateȱ objectivesȱ canȱ alsoȱ beȱ describedȱ here.ȱ Setȱ outȱ theȱ milestonesȱbyȱwhichȱyouȱwillȱmeasureȱtheȱbusiness’ȱsuccessȱandȱifȱ relevantȱ setȱ outȱ theȱ intendedȱ exitȱ strategyȱ andȱ timescaleȱ forȱ investorsȱtoȱreceiveȱaȱreturnȱonȱtheirȱinvestment.ȱ The financial projections Ifȱ youȱ haveȱ createdȱ aȱ financialȱ model,ȱ theȱ assumptionsȱ andȱ highlightsȱ shouldȱ beȱ describedȱ inȱ theȱ businessȱ plan,ȱ perhapsȱ evenȱ includingȱ aȱ profitȱ andȱ lossȱ accountȱ withinȱ theȱ bodyȱ ofȱ theȱ document.ȱTheȱfullȱmodelȱshouldȱbeȱprovidedȱinȱtheȱappendix.ȱȱ Forȱeachȱmajorȱassumptionȱwithinȱtheȱfinancialȱmodel,ȱsuchȱasȱtheȱ salesȱ forecasts,ȱ youȱ shouldȱ describeȱ andȱ justifyȱ theȱ approachȱ youȱ haveȱtakenȱtoȱarriveȱatȱtheȱnumbers.ȱUseȱgraphsȱandȱtablesȱtoȱmakeȱ itȱeasierȱforȱtheȱreaderȱtoȱunderstandȱtheȱforecasts.ȱ Ifȱyouȱareȱusingȱtheȱdocumentȱtoȱraiseȱinvestmentȱinterest,ȱitȱmightȱ beȱworthȱusingȱanȱexternalȱaccountantȱtoȱverifyȱtheȱmodel.ȱThisȱwillȱ addȱ confidenceȱ inȱ theȱ projectionsȱ asȱ anȱ externalȱ expertȱ hasȱ challȬ engedȱtheȱassumptionsȱandȱresults.ȱ

7.1ȱWhatȱshouldȱyourȱbusinessȱplanȱcontain?ȱȱȱȱȱȱ145ȱ

The financial requirements Ifȱtheȱbusinessȱplanȱisȱtellingȱaȱstory,ȱthisȱisȱtheȱpunchȱline.ȱThereȱisȱ veryȱ littleȱ pointȱ devotingȱ allȱ theȱ effortȱ intoȱ settingȱ outȱ theȱ opportunity,ȱ theȱ productȱ andȱ theȱ teamȱ ifȱ youȱ areȱ notȱ goingȱ toȱ askȱ theȱreaderȱforȱwhatȱyouȱwant.ȱItȱwouldȱbeȱlikeȱreachingȱtheȱendȱofȱaȱ fairyȱtaleȱandȱtheȱprinceȱnotȱaskingȱtheȱprincessȱtoȱmarryȱhim.ȱ Beingȱ carefulȱ notȱ toȱ makeȱ anȱ explicitȱ offer,ȱ youȱ shouldȱ setȱ outȱ theȱ needsȱ ofȱ yourȱ businessȱ andȱ theȱ methodsȱ youȱ proposeȱ toȱ satisfyȱ them.ȱ Thisȱ mightȱ includeȱ descriptionsȱ ofȱ howȱ muchȱ theȱ financingȱ willȱ relyȱ onȱ debtȱ asȱ opposedȱ toȱ equityȱ investment,ȱ whetherȱ investmentȱ isȱ requiredȱ inȱ stagesȱ orȱ inȱ oneȱ lumpȱ sum.ȱ Ifȱ youȱ haveȱ notȱ describedȱ anȱ exitȱ strategyȱ elsewhereȱ inȱ theȱ document,ȱ itȱ couldȱ beȱincludedȱhere.ȱ The executive summary Theȱ executiveȱ summaryȱ isȱ theȱ firstȱ partȱ ofȱ anyȱ plan,ȱ butȱ Iȱ haveȱ includedȱitȱatȱtheȱendȱofȱtheȱlistȱbecauseȱitȱshouldȱbeȱtheȱlastȱthingȱ youȱwrite.ȱȱ Theȱ executiveȱ summaryȱ determinesȱ whetherȱ theȱ restȱ ofȱ theȱ documentȱ evenȱ getsȱ readȱ atȱ all.ȱ Itȱ shouldȱ beȱ short,ȱ aȱ maximumȱ ofȱ twoȱpages,ȱandȱshouldȱincludeȱallȱtheȱkeyȱelementsȱfromȱtheȱotherȱ sectionsȱofȱyourȱplan.ȱȱ Itȱneedsȱtoȱbeȱpowerfullyȱpersuasiveȱbutȱrealistic.ȱYouȱshouldȱtryȱtoȱ avoidȱ‘salesȱspeak’ȱandȱhype.ȱItȱshouldȱalsoȱstandȱalone.ȱSometimesȱ youȱ mayȱ beȱ askedȱ toȱ sendȱ anȱ investorȱ anȱ executiveȱ summary,ȱ ifȱ theyȱ likeȱ whatȱ theyȱ see,ȱ theyȱ mightȱ thenȱ askȱ toȱ seeȱ theȱ wholeȱ document.ȱ

146ȱȱȱȱȱȱ7ȱHowȱdoȱyouȱwriteȱaȱbusinessȱplan?ȱȱ

7.2 How should the plan be prepared? Theȱ mostȱ importantȱ thingȱ aboutȱ yourȱ businessȱ plan’sȱ presentationȱ isȱthatȱitȱshouldȱbeȱreadable.ȱThisȱmeansȱyouȱshouldȱavoidȱtheȱuseȱ ofȱ jargonȱandȱ clearlyȱ explainȱ anyȱtechnicalȱ terms.ȱ Youȱ mightȱ wantȱ toȱ includeȱ aȱ glossaryȱ ofȱ termsȱ ifȱ yourȱ businessȱ isȱ technicallyȱ orientated.ȱȱ Itȱisȱalsoȱveryȱimportantȱtoȱrememberȱwhoȱyouȱareȱwritingȱtheȱplanȱ for.ȱ Thinkȱ aboutȱ whoȱ theyȱ are,ȱ whatȱ theyȱ wantȱ toȱ know,ȱ whatȱ actionȱ youȱ wantȱ themȱ toȱ takeȱ andȱ whatȱ languageȱ willȱ theyȱ understand?ȱItȱmayȱevenȱbeȱnecessaryȱforȱyouȱtoȱgenerateȱdifferentȱ versionsȱofȱtheȱplanȱtoȱshowȱtoȱdifferentȱaudiences.ȱ Theȱ useȱ ofȱ colour,ȱ picturesȱ andȱ diagramsȱ canȱ helpȱ theȱ readerȱ understandȱ theȱ mainȱ pointsȱ quickly.ȱ Ifȱ youȱ haveȱ aȱ prototype,ȱ orȱ evenȱ aȱ finishedȱ product,ȱ includeȱ aȱ photographȱ orȱ screenȱ shotȱ toȱ showȱreaderȱthatȱthereȱisȱsubstanceȱbehindȱtheȱwords.ȱ Youȱ shouldȱ alsoȱ takeȱ careȱ withȱ yourȱ useȱ andȱ presentationȱ ofȱ numbers.ȱForȱexampleȱifȱIȱwriteȱthatȱtheȱnumberȱofȱunitsȱboughtȱbyȱ theȱ marketȱ lastȱ yearȱ wasȱ 3675429,ȱ itȱ isȱ notȱ atȱ allȱ easyȱ toȱ read.ȱ Somethingȱ asȱ simpleȱ asȱ addingȱ aȱ fewȱ commasȱ soȱ thatȱ itȱ becomesȱ 3,595,429ȱmakesȱitȱaȱlittleȱeasierȱbutȱhowȱrelevantȱisȱtheȱprecisionȱofȱ theȱ number?ȱ 3.6mȱ isȱ aȱ lotȱ clearer,ȱ asȱ isȱ ‘moreȱ thanȱ threeȱ andȱ halfȱ millionȱ units…’ȱ Tablesȱ ofȱ numbersȱ shouldȱ beȱ treatedȱ inȱ theȱ sameȱ way,ȱshowȱfinancialȱprojectionsȱinȱthousands.ȱ Generallyȱ theȱ businessȱ planȱ forȱ aȱ startȬupȱ companyȱ shouldȱ notȱ beȱ longerȱthanȱ10ȱorȱ15ȱpages.ȱTheȱreaderȱshouldȱbeȱableȱtoȱreadȱitȱinȱ oneȱ sittingȱ andȱ notȱ getȱ boredȱ byȱ theȱ timeȱ theyȱ reachȱ theȱ end.ȱ Toȱ achieveȱ thisȱ lengthȱ whilstȱ stillȱ providingȱ allȱ theȱ information,ȱ youȱ shouldȱ makeȱ useȱ ofȱ appendicesȱ toȱ backȱ upȱ theȱ pointsȱ madeȱ inȱ theȱ mainȱ text.ȱ Ifȱ inȱ doubtȱ asȱ toȱ whetherȱ toȱ includeȱ something,ȱ leaveȱ itȱ out.ȱIfȱtheȱreaderȱisȱinterestedȱandȱhasȱmoreȱquestions,ȱtheyȱwillȱaskȱ

Howȱdoȱyouȱmakeȱbusinessȱpresentations?ȱȱȱȱȱȱ147ȱ

you.ȱAtȱthatȱpointȱyouȱcouldȱargueȱthatȱtheȱplanȱhasȱdoneȱitsȱjob,ȱitȱ hasȱraisedȱinterestȱandȱyouȱareȱnowȱtalkingȱtoȱitsȱtargetȱaudience.ȱ Theȱphysicalȱappearanceȱofȱtheȱbusinessȱplanȱisȱalsoȱveryȱimportant.ȱ Theȱ appearanceȱ ofȱ theȱ planȱ reflectsȱ onȱ youȱ andȱ yourȱ business.ȱ Itȱ shouldȱnotȱcontainȱanyȱspellingȱorȱgrammaticalȱerrors.ȱMistakesȱlikeȱ theseȱhaveȱaȱdisproportionatelyȱnegativeȱimpactȱandȱsuggestȱlackȱorȱ careȱandȱattentionȱtoȱdetail.ȱȱ Theȱpresentationȱofȱtheȱplanȱisȱcomplexȱandȱeasyȱtoȱgetȱwrong.ȱYouȱ needȱ toȱ strikeȱ aȱ balanceȱ betweenȱ makingȱ aȱ goodȱ impressionȱ andȱ lookingȱflashy.ȱIfȱtheȱreaderȱfeelsȱthatȱyouȱhaveȱwastedȱgoodȱmoneyȱ onȱaȱflashyȱcoverȱorȱbinding,ȱtheȱwrongȱmessageȱwillȱbeȱgiven.ȱTheȱ idealȱlookȱshouldȱshowȱthatȱyouȱareȱprofessional,ȱcompetentȱbutȱnotȱ extravagant.ȱȱ

How do you make business presentations? Makingȱ businessȱ presentationsȱ canȱ beȱ aȱ nerveȱ rackingȱ occasion.ȱ Popularȱtelevisionȱprogrammesȱmayȱportrayȱtheȱworstȱexamplesȱofȱ investorsȱ dismantlingȱ aspiringȱ businessȱ people,ȱ butȱ theȱ realityȱ canȱ beȱ closeȱ toȱ this.ȱ Fortunately,ȱ ifȱ youȱ areȱ properlyȱ preparedȱ andȱ knowledgeableȱ aboutȱ yourȱ opportunityȱ andȱ plans,ȱ itȱ isȱ entirelyȱ likelyȱthatȱtheȱexperienceȱwillȱbeȱpositiveȱandȱhopefullyȱrewarding.ȱ Rememberȱthatȱtheyȱhaveȱinvitedȱyouȱinȱbecauseȱtheyȱareȱinterestedȱ inȱyourȱplan.ȱTheyȱhaveȱfarȱbetterȱthingsȱtoȱdoȱwithȱtheirȱtimeȱthanȱ useȱyouȱforȱsport.ȱ Theȱ firstȱ thingȱ toȱ doȱ whenȱ preparingȱ toȱ makeȱ aȱ presentation,ȱ isȱ toȱ findȱ outȱ whoȱ youȱ willȱ beȱ presentingȱ to,ȱ howȱ muchȱ timeȱ youȱ haveȱ andȱ whatȱ youȱ thinkȱ theyȱ wantȱ toȱ know.ȱ Mostȱ presentationsȱ willȱ involveȱyouȱtalkingȱforȱaboutȱ20ȱminutesȱfollowedȱbyȱquestionsȱandȱ discussion.ȱ Rememberȱ thatȱ theyȱ areȱ likelyȱ toȱ beȱ busyȱ peopleȱ andȱ appreciateȱ conciseȱ presentations,ȱ ifȱ youȱ boreȱ themȱ orȱ takeȱ upȱ tooȱ muchȱtime,ȱtheyȱwillȱnotȱbeȱimpressed.ȱ

148ȱȱȱȱȱȱ7ȱHowȱdoȱyouȱwriteȱaȱbusinessȱplan?ȱȱ

Yourȱ formalȱ presentationȱ shouldȱ coverȱ theȱ mainȱ aspectsȱ ofȱ theȱ businessȱplan,ȱprobablyȱinȱtheȱsameȱlogicalȱorderȱinȱwhichȱyouȱhaveȱ laidȱoutȱtheȱdocument.ȱUsingȱaȱpresentationȱpackageȱandȱlaptopȱtoȱ showȱslidesȱisȱaȱgoodȱwayȱofȱstructuringȱtheȱpresentation.ȱItȱisȱbestȱ toȱ makeȱ sureȱ thatȱ yourȱ presentationȱ canȱ beȱ projectedȱ ratherȱ thanȱ haveȱ peopleȱ huddleȱ aroundȱ aȱ smallȱ screen.ȱ Askȱ ifȱ theyȱ haveȱ aȱ projectorȱavailable,ȱifȱnot,ȱconsiderȱtakingȱoneȱwithȱyou,ȱevenȱifȱthatȱ meansȱhiringȱoneȱforȱtheȱday.ȱȱ Itȱ canȱ beȱ aȱ goodȱ ideaȱ toȱ involveȱ aȱ numberȱ ofȱ peopleȱ inȱ theȱ presentation.ȱ Goingȱ inȱ withȱ aȱ teamȱ ofȱ threeȱ orȱ fourȱ peopleȱ showsȱ yourȱ commitmentȱ andȱ ensuresȱ thatȱ theȱ appropriateȱ peopleȱ areȱ onȱ handȱ toȱ answerȱ questions.ȱ Tryȱ toȱ keepȱ theȱ actualȱ presentersȱ downȱ toȱoneȱorȱtwo.ȱYourȱshowȱcanȱloseȱitsȱflowȱifȱtooȱmanyȱpeopleȱtakeȱitȱ inȱturnsȱtoȱtalk.ȱȱ Ifȱ possible,ȱ takeȱ examplesȱ ofȱ yourȱ workȱ orȱ productsȱ withȱ you.ȱ Letȱ theȱ audienceȱ tryȱ itȱ out,ȱ touchȱ andȱ feelȱ itȱ andȱ understandȱ whatȱ progressȱyouȱareȱmaking.ȱȱ Whenȱyouȱareȱmakingȱpresentationsȱtoȱsmallȱgroups,ȱperhapsȱevenȱ toȱ oneȱ person,ȱ doȱ notȱ beȱ surprisedȱ ifȱ theyȱ startȱ askingȱ questionsȱ duringȱ yourȱ talk.ȱ Thereȱ areȱ twoȱ approachesȱ youȱ canȱ take,ȱ oneȱ approachȱisȱtoȱaskȱthemȱpolitelyȱtoȱletȱyouȱfinishȱandȱkeepȱquestionsȱ toȱtheȱend.ȱTheȱsecond,ȱandȱbetterȱapproach,ȱisȱtoȱtakeȱtheȱquestionsȱ asȱ theyȱ comeȱ butȱ tryȱ toȱ steerȱ theȱ conversationȱ backȱ toȱ theȱ currentȱ slideȱandȱthenȱcontinueȱwithȱyourȱplannedȱpresentation.ȱTryȱnotȱtoȱ letȱ thisȱ disturbȱ you,ȱ theyȱ mustȱ beȱ interestedȱ toȱ haveȱ askedȱ theȱ question,ȱaskingȱthemȱtoȱwaitȱcanȱbeȱveryȱoffȬputting.ȱ Likeȱ manyȱ aspectsȱ ofȱ business,ȱ presentationsȱ areȱ madeȱ easierȱ andȱ moreȱ effectiveȱ withȱ goodȱ preparation.ȱ Doȱ aȱ practiceȱ runȱ andȱ timeȱ yourself,ȱwriteȱpromptȱcardsȱtoȱensureȱyouȱdon’tȱmissȱanything,ȱbutȱ don’tȱreadȱfromȱaȱscript,ȱthisȱlooksȱlikeȱyouȱdon’tȱknowȱtheȱmaterialȱ wellȱ enough.ȱ Makeȱ sureȱ youȱ arriveȱ withȱ plentyȱ ofȱ timeȱ toȱ setȱ yourselfȱ upȱ andȱ getȱ theȱ projectorȱ working.ȱ Finally,ȱ whileȱ youȱ areȱ

Howȱdoȱyouȱmakeȱbusinessȱpresentations?ȱȱȱȱȱȱ149ȱ

waitingȱforȱtheȱaudienceȱtoȱjoinȱyou,ȱkeepȱyourȱteamȱconversationsȱ professionalȱandȱpositiveȱ–ȱwallsȱcanȱsometimesȱhaveȱears.ȱ ȱ

8 Your role and your team

Inȱbothȱtheȱearlierȱsectionsȱcoveringȱwhatȱinvestorsȱareȱlookingȱforȱ andȱ writingȱ yourȱ businessȱ plan,ȱ theȱ importanceȱ ofȱ theȱ teamȱ hasȱ beenȱhighlighted.ȱTheȱattractivenessȱofȱtheȱmarketȱandȱtheȱbrillianceȱ ofȱyourȱsolutionȱwillȱnotȱovercomeȱtheȱmistakesȱmadeȱbyȱlackȬlustreȱ management.ȱȱ Manyȱ startȬupȱ companiesȱ areȱ conceivedȱ byȱ entrepreneurs.ȱ Theseȱ individualsȱ areȱ passionateȱ aboutȱ theȱ product,ȱ theyȱ haveȱ ultimateȱ faithȱandȱbeliefȱinȱitȱandȱareȱoftenȱequallyȱconfidentȱaboutȱtheirȱownȱ abilitiesȱtoȱsucceed.ȱTheyȱtendȱtoȱbeȱcharismaticȱandȱableȱtoȱexplainȱ theirȱvisionȱinȱencouragingȱwaysȱthatȱbringȱpeopleȱalongȱwithȱthem.ȱ Theyȱ haveȱ energyȱ andȱ enthusiasmȱ andȱ areȱ oftenȱ highlyȱ ambitiousȱ aboutȱ whatȱ theyȱ wantȱ toȱ achieve.ȱ Theyȱ areȱ justȱ whatȱ aȱ startȬupȱ companyȱneedsȱtoȱgetȱgoing.ȱ Unfortunatelyȱ theȱ entrepreneurialȱ personalityȱ hasȱ aȱ darkerȱ side.ȱ Theyȱcanȱbeȱarrogant,ȱargumentativeȱandȱfindȱitȱveryȱdifficultȱtoȱseeȱ projectsȱ through,ȱ continuallyȱ comingȱ upȱ withȱ newȱ ideasȱ andȱ directions.ȱ Theȱ startȬupȱ companyȱ willȱ quicklyȱ failȱ ifȱ theȱ entreȬ preneurȱ isȱ notȱ supportedȱ byȱ aȱ teamȱ thatȱ canȱ keepȱ theȱ company’sȱ focusȱandȱdeliverȱagainstȱtheȱplan.ȱ Togetherȱtheȱteamȱneedsȱaȱsetȱofȱattributesȱincludingȱcreativeȱflare,ȱ determination,ȱ abilityȱ toȱ deliverȱ andȱ empathyȱ forȱ theȱ customersȱ needs.ȱSomeȱofȱtheseȱattributesȱcanȱbeȱprovidedȱfromȱoutsideȱofȱtheȱ coreȱ teamȱ inȱ theȱ formȱ ofȱ advisorsȱ andȱ mentors.ȱ However,ȱ ifȱ allȱ ofȱ theseȱ attributesȱ areȱ notȱ availableȱ toȱ yourȱ startȬup,ȱ youȱ couldȱ beȱ headingȱforȱtrouble.ȱ

152ȱȱȱȱȱȱ8ȱYourȱroleȱandȱyourȱteamȱȱ

Itȱmayȱseemȱanȱobviousȱpoint,ȱbutȱtheȱteamȱshouldȱalsoȱgetȱonȱwellȱ togetherȱ andȱ enjoyȱ theȱ processȱ ofȱ planningȱ andȱ buildingȱ theȱ business.ȱYouȱneedȱtoȱthinkȱ‘Iȱwouldȱenjoyȱworkingȱwithȱthem’ȱasȱ wellȱasȱ‘theyȱwillȱbeȱgoodȱforȱtheȱbusiness’.ȱȱ

8.1 What do you want to achieve? Thisȱ canȱ beȱ aȱ difficultȱ question,ȱ butȱ youȱ needȱ toȱ beȱ totallyȱ honestȱ withȱ yourselfȱ inȱ answeringȱ it.ȱ Doȱ youȱ haveȱ aȱ missionȱ toȱ serveȱ aȱ particularȱmarket,ȱorȱchangeȱaȱparticularȱindustry?ȱMaybeȱyouȱwantȱ toȱ bringȱ aȱ particularȱ productȱ orȱ serviceȱ toȱ market,ȱ orȱ convertȱ yourȱ hobbyȱintoȱyourȱjob.ȱȱ Manyȱ startȬupȱ businessesȱ areȱ formedȱ becauseȱ theȱ ownerȱ wantsȱ toȱ workȱ forȱ themselvesȱ ratherȱ thanȱ forȱ anȱ employer.ȱ Thisȱ isȱ aȱ veryȱ validȱ reasonȱ andȱ isȱ becomingȱ aȱ moreȱ andȱ moreȱ popularȱ dream.ȱ Ifȱ thisȱisȱyourȱgoal,ȱyouȱshouldȱaskȱyourselfȱwhetherȱyouȱstillȱwantȱtoȱ workȱinȱtheȱbusinessȱasȱopposedȱtoȱworkingȱonȱtheȱbusiness.ȱIfȱyouȱ areȱsuccessful,ȱyouȱmayȱfindȱthatȱyouȱareȱforcedȱtoȱspendȱlessȱandȱ lessȱ timeȱ doingȱ theȱ jobȱ youȱ wantȱ toȱ doȱ andȱ moreȱ andȱ moreȱ timeȱ runningȱ theȱ businessȱ andȱ becomingȱ theȱ employer.ȱ Howȱ youȱ buildȱ yourȱteamȱandȱwhatȱobjectivesȱyouȱsetȱwillȱbeȱheavilyȱinfluencedȱbyȱ theȱconclusionȱyouȱcomeȱto.ȱȱ Imagineȱ forȱ example,ȱ thatȱ yourȱ hobbyȱ isȱ furnitureȱ building.ȱ Youȱ createȱ aȱ startȬupȱ companyȱ toȱ buildȱ andȱ sellȱ highȱ qualityȱ furniture.ȱ Toȱ makeȱ enoughȱ money,ȱ yourȱ modelȱ showsȱ youȱ willȱ needȱ threeȱ staff,ȱ oneȱ fullȱ timeȱ businessȱ person,ȱ sellingȱ theȱ productsȱ toȱ individualsȱ andȱ distributors,ȱ andȱ twoȱ craftsmenȱ toȱ handleȱ theȱ designȱandȱmanufacture.ȱIfȱyouȱdecideȱtoȱworkȱonȱtheȱbusiness,ȱyouȱ takeȱtheȱroleȱofȱbusinessȱpersonȱhandlingȱtheȱsales,ȱmarketingȱandȱ businessȱ development.ȱ Youȱ thereforeȱ employȱ twoȱ craftsmen.ȱ Alternatively,ȱ ifȱ youȱ decideȱ toȱ workȱ inȱ theȱ business,ȱ youȱ takeȱ aȱ craftsmanȱ role,ȱ takeȱ onȱ aȱ secondȱ toȱ assistȱ youȱ andȱ employȱ aȱ businessȱ managerȱ toȱ actuallyȱ runȱ theȱ business.ȱ Theȱ differenceȱ inȱ

8.2ȱSatisfyingȱtheȱcriticalȱsuccessȱfactorsȱȱȱȱȱȱ153ȱ

theseȱ twoȱ approachesȱ isȱ radical,ȱ youȱ needȱ toȱ thinkȱ carefullyȱ aboutȱ whatȱyouȱwantȱfromȱyourȱbusiness.ȱ Startingȱaȱnewȱbusinessȱisȱalwaysȱrisky,ȱbutȱhowȱmuchȱriskȱareȱyouȱ willingȱ toȱ exposeȱ yourselfȱ to?ȱ Ifȱ youȱ areȱ leavingȱ yourȱ currentȱ employment,ȱhowȱlongȱcanȱyouȱlastȱonȱyourȱsavingsȱbeforeȱtheȱnewȱ businessȱcanȱaffordȱtoȱpayȱyou?ȱItȱmayȱbeȱworthȱseeingȱifȱyouȱcanȱ workȱ partȱ timeȱ untilȱ theȱ newȱ ventureȱ isȱ upȱ andȱ running.ȱ Yourȱ existingȱ employerȱ mayȱ notȱ beȱ delightedȱ withȱ youȱ cuttingȱ yourȱ hours,ȱbutȱcomparedȱtoȱlosingȱyouȱcompletely,ȱtheyȱmightȱacceptȱit.ȱ Dependingȱ onȱ whatȱ yourȱ businessȱ isȱ goingȱ toȱ offer,ȱ yourȱ oldȱ employerȱmayȱendȱupȱasȱoneȱofȱyourȱclients.ȱȱ Youȱ needȱ toȱ askȱ yourselfȱ whatȱ youȱ areȱ preparedȱ toȱ putȱ intoȱ theȱ businessȱ personally.ȱ Howȱ muchȱ ofȱ yourȱ hardȱ earnedȱ personalȱ wealthȱareȱyouȱpreparedȱtoȱriskȱonȱtheȱventure?ȱHowȱmuchȱofȱyourȱ savingsȱ areȱ youȱ preparedȱ toȱ investȱ inȱ theȱ business?ȱ Willȱ youȱ reȬ mortgageȱyourȱhouse?ȱȱ Beyondȱ theȱ financialȱ commitments,ȱ howȱ muchȱ blood,ȱ sweatȱ andȱ tearsȱareȱyouȱpreparedȱtoȱinvest?ȱYouȱshouldȱnotȱunderȱestimateȱtheȱ amountȱ ofȱ timeȱ startingȱ aȱ newȱ companyȱ willȱ absorb.ȱ Evenings,ȱ weekendsȱandȱfamilyȱholidaysȱareȱallȱlikelyȱtoȱsuffer.ȱAnȱimportantȱ partȱ ofȱ thisȱ analysisȱ isȱ whetherȱ thoseȱ youȱ loveȱ areȱ preparedȱ toȱ acceptȱtheseȱcommitmentsȱandȱrisksȱtoo.ȱȱ

8.2 Satisfying the critical success factors Criticalȱsuccessȱfactorsȱareȱtheȱfewȱthingsȱthatȱinȱanyȱindustryȱmakeȱ theȱdifferenceȱbetweenȱsuccessȱandȱfailure.ȱIdentifyingȱtheseȱfactorsȱ isȱnotȱonlyȱanȱimportantȱwayȱofȱensuringȱyourȱbusinessȱisȱaȱsuccess,ȱ butȱalsoȱofȱidentifyingȱtheȱattributesȱofȱtheȱteamȱyouȱneedȱtoȱbuildȱ toȱmakeȱitȱhappen.ȱ Backȱ inȱ chapterȱ 4,ȱ youȱ carriedȱ outȱ aȱ riskȱ analysisȱ ofȱ theȱ technicalȱ andȱcommercialȱproblemsȱthatȱcouldȱbeȱencounteredȱasȱpartȱofȱtheȱ

154ȱȱȱȱȱȱ8ȱYourȱroleȱandȱyourȱteamȱȱ

developmentȱofȱyourȱmarketingȱplan.ȱNowȱweȱneedȱtoȱextendȱthatȱ exerciseȱtoȱincludeȱtheȱmanagerialȱrisksȱthatȱyouȱandȱteamȱareȱlikelyȱ toȱencounter.ȱ Justȱlikeȱinȱtheȱtechnicalȱandȱcommercialȱriskȱanalysisȱyouȱwillȱneedȱ toȱ examineȱ eachȱ riskȱ inȱ termsȱ ofȱ aȱ description,ȱ likelihood,ȱ impact,ȱ warningȱandȱmitigation.ȱ Theȱ firstȱ setȱ ofȱ risksȱ isȱ likelyȱ toȱ comeȱ fromȱ yourȱ abilityȱ toȱ attract,ȱ recruitȱandȱretainȱtheȱkeyȱmembersȱofȱstaffȱyouȱneed.ȱWhatȱif:ȱ x theȱrightȱpeopleȱdoȱnotȱapplyȱforȱyourȱvacancies?ȱ x theyȱdemandȱhigherȱpayȱthanȱyouȱhadȱbudgetedȱfor?ȱȱ x moraleȱdeteriorates?ȱ x keyȱpersonnelȱareȱattractedȱelsewhere?ȱ Theȱbusinessesȱattitudeȱtoȱqualityȱisȱtheȱnextȱareaȱtoȱexamine.ȱThisȱ isȱaddressedȱhereȱbecauseȱitȱaffectsȱtheȱwholeȱbusinessȱnotȱjustȱtheȱ qualityȱofȱtheȱproduct.ȱQualityȱimpactsȱonȱeverythingȱfromȱhowȱtheȱ telephonesȱ areȱ answered,ȱ howȱ cleanȱ theȱ premisesȱ areȱ kept,ȱ howȱ promptlyȱ billsȱ areȱ paidȱ toȱ howȱ regularlyȱ theȱ managementȱ teamȱ meets.ȱWhatȱif:ȱȱ x standardsȱstartȱtoȱslip?ȱ x nobodyȱcares?ȱ Aȱlargeȱareaȱofȱmanagerialȱriskȱisȱcenteredȱaroundȱtheȱlegalȱsideȱofȱ theȱ operation.ȱ Thereȱ areȱ areasȱ ofȱ riskȱ attributedȱ toȱ litigation,ȱ liability,ȱinsurances,ȱenvironmentalȱresponsibilities,ȱtaxation,ȱregulȬ atoryȱ changes,ȱ intellectualȱ propertyȱ protectionȱ andȱ employmentȱ law.ȱWhatȱif:ȱȱ x newȱemploymentȱorȱcommercialȱlawsȱcomeȱintoȱeffect?ȱ x yourȱproductȱharmsȱsomeone?ȱ x youȱinfringeȱsomeoneȱelse’sȱintellectualȱpropertyȱrights?ȱ Theȱnextȱareaȱofȱmanagerialȱriskȱconcernsȱstrategicȱrisks.ȱWhatȱif:ȱȱ x theȱmarketȱdynamicsȱchange?ȱ x opportunitiesȱforȱgrowthȱpresentȱthemselves?ȱ

8.3ȱHowȱimportantȱisȱexperienceȱȱȱȱȱȱ155ȱ

x

managementȱisȱtooȱbusyȱtoȱthinkȱstrategically?ȱ

Lastȱbutȱbyȱnoȱmeansȱleast;ȱweȱneedȱtoȱexamineȱtheȱfinancialȱrisks.ȱ Financialȱ risksȱ willȱ comeȱ fromȱ problemsȱ withȱ cashȱ flow,ȱ potentialȱ insolvencyȱandȱinvestmentȱrequirements.ȱWhatȱif:ȱ x customersȱareȱlateȱtoȱpayȱyou?ȱ x suppliersȱdemandȱearlierȱpayment?ȱ x growthȱincreasesȱbeyondȱexpectation?ȱ x cashȱrunsȱout?ȱ x investmentȱtakesȱlongerȱthanȱexpectedȱtoȱraise?ȱ x loansȱareȱdifficultȱtoȱsecure?ȱ Onceȱallȱtheȱrisksȱhaveȱbeenȱidentifiedȱidentityȱtheȱcriticalȱonesȱbyȱ lookingȱforȱtheȱshowȬstoppersȱandȱexpandingȱonȱyourȱanalysisȱandȱ mitigationȱstrategies.ȱ Whenȱyouȱareȱbuildingȱyourȱteam,ȱlookȱforȱevidenceȱthatȱtheyȱhaveȱ aȱ trackȱ recordȱ ofȱ identifyingȱ andȱ actingȱ onȱ theȱ criticalȱ successȱ factorsȱ youȱ haveȱ identified.ȱ Whenȱ drawingȱ upȱ whoȱ isȱ responsibleȱ forȱ whatȱ inȱ yourȱ team,ȱ makeȱ sureȱ thatȱ eachȱ criticalȱ factorȱ hasȱ someone’sȱnameȱagainstȱit.ȱ

8.3 How important is experience Thereȱisȱnoȱdoubtȱthatȱanȱexperiencedȱteamȱcanȱgreatlyȱimproveȱtheȱ chancesȱ ofȱ successȱ forȱ aȱ newȱ business.ȱ Thereȱ are,ȱ howeverȱ manyȱ successfulȱ businessesȱ whichȱ wereȱ builtȱ byȱ teamsȱ withȱ littleȱ priorȱ businessȱ experience,ȱ althoughȱ inȱ manyȱ cases,ȱ theyȱ didȱ notȱ doȱ itȱ entirelyȱ alone.ȱ Anȱ inexperiencedȱ teamȱ canȱ stillȱ beȱ successfulȱ butȱ theirȱchancesȱofȱsuccessȱareȱgreatlyȱenhancedȱbyȱtakingȱadviceȱfromȱ others.ȱȱ Businessȱ angels,ȱ nonȬexecutiveȱ directorsȱ andȱ mentorsȱ areȱ allȱ excellentȱ sourcesȱ ofȱ experience.ȱ Theseȱ individualsȱ needȱ notȱ evenȱ comeȱ fromȱ theȱ sameȱ marketȱ orȱ industryȱ toȱ beȱ ableȱ toȱ makeȱ goodȱ suggestionsȱ coveringȱ everythingȱ fromȱ corporateȱ structureȱ toȱ

156ȱȱȱȱȱȱ8ȱYourȱroleȱandȱyourȱteamȱȱ

marketing.ȱ Ifȱ youȱ doȱ notȱ haveȱ anȱ experiencedȱ teamȱ youȱ wouldȱ beȱ veryȱwellȱadvisedȱtoȱtakeȱonȱaȱmentorȱorȱnonȬexecutiveȱdirectorȱtoȱ helpȱyou.ȱ Mentorsȱ canȱ beȱ foundȱ inȱ manyȱ guises.ȱ Someȱ businessȱ supportȱ organisationsȱoperateȱmentorȱservices.ȱTheyȱwillȱidentifyȱaȱsuitableȱ personȱforȱyouȱandȱmakeȱanȱintroduction.ȱAlternatively,ȱyouȱcouldȱ approachȱsomeoneȱyourselfȱwhoȱyouȱfeelȱcouldȱhelpȱyou.ȱȱ Inȱgeneralȱaȱmentorȱisȱaȱpersonalȱadvisorȱtoȱyou,ȱratherȱthanȱtoȱyourȱ company.ȱWhenȱyouȱselectȱaȱpotentialȱmentor,ȱyouȱareȱlookingȱforȱ someoneȱ withȱ greatȱ experience,ȱ someoneȱ whoȱ willȱ understandȱ theȱ pointȱofȱyourȱproductȱorȱserviceȱandȱsomeoneȱwhoȱyouȱfeelȱyouȱcanȱ getȱonȱwith.ȱȱ NonȬexecutiveȱ directorsȱ areȱ differentȱ inȱ thatȱ theyȱ takeȱ onȱ legalȱ responsibilitiesȱ andȱ soȱ focusȱ theirȱ adviceȱ toȱ theȱ companyȱ ratherȱ thanȱyouȱpersonally.ȱȱ

8.4 Networking Networkingȱ hasȱ alwaysȱ beenȱ anȱ importantȱ partȱ ofȱ business.ȱ Moreȱ recentlyȱ itȱ hasȱ becomeȱ anȱ industryȱ inȱ itsȱ ownȱ rightȱ withȱ theȱ formationȱofȱcommerciallyȱrunȱnetworkingȱgroupsȱandȱservices.ȱȱ Networkingȱisȱimportantȱbecauseȱyouȱandȱyourȱbusinessȱneedȱtoȱbeȱ connectedȱtoȱtheȱmarket,ȱtheȱindustryȱandȱtheȱbusinessȱcommunity.ȱ Youȱneedȱtoȱbeȱwellȱconnectedȱwithȱtheȱsupplierȱbaseȱthatȱsupportsȱ yourȱ industry.ȱ Thisȱ allowsȱ youȱ toȱ selectȱ theȱ rightȱ suppliersȱ andȱ keepȱ upȱ withȱ trendsȱ andȱ developmentsȱ thatȱ willȱ affectȱ yourȱ business.ȱ Youȱ obviouslyȱ needȱ toȱ beȱ wellȱ connectedȱ withȱ yourȱ customers,ȱ butȱ youȱ alsoȱ needȱ toȱ beȱ wellȱ informedȱ aboutȱ yourȱ competitorsȱandȱtheȱwayȱtheȱmarketȱisȱdeveloping.ȱ Tradeȱshowsȱandȱexhibitionsȱareȱanȱimportantȱopportunityȱtoȱmakeȱ contactsȱandȱkeepȱupȱtoȱdateȱwithȱtheȱindustry.ȱEvenȱifȱyouȱareȱnotȱ

8.4ȱNetworkingȱȱȱȱȱȱ157ȱ

readyȱtoȱtakeȱaȱstandȱandȱmarketȱyourȱwares,ȱitȱisȱimportantȱforȱyouȱ andȱ yourȱ teamȱ toȱ attendȱ inȱ orderȱ toȱ meetȱ peopleȱ andȱ introduceȱ yourselves.ȱ Tradeȱ associationsȱ areȱ alsoȱ anȱ excellentȱ wayȱ ofȱ becomingȱknownȱinȱtheȱindustry,ȱmakingȱcontactsȱandȱkeepingȱupȱ toȱdateȱwithȱtheȱmarketȱandȱindustryȱissues.ȱ Businessȱ groupsȱ areȱ alsoȱ worthȱ considering.ȱ Thereȱ areȱ aȱ largeȱ numberȱ ofȱ theseȱ thatȱ operateȱ onȱ localȱ levels,ȱ allȱ theȱ wayȱ upȱ toȱ nationalȱandȱbeyond.ȱTheseȱprovideȱexcellentȱopportunitiesȱtoȱkeepȱ upȱ toȱ dateȱwithȱ businessȱ trendsȱ andȱ issues.ȱ Itȱmayȱ beȱ thatȱ thereȱ isȱ noȱotherȱpersonȱinȱtheȱroomȱworkingȱinȱtheȱsameȱsectorȱasȱyou,ȱbutȱ youȱareȱallȱaffectedȱbyȱsimilarȱoutsideȱinfluencesȱsuchȱasȱchangesȱinȱ employmentȱ law,ȱ localȱ planningȱ problemsȱ orȱ howȱ toȱ growȱ yourȱ businesses.ȱSinceȱ thereȱ isȱ littleȱ aspectȱ ofȱ competition,ȱ theȱ exchangeȱ ofȱideasȱandȱthoughtsȱcanȱbeȱveryȱproductive.ȱ Manyȱ ofȱ theseȱ eventsȱ andȱ otherȱ servicesȱ areȱ providedȱ byȱ profȬ essionalȱ institutions,ȱ joiningȱ anȱ appropriateȱ instituteȱ andȱ makingȱ goodȱuseȱofȱtheȱservicesȱonȱofferȱcanȱbeȱveryȱvaluable.ȱȱ ȱ

9 Closing remarks

Lookȱ backȱ overȱ theȱ groundȱ weȱ haveȱ coveredȱ inȱ thisȱ book.ȱ Weȱ startedȱ byȱ carryingȱ outȱ aȱ thoroughȱ analysisȱ ofȱ theȱ strengthȱ andȱ potentialȱofȱyourȱbusinessȱidea.ȱWeȱlookedȱatȱwhatȱproblemȱyouȱareȱ goingȱ toȱ solveȱ forȱ yourȱ customersȱ andȱ startedȱ toȱ thinkȱ aboutȱ whoȱ andȱwhereȱtheyȱare.ȱWeȱseparatedȱtheȱmarketȱfromȱtheȱindustryȱandȱ lookedȱ atȱ theȱ competitiveȱ landscapeȱ youȱ willȱ findȱ yourselfȱ inȱ andȱ howȱyouȱwillȱcompeteȱforȱyourȱshareȱofȱtheȱmarket.ȱWeȱconcludedȱ withȱtheȱsoulȱsearchingȱquestionȱ–ȱdoȱyouȱhaveȱaȱbusiness?ȱ Havingȱestablishedȱthatȱthereȱisȱaȱsolidȱplatformȱonȱwhichȱtoȱbuildȱ yourȱ business,ȱ weȱ nextȱ exploredȱ theȱ methodsȱ andȱ costsȱ ofȱ proȬ tectingȱyourȱvaluableȱintellectualȱpropertyȱrights.ȱWeȱshowedȱhowȱ theseȱrightsȱareȱimportantȱnotȱjustȱtoȱprotectȱyourȱbusinessȱbutȱalsoȱ yourȱinvestors.ȱ Theȱlegalȱstatusȱofȱtheȱcompanyȱwasȱtheȱnextȱtopicȱtogetherȱwithȱtheȱ responsibilitiesȱ andȱ dutiesȱ thatȱ youȱ willȱ takeȱ onȱ whenȱ youȱ startȱ yourȱ company,ȱ someȱ ofȱ theȱ responsibilitiesȱ areȱ quiteȱ rightlyȱ arduousȱ soȱ weȱ knowȱ thatȱ startingȱ aȱ companyȱ isȱ aȱ seriousȱ underȬ taking.ȱ Nextȱweȱtookȱaȱcloseȱlookȱatȱmarketsȱandȱmarketingȱandȱdiscoveredȱ thatȱ weȱ can’tȱ simplyȱ inventȱ aȱ betterȱ mouseȱ trapȱ andȱ waitȱ forȱ theȱ doorȱbellȱtoȱring.ȱWeȱsawȱhowȱdifferentȱmarketȱgroupsȱbehaveȱandȱ developedȱstrategiesȱtoȱmoveȱtheȱproductȱfromȱoneȱtoȱtheȱnext.ȱ Havingȱ setȱ theȱ sceneȱ forȱ whatȱ ourȱ businessȱ wasȱ for,ȱ weȱ startedȱ aȱ longȱ lookȱ atȱ theȱ financialȱ aspectsȱ ofȱ startingȱ aȱ company.ȱ Weȱ sawȱ howȱcashȱflowȱdrivesȱtheȱbusinessȱandȱexploredȱtheȱvariousȱwaysȱofȱ

160ȱȱȱȱȱȱ9ȱClosingȱremarksȱ

raisingȱmoneyȱforȱtheȱbusiness.ȱWeȱtookȱaȱdetailedȱlookȱatȱventureȱ capitalȱ toȱ understandȱ theȱ needsȱ ofȱ theseȱ investorsȱ asȱ wellȱ asȱ whatȱ theyȱhaveȱtoȱoffer.ȱWeȱthenȱconstructedȱaȱfullȱfinancialȱmodelȱforȱaȱ startȬupȱ businessȱ toȱ understandȱ howȱ toȱ forecastȱ salesȱ andȱ costȱ theȱ growthȱofȱtheȱbusiness.ȱ Weȱlookedȱatȱbusinessȱplansȱandȱpresentationsȱtoȱseeȱhowȱinvestorsȱ andȱ otherȱ interestedȱ partiesȱ wouldȱ expectȱ toȱ beȱ approachedȱ andȱ whatȱtoȱexpectȱwhenȱyouȱmeetȱthem.ȱFinallyȱweȱlookedȱatȱtheȱroleȱ ofȱyouȱandȱyourȱteamȱandȱwhereȱyouȱcouldȱfindȱsupportȱandȱadviceȱ asȱyouȱtakeȱyourȱbusinessȱforward.ȱThroughout,ȱweȱhaveȱseenȱhowȱ importantȱ externalȱ supportȱ andȱ expertiseȱ isȱ goingȱ toȱ be.ȱ Lawyers,ȱ patentȱagents,ȱaccountants,ȱmentorsȱandȱadvisorsȱallȱhaveȱaȱcrucialȱ roleȱinȱyourȱfuture.ȱ Theȱ nextȱ stepsȱ areȱ upȱ toȱ you.ȱ Hopefullyȱ youȱ nowȱ haveȱ anȱ appreciationȱ ofȱ whatȱ isȱ involvedȱ inȱ startingȱ yourȱ business.ȱ Theȱ rewardsȱ andȱ theȱ satisfactionȱ canȱ beȱ greatȱ butȱ theȱ effortȱ andȱ determinationȱneedȱtoȱcomeȱfromȱyouȱifȱyouȱareȱtoȱsucceed.ȱIȱwishȱ youȱtheȱbestȱofȱsuccessȱinȱallȱyourȱbusinessȱendeavours.ȱȱ ȱ

References and further reading

CravenȱRȱ(2001)ȱKickȬstartȱyourȱbusiness.ȱVirginȱPublishing,ȱLondonȱ MooreȱGAȱ(1991)ȱCrossingȱtheȱchasm.ȱHarperȬCollins,ȱNewȱYorkȱ MooreȱGAȱ(1995)ȱInsideȱtheȱtornado.ȱHarperȬCollins,ȱNewȱYorkȱ MullinsȱJWȱ(2003)ȱTheȱnewȱbusinessȱroadȱtest.ȱPrenticeȱHall,ȱLondonȱ PorterȱMEȱ(1980)ȱCompetitiveȱStrategy.ȱTheȱFreeȱPress,ȱNewȱYorkȱ Southonȱ M,ȱ Westȱ Cȱ (2002)ȱ Theȱ beermatȱ entrepreneur.ȱ Prenticeȱ Hall,ȱ Londonȱ WiefelsȱPȱ(2002)ȱTheȱchasmȱcompanion.ȱHarperȬCollins,ȱNewȱYorkȱ ȱ

Index

advisoryȱgroup,ȱ8ȱ agingȱpopulation,ȱ20ȱ AIDAȱmodel,ȱ120ȱ Amazon.com,ȱ39ȱ Apple,ȱ69ȱ ȱȱ balanceȱsheet,ȱ117ȱ Betamax,ȱ69ȱ Blackberry,ȱ76ȱ boardȱofȱdirectors,ȱ65ȱ brandȱloyalty,ȱ23ȱ businessȱangels,ȱ99ȱ businessȱplan,ȱ139ȱ presentation,ȱ146ȱ businessȱpresentations,ȱ147ȱ ȱȱ cashȱflow,ȱ89,ȱ116,ȱ135ȱ climateȱchange,ȱ20ȱ CocaȬCola,ȱ33ȱ coffeeȱ&ȱbiscuits,ȱ3,ȱ80,ȱ113ȱ companyȱdirectors,ȱ64ȱ duties,ȱ66ȱ companyȱvaluation,ȱ108ȱ computerȱsoftwareȱsector,ȱ11ȱ copyright,ȱ50ȱ criticalȱsuccessȱfactors,ȱ80,ȱ85,ȱ153ȱ customers,ȱ7,ȱ70ȱ behaviour,ȱ10ȱ motivation,ȱ8ȱ power,ȱ25ȱ

debt,ȱ96ȱ assetȱfinance,ȱ97ȱ factoring,ȱ93,ȱ97ȱ loans,ȱ96ȱ overdraft,ȱ97ȱ dueȱdiligence,ȱ105ȱ DVD,ȱ70ȱ ȱȱ eBay,ȱ56ȱ EBIT,ȱ115ȱ employmentȱcosts,ȱ127ȱ entrepreneurs,ȱ151ȱ equityȱfunding,ȱ98ȱ exitȱstrategy,ȱ110ȱ expenditure,ȱ114ȱ ȱȱ financialȱplanning,ȱ113ȱ ȱȱ GeoffreyȱMoore,ȱ71ȱ grants,ȱ94ȱ grossȱmargin,ȱ114ȱ ȱȱ income,ȱ114ȱ industries,ȱ4,ȱ22ȱ environment,ȱ26ȱ regulation,ȱ23ȱ insolvency,ȱ68ȱ intellectualȱpropertyȱrights,ȱ23,ȱ 26,ȱ31ȱ InternationalȱOrganisationȱforȱ Standardisation,ȱ23ȱ

164ȱȱȱȱȱȱIndexȱ internetȱdomainȱnames,ȱ33ȱ investors,ȱ31ȱ iPod,ȱ69ȱ iTunes,ȱ70ȱ ȱȱ keyȱopinionȱleaders,ȱ7ȱ ȱȱ licensing,ȱ7ȱ lifeȬstyleȱbusiness,ȱ15ȱ limitedȱcompany,ȱ53ȱ ArticlesȱofȱAssociation,ȱ57ȱ MemorandumȱofȱAssociation,ȱ 57ȱ shareholders,ȱ58ȱ shares,ȱ59ȱ Lotus,ȱ49ȱ ȱȱ managedȱoffices,ȱ133ȱ management,ȱ143,ȱ151ȱ experience,ȱ155ȱ marketing,ȱ69ȱ marketingȱplan,ȱ86ȱ markets,ȱ4,ȱ141ȱ analysis,ȱ5ȱ dynamics,ȱ18ȱ earlyȱadopters,ȱ73ȱ earlyȱmajority,ȱ74ȱ innovators,ȱ72ȱ laggards,ȱ74ȱ lateȱmajority,ȱ74ȱ need,ȱ5ȱ niche,ȱ78ȱ size,ȱ16ȱ winning,ȱ76ȱ MichaelȱPorter,ȱ22ȱ mobileȱphones,ȱ77ȱ monopolies,ȱ23ȱ MSȱExcel,ȱ117ȱ

networking,ȱ156ȱ nonȬdisclosureȱagreement,ȱ8,ȱ32,ȱ 34ȱ ȱȱ organicȱfood,ȱ4ȱ ȱȱ partnership,ȱ55ȱ patents,ȱ34ȱ agentsȱandȱlawyers,ȱ51ȱ computerȱsoftware,ȱ41ȱ costs,ȱ45ȱ disclosure,ȱ35ȱ EuropeanȱPatentȱOffice,ȱ43ȱ exclusions,ȱ39ȱ international,ȱ43ȱ novelty,ȱ37ȱ PatentȱCoȬOperationȱTreaty,ȱ 43ȱ protection,ȱ36ȱ submission,ȱ40ȱ timeȱtoȱgrant,ȱ44ȱ price,ȱ123ȱ competing,ȱ25ȱ productȱadoptionȱlifecycle,ȱ71ȱ profitȱ&ȱloss,ȱ115ȱ prospectus,ȱ139ȱ publicȱlimitedȱcompany,ȱ56ȱ ȱȱ registeredȱdesigns,ȱ47ȱ researchȱandȱdevelopment,ȱ27ȱ ResearchȱinȱMotionȱLtd,ȱ76ȱ risk,ȱ154ȱ riskȱanalysis,ȱ80ȱ ȱȱ salesȱforecasting,ȱ120ȱ services,ȱ124ȱ shareholdersȱagreements,ȱ63ȱ sharesȱ convertible,ȱ61ȱ

Indexȱȱȱȱȱȱ165ȱ optionȱschemes,ȱ62ȱ ordinary,ȱ60ȱ preference,ȱ60ȱ redeemable,ȱ61ȱ soleȱtrader,ȱ54,ȱ55ȱ spreadsheet,ȱ117ȱ staff,ȱ28ȱ stakeholders,ȱ12ȱ analysis,ȱ13ȱ suppliersȱ power,ȱ24ȱ ȱ

tradeȱassociations,ȱ17ȱ tradeȱmarks,ȱ48ȱ tradeȱsecrets,ȱ33ȱ turnover,ȱ114ȱ ȱȱ uniqueȱsellingȱpoints,ȱ9ȱ ȱȱ ventureȱcapital,ȱ99,ȱ101ȱ deals,ȱ107ȱ VHS,ȱ69ȱ