Why is Scotland creating a fifth of the UK‘s patents, but only gaining a tenth of UK venture capital? David Farquhar, CEO of 2in10, argues that in the technology sector at least, we don’t build the right things: We are not focused on marketing and selling. These are rough notes from David Farquhar’s talk to a Edinburgh Entrepreneurship Club/Edinburgh-Stanford Link event.
What’s wrong with technology innovation in Scotland?
First there is a tendency to focus on Intellectual Property (IP). Then focus shifts to the customer, but by offering services – a different product for each customer. That creates a lot of small businesses that struggle to grow.
What’s keeping CEOs awake at night? Lack of revenue from sales. And their investors? Lack of plans for making sales.
80% of firms are targeting the US as their main market, yet most lack basic knowledge about how to sell to the US market. If you don’t know how much you’re going to need to pay a US sales-person, how robust really is your business plan?
Two thirds of the most highly valued technology comes from the US, so why not adopt their core philosophy? Build around a market problem, and sell the way customers want to buy.
To misquote Ben Holmes (Index Ventures):
“For every Â£1 invested in building, spend Â£5 on marketing and selling.”
Practices and structure
There is not a lack of sales talent in Scotland, nor a crisis of confidence.
There is a need for more best practice to be adopted, specifically:
- Build the right thing.
- Talk in the right language.
- Understand how people like to buy things.
- Drive revenue.
Most startup firms are structured poorly. Typical startups contain a CEO (who can talk) and a CTO (the brainy one). A structure then develops with engineering and sales/marketing separate.
Instead, sales and marketing should be separate functions, with a “healthy” tension between the two. Product development should reside within the marketing function, not with engineering. This often marginalises the original brains behind the operation (CTO) within the structure, but is necessary to keep market focus.
Wolfson Microelectronics is one of the best known Scottish-based technology firms. Its audio technology is used in products such as the iPod and XBox. It was started in 1984, but by 2000 only had revenue of Â£6 million per year. To prepare for floatation (IPO) it strengthened its board, including people who had worked in the US. They introduced concepts such as product managers, which fundamentally changed the way the business operated. By 2007 revenue had risen to Â£180 million.
Failing to understand the buying cycle is a key criticism of selling: For example, a new product might only be purchased as part of an existing product – selling the new product separately to consumers might not work.
A market can be defined as, “a group of customers with the same pain and money“. Money or else they cannot buy. Pain because they have to have a reason to buy. And a group because they have to talk to one another (markets follow a few lead individuals).
It is important not to make assumptions about what the market requires. Chances are the market isn’t how the startup team envisaged it, or has different priorities.
Lumigent was highlighted as a good example of how one technology could be pitched to several different audiences.
David showed how Thomas Siebel‘s Customer Relationship Management software was developed.
It starts with a given idea, in this case based on exposure to the problems of potential customers. The IP stems from that given idea. IP is important for product differentiation. A market segment is identified (again from the given idea) that both has pain and money. From the pain and IP, develop a product. If there is competition, it is necessary to address a specific category. Finally, from the product and category emerge a position – the claim on which the product will be sold. And from that, revenue is generated.
This pattern is not entirely restricted to Scotland. It seems a common complaint that the UK and Europe is much better at creating things than commercialising them, in contrast to the US, which is good at commercialising them. In subsequent discussion it was noted that in the US engineers are often taught how to commercialise ideas within universities, which rarely happens in the UK.