Top three errors of innovating engineering and technology start-ups

Guest Blog

A chartered engineer, David Falzani is president of Sainsbury Management Fellows which was founded over 25 years ago by Lord Sainsbury to encourage better management skills in UK engineering. David is also chief executive of Polaris Associates which helps entrepreneurial companies develop and grow as well as visiting professor at Nottingham Business School where he teaches how to bring technology, innovation, entrepreneurialism together to create successful businesses.

dumper
How can you keep your product — and your start-up — out of the dumper?

The early hurdles of setting up a new business are fairly well known: choosing a name, setting up a legal entity, raising capital, evolving a product or service to sell etc. Having made all of this effort, it’s a shame that the failure rate is so high. 90% of technology start ups fail. Whilst some of these failures may have been inevitable, many fail due to common errors that undermine a company’s ability to survive, grow and scale.

I’ve therefore listed below the ‘top 3’ most commons errors I see when mentoring:

Selling something no one wants

Not just for start ups, this is probably the biggest problem when developing an innovative new product. It’s particularly true for technology companies since the products are often brand new, have never existed before, and therefore there’s no established buying behaviour.  In this situation you literally don’t know what you don’t know.

Instead of embracing this fact, companies often assume that a ready market exists for a new product or service, and about how this should be developed and delivered. Once these assumptions become embedded it can be very difficult to shift them. This error often manifests itself as a product or service that is very difficult to actually sell.

I like to call this a high burden sale and it tends to have a characteristic of either

  1. having high educational requirements, or
  2. it seeks to fix a problem that’s causing a low level of ‘pain’

High educational requirements mean you have to invest a lot of time and/or money to explain to your customer what the value proposition is. If, at the end of this, the conversion rate and margins aren’t high enough, you go out of business. Low pain fixing products are ‘nice to haves’ that no one in today’s busy world can actually be bothered to get around to buying. The product graveyard is full of better mouse traps that nobody bought.

Techniques such as The Lean Startup methodology, help avoid these risks. Essentially, acknowledge the lack of certainty in the system and take an incremental approach with strategic sales to discover a product customers will actually really care about.

Not asking a fair price (i.e. not charging enough)

For smaller companies already active in the market place, and perhaps already profitable, this is perhaps the most common error limiting growth. It is usually due to a cognitive bias in the management team, either due to lack of confidence in the value proposition or perhaps due to over reliance on the use of old fashioned “cost plus” pricing methodology, as opposed to pricing based on customer derived value. Sometimes it can be due to the innovative nature of the technology – there’s no competitor to peg pricing against. The negative consequences of this bias is that the business is never able to produce the cash it requires (and deserves) to reinvest in R&D/training etc.

As far as finding remedies, there are tests and perspectives that can highlight what value a client actually sees in a product and hence pricing policies to suit. For example, I often ask mentees to consider how they could run an experiment that could revolutionise their approach to pricing: to find a safe way to double their price in selected markets or products, and see what happens. One company chose to double its prices within the M25. To its amazement the higher price made little difference to the sales conversion rate and completely revolutionised their cash flow, helping them grow from 8 to 22 staff.

Danger of over execution before point of scalability

This error normally leads to a business running out of cash. Trying to grow the cost base at the correct speed in relation to the sales growth curve can be tricky. The negative consequences here can be building up a burn rate that is too high and consequently running out of cash. It’s easy to become excited by early positive signs from the market and start to ramp up overhead costs. This problem also makes it difficult to raise more capital as the fact that sales has lagged behind costs and caused a cash crisis undermines the credibility of the business. Often reducing costs is then difficult and means dismantling operational investments or writing off investments. Scaling is often a tricky ‘chicken and egg’ situation. The key thing is to ensure that few unknowns lie within the business in order to produce a balanced and properly funded growth curve. In other words, a company ready to scale should be convinced that all the major questions have been answered, and all that is required to increase the business size three fold or five fold is money and resources, not inventive steps or further market discovery.