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It is now easier than ever for IT professionals to turn entrepreneur and launch a startup business, but a couple of years ago, new companies were not faring so well.
According to an analysis of Companies House data by the Centre for Entrepreneurs, business formations reached a record high of 663,272 in 2018.
The record figure follows a decline in business birth rates between 2016 and 2017, which went down for the first time since 2010, and an increase in business death rates over the same period.
The recent uptick in business formations suggests that, for any IT professionals who are familiar with business problems and think they know how to solve them, now is the time to get that startup going.
But what makes a startup into a success? Computer Weekly spoke to a number of founders and investors to find out how business-to-business (B2B) tech startups can stand out and remain competitive in a crowded marketplace.
John Thompson has years of experience in the startup scene. Having grown two software-as-a-service (SaaS) startups as CEO and successfully exited one of them, he now advises other SaaS companies and chairs a number of other startups.
“If I reflect on the last 10 years versus the previous 10 years, it is now much easier to raise money, it’s much easier to get your product to market and much easier to acquire your customers,” says Thompson. “It’s also much more competitive, brutally so, because other people can get that easy money as well and come after you. I don’t necessarily think it’s any easier to create a big exit than it used to be – I just think it’s easier to play the game.”
Find a niche
Thompson says that, in this context, it is vital for startups to find a niche if they want to compete with the products already in place.
This point was echoed by all those interviewed by Computer Weekly, who agreed that specificity is key to gaining a competitive advantage – solutions developed by tech startups must address particular business problems.
If they have too broad a focus, they risk being usurped by more specialised teams.
For example, Cristina Vila, founder and CEO of software management platform Cledara, used to track and manage the use of SaaS products for a fintech she worked for.
“SaaS isn’t very visible, so if you buy something and you don’t use it, you forget you have it,” says Vila. “We even found products we were paying for that we just didn’t know we had, or we thought we had already cancelled.”
Vila adds: “SaaS is great, it really allows companies to move quickly and access technology they couldn’t before, but it creates this burden internally. In companies with hundreds or thousands of people, the problem will be even bigger, so there has to be a solution – and that’s why I started Cledara.”
Homing in on a specific problem can also help distil a product to its essential core, preventing the startup’s founders and the developers they have hired from getting distracted and spreading themselves too thinly by trying to add functionalities that are not required.
“That is one of the big challenges faced by every founder,” says Vila. “Because we can be pulled in so many directions, having the ability to say no and leave it out is really important.
“You need to be able to de-scope anything that is not essential and really just always focus on what it is that’s going to add the most value. It’s about offering the simplest solution possible and addressing a real problem.
“You have to create something that allows you to do something you couldn’t before.”
James Gill, CEO and co-founder of GoSquared, a real-time web analytics and customer data software platform set up 12 years ago, shares this sentiment. “No matter who owns a certain part of the market, there is always a more fine-grained niche that can be carved out and turned into a big business,” he says.
“You see these things where someone has built something you never thought there would be enough of a demand for, like someone building something for farmers, but then someone has built something specifically for corn farmers and made a segment of the market out of that. That’s what continually amazes me.”
Gill also highlights how people have been telling him for a decade that no more innovation could take place in the analytics space. “But you look today and there are hundreds of analytics companies out there – each of them doing very well, growing over time and finding more and more segments and markets to go into,” he says.
Build a ‘defensive moat’
Once a startup finds a competitive niche, the next stage is to protect and maintain the product’s advantage, which can be difficult in an environment of fast-paced technological change and innovation.
Thompson adds: “If your product is the castle, your castle has to have a defensive moat around it. It can come from scale, it can come from ease of use, and it can also come from intellectual property, although that’s a relatively small percentage of startups.”
Thompson emphasises the point that a “defensive moat” is anything that stops other products being adopted over your own. “End-users’ tolerance of software that is hard to deploy or hard to use is very, very low right now,” he says. “Being relentlessly focused on the customer and bringing them benefits in a really easy way is super important.
“Ten years ago, you could have software that might have been a bit of a science project to get it up and running, but once you got it up and running, there were really big benefits, and people would buy that kind of software and be patient with it through the adoption cycle – but not today.”
John Thompson, entrepreneur
Alex Theuma, founder of SaaStock, Europe's largest SaaS conference, says this need for easy-to-use products is a result of enterprise “consumerisation”:
“I guess this has been happening basically since Slack first came about,” he says.
“They were bandied around as the ‘consumerisation of the enterprise’ – they are thinking ease of use, customer-centricity, and a lot of companies have looked to outliers like Slack and seen the product go viral, so a lot of them are investing in making the product easy and fun to use.”
Outside of the customer-centric focus on ease of use and adoption, a certain amount of “stickiness” can also help B2B startups to protect their products and maintain their business relationships.
Thompson says: “Stickiness means that once the software is in, it’s hard to get out. But that’s not the strongest reason to keep using a piece of software – you want people to use your software because it’s the best, but a certain amount of stickiness is definitely beneficial.”
Focus on people
But while a defensive moat can protect a product, it can be hard to get the product anywhere without the right team leading and building it.
Cledara’s Vila says: “I am a solo founder, right, but especially when it comes to fund-raising, investors look at the teams. So obviously, if you are just one person, there is no team – and that’s been challenging.
“I think I understand why they say that, because obviously running a startup is hard, it’s 24/7, so if you can have someone by your side with those complementary skills that you don’t have, that obviously doubles the capacity of the company instantly.”
GoSquared’s Gill, on the other hand, was one of a team of founders. “I genuinely don’t know how you do it if you don’t have co-founders,” he says.
“Sure, there’s all the fun stuff like bouncing ideas around, but you also have some really difficult decisions to make and if you don’t have people sharing in that, it’s hard.”
Cristina Vila, Cledara
But Vila emphasises that, ultimately, each company’s founder has to do what is right for them. “I didn’t want to rush and get a co-founder because that’s what’s expected in the market when you’re beginning a startup,” she says. “I wasn’t going to get a co-founder just for the sake of it.”
Although having a co-founder can help, Vila says it is important to trust your team and choose the right people, a views that was echoed by the investors that spoke to Computer Weekly.
Seasoned investor Annemie Ress, UK managing director and chief people officer at Innogy Innovation Hub, says: “Whether it’s one founder or two, what we tend to look at is who they have surrounded themselves with. Is it a diverse group of people, have they worked together before, what’s their track record?
“What I find interesting is if, in that team, you have a combination of people who come from the corporate world and then transitioned into the startup world, and vice versa.”
Ress adds: “I think co-founders or multiple founders have their own challenges, which also makes me personally take a step back, because I know what could potentially come down the line if they haven’t had some type of conversation at the outset of their relationship.”
Approaching big corporates
Within these teams, it is important to have people with good enterprise sales skills when approaching larger corporate entities.
Thompson says: “There’s a bit of a myth that sales aren’t important any more because of SaaS. People think we can just adopt the software, but you’re dealing with an enterprise, so there’s going to be multiple stakeholders that you need to deal with.
“If you’re good at sales, you can interact with the right people in the organisation at the right time, in the right way, and help them build the buying case.”
This sentiment is shared by Vila, who adds: “Usually, when you speak to someone at a startup, anybody can pretty much take a decision, but obviously in a large corporate, not everyone can make a decision – it has to go through a chain.
“It is very important to find your sponsor within the company, understand the decision-making process and who is the ultimate decision-maker and what they care about as well. If you can do that, then the relationship with the large corporate is going to be better.”
Vila concludes that, because startups are more agile by nature, there is also a need to manage each other’s expectations, especially when it comes to timelines. “The startup feels like the corporate is slow and doesn’t care, and the corporate feels the startup founders are too pushy or are rushing,” she says.
Innogy Innovation Hub’s Ress points out that corporates often expect the same rate of delivery and interaction from a startup as they do from the more established organisations they work with.
“A lot of education needs to be done in the corporate world and in the startup world as to how things work, a transparent conversation needs to happen around expectations, and speed is obviously different in both worlds,” says Ress.