‘Obsession’ with funding can stunt growth of early-stage business

Too many early-stage businesses are seduced by the prospect of funding instead of building their business through sales. That’s the contention of successful UK software engineer and author Gordon McAlpine who believes they should instead concentrate on achieving scale through building a better sales engine.

"Entrepreneurs seem obsessed by getting to the next funding round and see this as a rite of passage rather than concentrating on building the fundamentals of their business," he tells The Irish Times. "I'm not against investment per se, as everyone needs some seed or start-up capital, but funding is not necessarily a silver bullet for scaling up your enterprise," he adds.

McAlpine says it is now seen as the norm for start-up and scale-up stage ventures to have funding rounds, and entire ecosystems have been built up around this. The assumption is that funding is always necessary and it is best practice to seek it, based on influence of US tech models. There is a downside to this, however, he believes.

“I would question whether some of that funding is curbing people’s hunger to test their business model and grow their business. Are they getting too much thrown at them? To build a successful business you must grow sales and drive revenues at some point. You need hunger. The danger is you end up spending too much time answering to investors, navigating the various stages of funding and hoping you making some sales in the meantime. It can blunt the appetite to make sales and drive revenues if there’s lots of cash sloshing about.”

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McAlpine has form in this department. As cofounder of in 1997 of a technology firm called BigHand, he bootstrapped a successful business that developed dictation software tools for the legal profession without needing to secure bank borrowings or having to dilute equity.

McAlpine says BigHand was a high-margin software business yielding pre-tax profits of around £3 million a year before it was sold in a management buyout in 2006, netting its two promoters a tasty, albeit undisclosed, windfall (he cites a confidentiality clause). He later used some of the money from the sale to participate in Channel 4's Secret Millionaire programme, where he gave away tens of thousands of pounds to charities in the Govan area of Glasgow.

Simple company

“Apart from our own small initial seed capital, we financed the business through sales. We felt we neither wanted nor needed funding. It was a simple company with one product and one market sector. Our model went against what a lot of entrepreneurs want to do in trying to take on the world, but it threw off a lot of cash and it enabled us to grow.”

Recounting some of the key insights from his business journey in his new book, Scale up Millionaire, McAlpine advises that there are three crucial factors to ensure that your business can expand significantly. The first is having a product that has the potential to address customers' pain points and needs, and the second is having passion about your product and the difference it makes.

Thirdly, and more interestingly, the product must be one that can be sold and delivered consistently without customisation. “A bespoke product will undermine your sales activity because you’ll be so busy customising that you will be distracted from your focus on sales, which in turn will hamper your potential to scale up,” he notes.

Moreover, McAlpine believes that a common mistake of many businesses is that they try to develop a portfolio of products before exploiting the full benefits of the original. “Wanting to do too much can tear apart a small technology company: for example, if you are trying to do too many versions of it to satisfy different types of customers. It can become very hard to project manage.”

McAlpine adds that genuine passion for what you do is a hugely important element that drives founder sales, and you need to inject this into the business to overcome the many hurdles entrepreneurs face. “Passion shouldn’t be about excitement at the chance to jump on a trend to make a quick profit. It should be about belief in your product and the idea that it may have a positive impact on your community or the world in some way.”

McALPINE’S SALES TIPS

- Focus first on a microniche where you will get known quickly, get word-of-mouth recommendations and grow sales quickly.

- Organise sales prospects rigorously. Require salespeople to log precise meeting notes by the end of each week

- Use a demonstration rather than a presentation to bring your product to life and give prospects clarity and confidence in what they would be buying

- If prospects are keen, don’t be afraid to ask for the business and close the sale by offering to send an order form and getting your project manager to provisionally book out time to start the project

- Involve staff in developing a rewards programmes that’s fair, aspirational, and as good as any big company can offer