Mike Bath, Technology Transfer Manager, Physical Sciences, Durham University and PraxisUnico Board and Conference Committee member (pictured) reports on the talk by Prof John Mullins, London Business School.
Prof. Mullins opened his talk by challenging two widely held assumptions about the creation of new businesses. Described by him as “centrepieces” they were:
- Entrepreneurs must research and write a detailed Business Plan
- Entrepreneurs must raise start-up capital from Venture Capitalists (VCs)
The first challenge was based on the question, “Why waste time on elaborate plans that are very likely to change?”. Mullins described a common scenario whereby an investment is made on the basis of Plan A, but, unexpectedly, external events render this plan redundant and so Plan B is used. The audience recognised these observations and agreed that Plan A rarely succeeds. His proposition was that instead of writing Plan A, instead Test the business. Testing rather than planning means truly understanding if customers will part with cash for the goods or services. This approach has the advantage of discovering true business potential at an early stage. If it fails, it fails early.
The challenge to centrepiece 2 was based on observations about VC success rates. Data presented showed that the vast majority of VC investments failed. Prof Mullins explained that spectacular,high profile VC successes, with companies like Facebook, created the illusion that VC returns are much bigger than they really are. Failures simply don’t get any attention, and so an inaccurate perception of the world exists. But what could replace VC investments? Linking back to the idea of “Test-don’t-Plan” one alternative is for customers to pay upfront for goods and services, and use this money to create the business. Practical examples were shown using models such as; Subscription, Pre-order, Scarcity, Service to Product, and Match Making. The audience engaged in a discussion which tested applications of the models. It was agreed that funding business creation in this way is not an easy option and some types of business would not be suitable, e.g. clinical trials.
However, the idea of placing the customer at the centre of early stage businesses was seen as advantageous. And, as businesses grow, the argument for the traditional VC model may become stronger. In conclusion, the proposal to focus on Testing rather than Planning was seen as progress. Similarly, advantages were seen in obtaining start-up capital from future customers, with VC investments used for later growth.
Professor Mullin's presentation is available online here: http://www.praxisunico.org.uk/resources/presentations.asp Professor Mullin's book, The Customer Funded Business, is out now.