Lessons from Hermann Hauser

Another interesting Enterprise Tuesday lecture by serial entrepreneur and angel investor Hermann Hauser (Amadeus Capital Partners). He talks about the mistakes he has learnt from in five of the 62 companies that he has been involved with: Acorn, ATML, Harlequin, ART, and Polight. Here are my notes and thoughts:

• Acorn spent its first five years not being able to produce enough computers to meet the demand. It therefore signed long-term agreements with manufacturers, and eventually met demand. Unfortunately, at this point the market crashed. Inventory piled up, and the company had to be rescued by Olivetti. Corollary: understand the variations in your market, and plan inventory sizes appropriately.


• ATML's initial product was (probably) the best 25 Mbit/s ATM switch on the market. This did not sell, as 100 Mbit/s switched ethernet soon arrived on the scene. Larry Ellison (of Oracle fame), invested in the company, and hence kept it afloat. However, the company began to make significant sales of its ATM to IP "conversion" chip to manufacturers of DSL modems. The business model was then changed, resulting in real growth. A merger with American company Globespan was proposed, but this turned out to be a bad move, as their management team was not as strong as ATML's (by this time Virata). Corollaries: product strategy needs to be correct (and malleable); don't assume that as a British company you need to be bought by an American company to succeed.


• Harlequin's aim was to build the world's greatest AI company, by producing a LISP interpreter. But this wouldn't be profitable, as it would be a small market. In order to obtain revenue, the company produced PostScript technology for printers. The founder refused to raise cash through selling equity, but wanted to raise debt. Natwest gave him a £5 million loan. That increased to £10 million. The difference between banks and VCs is that banks can call in the loan. Harlequin was sold for £1. Corollary: in a fast growing, high-tech company, you need equity, not loan, finance.


• ART (Advanced Rendering Technology) made a break-through in hardware rendering technology. Genereated photorealistic images for car companies. But there were only so many car adverts that needed making! Corollary: market size matters!


• Polight produced holographic storage technology. Unfortunately, a very gifted physicist on the team showed that it was in fact impossible to produce the technology that they were working towards. Corollary: sometimes the technology itself may be at fault.


• Time estimation: whatever you estimate, multiply by Pi to get a realistic estimate. Similarly, market size estimates tend to be very overstated.


• People-related issues are common: people fall out with each other surprisingly easily.


• Finally, keep making mistakes, but make new mistakes.

Personally, I think that much of the above is obvious in hindsight. In other words, I'm sure that ART were aware that they needed a big enough market in order to generate sales growth long-term, or that Acorn would not have signed manufacturing contracts if it had known that demand was going to fall. Perhaps the most interesting conclusions to be drawn centre around how ATML was nimble enough to change their strategy (i.e. that they were willing to sell that one chip that was a tiny part of their much more complex core product), and that they would probably have done better not to merge with Globespan.

So how to avoid the "obvious" mistakes when starting out? Clearly it's not easy. Here's my take, for what it's worth:

• Market trends & inventory: of course, the ideal company is one that has no inventory, and yet can keep up with demand. If you're selling pure IPR, like chip designs (e.g. ARM), that's great, because inventory becomes someone else's problem. In the case of a software company (assuming its products are sold for download, or online use, rather than on shop shelves), inventory perhaps becomes synonymous with how much server capacity you have, plus possibly support staff. Hence, using cloud computing services such as Amazon's EC2, (or their content distribution network, CloudFront) and outsourcing non-core work to contractors (as suggested by Seedcamp's Reshma Sohoni) provides much greater flexibility to respond to demand. Of course, reading market trends hopefully means that you're aware of what proportion of your services are "base load" and hence could be performed in-house.
• Product strategy: be prepared to admit that your first idea didn't work, but that a part you never envisaged could be valuable actually might be. Concentrate on your core competencies.
• Market characterisation: talk to your potential customers! I find it incredible that there are so many web sites that make it so hard to give good feedback once they're selling (and that's after they've decided on their product!). As David Langendries pointed out in a comment on my post "The Dangers of Online Feedback", companies would do well to pick up the phone. Most successful products are preceded by good marketing (distinct from advertising), says Seth Godin. Which to me, means that technologists need to be very sure they can convince the customer that their product solves a problem that the customer (maybe) never realised they had. And convincing means talking, rather than yet another online survey.

So there you have it: terribly simple, right? ;-). Then again, you'll find plenty of other conflicting advice elsewhere. Over at OnStartups, Jason Cohen suggests that instead of trying to figure out which strategy is best, given that conflicting ones have produced equally successful companies, perhaps you just need to buck conventional wisdom (and hence not copy 37signals or Fog Creek)... Thoughts?