Originally appeared on The Economist’s Schumpeter blog, 21 March 2012
HOLLYWOOD portrayed Mark Zuckerberg, Facebook’s boss, as aloof, disinterested and awkward in all manner of ways in “The Social Network”. During important meetings with venture capitalists and potential investors Mr Zuckerberg’s character became increasingly distracted and at one such appointment his business attire was a bath robe, pyjamas and slippers. (This made-for-the-movies moment actually stems from a real event, when Facebook made a pitch to Sequoia Capital.) Despite his apparent insouciance, Facebook secured enough capital to finance its business, turning it into one of the world’s largest companies. Facebook’s experience, however, is rare.
Most companies need to lay on the charm to get investors to prise open their wallets. When it comes to starting up a small tech business, having a good idea is the easy part. Financing that idea and marketing it is where many start-ups fall down. And geeks are not known for their social skills. Many struggle to come across well in the slick, fast-talking world of venture capitalists and angel investors. Esther Dyson, an American angel investor in tech companies, recently told peHUB, a private-equity website, that “it’s much easier to invest money than to attract it.” Those who do manage to get enough cash face another problem. All that time spent glad-handing businessmen and investors means the development of a product can stagnate. The geeks need to return to programming, error checking and developing, while juggling the composition of a commercial team from scratch. It is little wonder that so few ideas come to full fruition.
Young start-ups usually have had two financing options: hands-off venture capitalists that are willing to plough money into a company without rolling up their sleeves, or business incubators that are short on funds but wealthy in enthusiasm and knowledge. The Sandpit, a London-based entrepreneurial organisation, has come up with a third way by taking equity in promising start-ups, giving them a direct investment in their success. Founded by Simon Campbell, The Sandpit made its first big investment last year in SoDash, a social media-powered sales platform for companies that relies heavily on artificial intelligence algorithms to predict and track public perception of brands. The Sandpit put £125,000 ($200,000) into SoDash’s coffers, and provided staff and advice to the young company. Three months after partnering with The Sandpit an extra £120,000 of annualised sales to clients including RBS, Virgin Trains and Universal Music had been secured. SoDash won the PepsiCo10 competition, which highlights new technologies based in Europe.
Jonathan Grubin, head of product at The Sandpit, now splits his time between London and SoDash’s offices in Edinburgh. He explains that “Although we’re two separate groups on paper, we act and work as if the products are our own…we effectively become the commercial arm of the businesses we get involved with.” Because of their equity stake, it is in The Sandpit’s interest to see SoDash grow. Simply throwing money in (the old venture capital set-up) is seen as inefficient. The Sandpit wants real returns from its investment, and lends all the manpower it can muster to help achieve that.
A hands-on process is beneficial for start-ups. “Most entrepreneurs want to be plugged in to a network where they can get advice and help growing their business,” says Robert Scoble, a respected tech blogger once described as “a minor celebrity among geeks.” A personal touch is needed in order to succeed, with relationships that plug the monetary and expertise gaps that are bound to exist in nascent tech start-ups. That is precisely what the likes of The Sandpit provide.
Facebook was and is a rule unto itself. The rest of the world has to sweet-talk financiers into parting with their cash. Marketing is therefore all-important for start-ups. As Mr Scoble explains, “you have to be both good, and have a good bullhorn, to rise above the noise.”