Innovative Success: Role of Funding, Revenue, Time to Market

2018-04-17T10:44:40+00:00 01-27-2013|

A European to US Comparative

Successful global growth of ICT, Medtech, green tech/sustainability and consumer product innovations (as a result of great creative minds, research, academia and public support) can be the future for many European economies.

However, sustainable growth requires more than a product idea. It demands skillful commercialization to drive customer adoption and revenue generation. Funding ultimately comes from profitability but during the ‘startup period’, investment is needed to build the solution and acquire initial customers. The source of the funding, the process for attainment of customer commitments and time to market is often quite different for European compared to US companies and entrepreneurs.

European Innovation Path to Market

In European, having a great innovative idea is often followed by a lengthy ‘fundraising’ period. The entrepreneur spends time (the most important and irreplaceable resource) building, refining and delivering investor pitches and completing applications for initial public funding.

If attained, the first seed capital is used to finance product development. Since perfecting the product before it is ‘customer ready’, may take more time than expected, many entrepreneurs need more funding round before beta customers (and revenue) are secured.

Each fundraising round can deflect the innovator’s focus from market development and potential customer, channel and team acquisition. Therefore, for many European companies, three or more years may be required to move from idea to beta customer acquisition.

The path to Market (European):

  1. An entrepreneur or innovator within a company has a great idea
  2. Fundraising – investor presentation developed, pitched, discussed
  3. Product development
  4. Additional fundraising for finalization of product and customer acquisition
  5. Beta customers and product refinements
  6. Fundraising for market entry
  7. Revenue generation
  8. Profitability of sales/operations or additional fundraising to support growth

Depending on the level of seed capital previously raised, additional funds may be needed to address the needs or requests learned from customers in the beta or to support market entry. When the product is deemed ‘ready’, marketing activities and customer development begin. With the business model and market variations, significant customer revenue can be anticipated at the end of a 6 – 12 months ‘sales cycle’.

Therefore, considering the time required for fundraising, product refinements, and the sales process, successful revenue generation is often three, four or more years after the idea is conceived and the ‘startup’ process is initiated.

In rapidly evolving markets (such as ICT, MedTech, Greentech and consumer products), changes in customer needs and the entry of new competitors through this three to six-year period, can impact or obliterate the original opportunity. In fact, each month between idea and launch impacts success.

If the need and position for the innovation remain viable when the innovator is ready to ‘go to market’, then the customer, market and team development required to fully leverage the opportunity can be costly. Hence additional funding may be required.

Due to the time, effort and ongoing funding required over 3-8 years, over 90% of great innovations in European never make to market. For those that do, more challenges await as they must accelerate revenues quickly and deliver profitable growth to provide investor return.

As WeVideo, bMobilized, Meltwater and Opera Software have shown ongoing success is possible and as demonstrated by Tandberg, Playfish, FAST, Falanx and others, a lucrative exit can be achieved. However persistent, commercialization skills and patient investors are critical requirements

US Innovation Path to Market:

In the US, speed and timing are often the greatest determining factors for the success of an innovation. By reducing time to market and accelerating customer and revenue attainment, US innovators have achieved a 25-40% success rate for bringing new solutions into the market – within 1-2 years from conception of the idea.

Instead of using valuable time seeking initial seed capital, many entrepreneurs and or founders start by ‘self-funding’ through personal savings, bank loans (including the second mortgage against property) or contributions from family. (Ultimately self -funding improves the chances of gaining angel or VC funds – as it demonstrates the founders’ belief in the concept and market opportunity).

During the first year of product development, the entrepreneur and team members may share aspects of the new product concept with colleagues and potential customers. Through this, they will gain feedback and ‘emotional involvement’ or commitment to future use/purchase of the solution.

After validation of the concept (often six to twelve months after ‘startup’), the team may seek additional capital to fund product and market development costs. This is often through ‘friends, family, and fools’ – ie investments from people who know the founding team and believe in the concept and market potential. At this point, known angel investors can be approached and crowdsourcing or Kickstarter campaigns are launched to the entrepreneurs’ network.

Funding received from these efforts will be used to finalize the product prototype and move into the beta test – with initial market feedback and seed funding.

The path to Market (US):

  1. An entrepreneur or innovator within a company has a great idea.
  2. Entrepreneur or team provides initial funding from savings, loans or contacts.
  3. Product development and customer feedback.
  4. “Friends, family, and fools” investment sought / crowdfunding or Kickstarter campaigns initiated.
  5. Beta / initial customer attainment and commitment.
  6. Fundraising – investor presentation developed, pitched, discussed – to support broader customer, partner, and team acquisition.
  7. Market launch.
  8. Revenue and profitability growth.

After initial customer commitments and beta results are in place, the innovator is then positioned to approach ‘institutional investors’ ie angel networks or venture capital companies to fund the expansion of customers, partners, and the team.

US investors will ask for the demonstration of customer commitments and revenue forecasts, as well as a strong business plan detailing the expected return through profitability and/or potential exit (within 2-3 years of investment). If funding is received, the investors will expect strong 100-300% monthly revenue growth and breakeven profitability within one year of investment.

If the US the innovator/team does not attain or chooses not to pursue outside funding there is an alternative. Since they have a working solution and customer commitments, they can continue to ‘bootstrap’. This may mean a slower pace of growth funded by revenue instead of outside investments. For some entrepreneurs, this ‘customer funded’ approach is desirable as it can allow them to retain control of the company and share ownership.

Conclusions and Observations:

Next Step’s experience has shown:

  • European innovators start with and have greater dependence on investor funding than US companies. Less capital is raised through more small funding rounds earlier in the life of the startup.
  • There are distinct differences in focus and time spent seeking investment, product development, and market feedback. The European entrepreneur tends to put much more time into raising capital and product development which can often slow time to market. European average time to market is 3 -8 years versus 1-3 years in the US.
  • US companies accelerate time to market and revenue generation through gaining feedback, validation and customer commitments for the solution during the development process. This increases success while reducing time to market.
  • Investor expectations for revenue growth, profitability and time to exit are much greater in the US – more capital is available but at a higher ‘price’. Success rates for innovations funded by institutional investors in the US are higher – 10-25% of funded companies deliver strong returns.
  • Sustainable success requires a great product/solution innovation and customer adoption and revenue generation to ultimately fund growth.

These differences were demonstrated through a recent study conducted by Next Step to analyze the investment, revenue and profitability performance of twenty European companies (ICT, MedTech, Greentech and consumer products) compared to similar US-based companies. Despite gaining more investment funding, the revenues and profitability of the European companies (including mid-size companies Opera Software and Moods of Norway) were significantly lower than the results demonstrated by comparable US companies.

For a white paper describing this study, please contact Next Step European on 902 30 9802 or Marianne Kuhn on [email protected]