Incubators and beyond

How do start-up companies or established corporations make a success of business on the internet? ROBIN TYE, Partner for e-business consulting, explains to Nicholas Keith why PWC is uniquely positioned to help

New ventures usually need help in developing and launching their ideas, establishing their businesses, working through to profit, managing growth, and securing their financial base. This is particularly true in e-business and e-commerce, where ideas may be two-a-penny, but the right funding and support services are harder to find, especially after the dip in confidence in dotcoms since Spring 2000.

At present there are broadly two main types of e-business enterprise: business to consumer (B2C); and business to business (B2B), where PWC is increasingly focussing its attention. There are also two kinds of e-business entrepreneur: start-up dotcoms, and established "dotcorps" (where corporations are taking an entrepreneurial e-business interest).

In the case of the start-up dotcom entrepreneur, there are a series of hoops to go through once an e-business idea has been formulated. After launch funding from family and friends, business angels or venture capitalists (VCs), the entrepreneur is likely to need more capitalisation and other resources to nurse the infant company to success.

So the entrepreneur may look at bringing in an incubator company. What is an incubator? There are large numbers of them, but there are very few which match the full service which PWC can offer.

A full-service incubator like PWC will offer a range of services in addition to funding - office space and facilities; refinement of products and processes; recruitment; legal services; tax and accounting advice; technology development; graphic design; identifying customers, marketing, and branding; and corporate organisation. These services are provided in exchange for equity.

"Commercial incubators have a mixed history," Robin Tye added, "partly because some of them have not been around for very long; partly because they may offer only a limited service; and partly they may be looking for an exit from the incubatee. But PWC does not have any of those constraints. Our full service goes through incubation and well beyond. We focus on e-businesses from the early phase of incubation, when the egg is being hatched, and then provide a full service to all our entrepreneurs to ensure successful growth and maturation of that e-business."

When you are looking for an incubator, Robin Tye itemised three requirements:

"First, you need an incubator who knows your industry well. Being a global firm, PWC have developed international expertise in all industry sectors, and so we can add value accordingly.

"Secondly, you need the incubator to be global because internet entrepreneurs want to build an instant international operation. Perhaps there will be a regional phase in step one, but that quickly needs to become global. You need global reach and PWC have 160,000 staff in 150 countries.

"Thirdly, you need to find an incubator with a full service and a history of working with high-tech, high-growth start-ups. PWC have had that for 20 years or more, from our association with high-tech, high-growth entrepreneurs in places like Cambridge and Reading, and all over the world.

"On top of that technological capability, PWC add their breadth of other services, such as marketing, branding, accounting, legal advice and so on. The entrepreneur who runs a dotcom company does not have the time to coordinate the 20 or so sets of skills which our service provides."

The start-up funding process
As Robin Tye explained, "For a start-up company there is a typical funding process, Initially, funds will come from the founder, and friends and family, who will provide the seed capital to develop the entrepreneur's business proposition.

"Secondly, a business angel (or more family capital) will be needed to invest £200,000 to £300,000 to provide three or four months for start-up. The angel will be an individual of high net worth, who invests in sectors which he knows and expects to add value by giving knowledgeable advice to the business in which he has invested. In the first three months the new venture must:

• develop a well-thought-out business plan
• start trading
• put its management team in place.

"Then the start-up will need a first round of funding from a specialist VC, say for £3 million or more. VCs may or may not offer much help other than funding; and, since the downturn in dotcom companies, they are much more choosy. A second round of funding will follow, maybe for £10 million, to cover the second six months of trading

"In the second year the new venture gets into accelerated growth where the company is looking to expand, to get more customers, to refine the business model and to drive towards profitability. The B2B start-up would aim to be profitable by the end of year two. Making a profit by the end of year two is more credible in business terms for B2B than in the B2C model.

"However, the challenge of growth is still a major problem for start-up B2B companies," Robin Tye said. "Technology businesses have their own style and they may find themselves growing at 2000 per cent or more - where growth of 20% would be exceptional for a traditional bricks-and-mortar company. The question is how to manage that growth without going to pieces; how to keep pace with recruiting, training and managing new faces in the team.This can be a nightmare for start-ups, but this is where PWC can help with 30 years of useful experience of working with entrepreneurs in high technology."

Securing the financial base & strategic partners
"In years two and three, the dotcom founders will want to secure their financial base, either through a public offering or a corporate sale. The majority of European B2B entrepreneurs are probably not looking for a quick exit, but they want to stay with their businesses.

"At this stage they will need strategic corporate partners. Indeed there is no reason why they should not have multi-corporate owners - and they do not have to make a public offering. The ratio of trade sales to IPOs is likely to be 14:1.

"Should the strategic partners be competitive or complementary? How will the relationships work, wherever the strategic partners come from? The process of getting agreement can be long and difficult And corporate partners will bring to the party more than just finance; they will be customers of the new venture and may offer content or other services. [The issue of strategic partnerships is extremely complex, and the subject of a separate article]."

Corporations and e-business
Another new development in B2B ventures is the increasing number of corporations which are becoming involved in launching their own e-businesses. "Previously, PWC advised more start-up dotcom companies than corporate entrepreneurs," Robin Tye said. "Now it is the other way around: and in six months I expect the corporate clients to outnumber the dotcom start-ups by 5 to 1.

"The corporates got into e-business first as a sales channel, and for international e-marketing. Now they are setting up new e-businesses in B2B, and levering up new brands or creating new assets. While corporate ventures are better funded than start-ups they will still look to incubators for help. For one thing, they must consider whether to build the e-business as a division of the main company - this is known as 'bubble in'; or away from the main site (called 'bubble out'), where an incubator will be a valuable partner. As a general rule, innovation in a corporation is better the farther it is away from head office.

"The other area where PWC can help corporate entrepreneurs is in knowledge transfer. Corporations are frequently approached by start-ups who are looking for partners. This is new and, if you are a corporation and you are approached, how do you know what to do? How do you choose one entrepreneurial start-up from another? This is where a full-service incubator like PWC has a clear role.

"At PWC we have 30 years of experience in establishing processes and procedures for vetting and cementing strategic partnerships. This is knowledge and experience which most other incubators simply do not have.

"If dotcoms are looking for advice and support, they have to talk to people who have done it. Unless you as an incubator have done it, you don't have anything to say. This is a practical problem and we are talking about real-time action on many fronts."

Conclusion

The PWC incubator service is built on the four pillars of deep industry knowledge, global reach, full service, and technology know-how. "While we have big clients, we have also earned our spurs in dealing with start-up entrepreneurs at the coal-face of business life," Robin Tye emphasised. "The new internet business is entrepreneurial, whether it is coming from big corporations or small start-ups.

"We have 20 years or more experience in the high-tech, start-up world, and our full incubator service is worldwide - from Singapore to Toronto, and from Stockholm to Tokyo. At present a lot of our work is in the European market, which is growing fast, but we have had plenty of experience in the US, where we are fully involved as consultants.

"We have a long history of being involved with entrepreneurs. And our full incubator service allows us to play a valuable role in e-business, where the technology of the internet is enabling new business forces to come through and succeed."

Note: Article first published in PricewaterhouseCoopers' customer magazine, "Creating Wealth - in the Digital Age"