Royal Academy of Engineering Enterprise Hub: The Entrepreneur's Handbook

STAGE 4

How to grow the business

Image: © This is Engineering

In Stage 4

Corporate administration

At this stage in your journey, if cashflow is sufficient, you might be looking at hiring managers to take care of expanding responsibilities in areas like human resources, IT and finance. You will have considered these topics earlier in the journey, and it’s now time to implement them.

IT and finance systems

Essentials like a website and payroll should already be in place. In addition to this, you’re going to need to register for VAT, purchase licenses to the various software packages your company will use and then look at financial obligations. You will need to register as an employer for PAYE (Pay As You Earn) and NIC (National Insurance Contributions) in relation to your employees, more information on which can be found on the HM Revenue and Customs website. To do all of this, you’re going to need to implement appropriate bookkeeping and accounting support to ensure you’re fully compliant with current legislation. In short, seek advice.

Human Resources (HR)

Until you have a dedicated HR manager or equivalent service, you’re going to have to make yourself aware of all relevant government regulations that exist. It is recommended you compile a company handbook comprising all your policies and procedures, and a workplace pension must be in place. One extremely important area that must be implemented and policed will be your health and safety policy. The law places responsibility on organisations and employers, which means directors can be held personally liable for any H&S breaches. More information can be found here.

Plans for ongoing recruitment will also need to be considered. This process can be time-consuming, expensive (if you use a recruitment agency), and even more expensive if you get it wrong with a bad hire. Be sure to include a submission deadline in your adverts, which many of our awardees neglect to do. Many applicants wait until the last minute to submit, so you must instil a sense of urgency within them.

As a small company, you can’t compete on pay and benefits, and can only offer so much equity. Instead, compete on company culture, impact, and an inspiring vision. To establish the desired culture, some leaders participate in the interviews for all of the first hires, and design the interview to test culture-fit rather than just skills. You’ll need an onboarding process for new hires to get them up to speed quickly – with your small size and low cashflow, you need them to become productive team members quickly.

Image: © BP

When it comes to recruitment, as a small company you can’t compete on pay and benefits. Instead, compete on company culture, impact, and an inspiring vision

Insurance

Any new company is going to have to consider taking out insurance to protect against the impact of loss or damage to assets or liabilities incurred through daily operations. Investors may insist certain insurances are in place prior to their investment. There are certain types of insurance (such as employers’ liability) that are compulsory for any business, and there will be a handful of others that investors might insist you have in place depending on your sector. Examples include public liability insurance, equipment insurance, buildings and contents insurance, goods in transit insurance, product liability insurance and so on. More information on insurance types and providers is available here.

At an early stage, you will want to compile an inventory of assets and areas of liability exposure, seeking guidance from a professional regarding an appropriate level of protection given your situation.

Three core insurances you will be expected to have include:

Key Person Insurance – covers the costs of incapacity, illness and death of essential team members such as a CEO, founders or key researchers. Often requested by investors.
Employers Liability Insurance – protects against claims from employees for accidents and sickness suffered as a result of working for you, or on one of your sites.
Directors and Officers Insurance (D&O cover) – Protects directors and officers from loss resulting from claims made against them in relation to their duties in their roles. Any company director will want this to be in place.

Personal tax matters

It is important to understand HMRC are likely to consider the shares you acquired at spinout to be a benefit by reason of your employment, and therefore subject to income tax if their market value rises.

It’s also worth noting that the value of IP transferred into the company is essentially ignored on the basis of a Researchers Tax Exemption. Talk to your TTO and tax advisors, as they can assist with how best to set up the company. Getting this wrong can be very costly to you personally.

Company tax matters

The company you register is a separate entity to you as an individual, and it will need to pay tax on its profits. These are calculated from a self-assessment tax return, which you must submit within 12 months of the end of your defined accounting period. When starting out, the allowable expenses of the company may be more than its turnover; it will effectively have tax losses rather than profit, and no corporation tax will be payable.

R&D tax credits may also be available to research-intensive companies paying tax in the UK. There is also Patent Box, which can offer tax breaks for companies commercialising patented inventions, as well as a range of other available schemes. This is another area in which you will benefit from (and should seek out) specialist tax advice.

Share options / Options pool

This is where you set aside a certain number of shares, and define rules governing how employees can buy or earn a specific number of shares at particular points in the company’s life. Examples might include after working for the company for a set period of time, achieving a particular goal, or at point of sale or exit. These can be used to either entice new senior employees to join you, or reward existing employees for good performance.

This can be a good method to break equity stake deadlocks between academic founders, who often expect to receive equal shares but are not necessarily committing the same amount of time to the project. Asking everyone to take 5% less and allocate the remainder to an option pool (to be earned for reaching specified value-creating milestones) can be more agreeable than a direct request for them to reduce their stake and allocate it elsewhere. Options pools won’t dilute the existing shareholders’ stakes if you bring new staff on board and give them shares, as those shares had already been earmarked.

“One of the largest challenges is to find C-suite managers that bring commercial skills into the business to drive it forward and get the company to market. This is why efforts should be placed on finding these people. A large options pool should be put in place for these hires, so that they are able to work in the business from an early stage. Exploring interim roles is also a possibility.”

VC investor

“Academics typically (not always) assume that the tech will sell itself. They forget that the best idea in the world still requires sales and marketing activity, and that the market will also often accept products that are not "perfect". There is a lot to be said for putting a product on the market and seeing what happens.”

Angel investor

Sales and marketing

Selling is a skill, and like all skills, it takes time and practice to become good at it. As an academic, you are likely used to collaboration and the free exchange of knowledge, so the mindset of only releasing your knowledge for payment is potentially unappealing. However, this is a mindset you must embrace. It’s highly likely that the initial sales will be made by the founding team members, rather than sales professionals who you are yet to hire, so you need to learn the process and become comfortable with it. Additionally, if you understand the process, you will be better able to hire the right people and know how to manage them.

A classic error we often see academics make involves taking their objectively better product, and significantly undercutting the competition with the intention of capturing a large section of the market. This massively reduces your potential for profit and shows a complete lack of commercial acumen. If it truly is better, why sell it for less than the customer has demonstrated a willingness to pay, or deliberately make less profit? Less profit means you grow more slowly and deliver your product to fewer customers, reducing your impact. This may seem greedy to an academic used to the free exchange of knowledge, but it’s a change of mindset you may have to make to succeed in business. Investors will certainly see this approach as a potentially fatal flaw.

To market, to market

Before you can even start selling, you need to engage in marketing. While few people say they like being marketed to, the reality is you have probably heard about almost every type of product you’ve ever bought before you bought it – even if you ultimately bought a different brand. If you ever wondered how a company with an objectively worse product is still in business, it may well be good marketing.

Marketing is a fairly broad term whose most obvious component is advertising, either through paid promotion or passive advertising via a website. As few spinouts have the funds for an advertising campaign or marketing team, a good website clearly articulating what problem you are solving (and for whom) is a great way to start. Even if you don’t have a product ready to sell yet, give potential customers a way to get in touch or register their interest. Not only will this give you a contact list once you’re in a position to start selling, it provides great validation to investors that people are interested and seeking your product out. Potential customers lining up for more information is much better proof of a product’s desirability than you saying it’s desirable!

Sales involves related areas like contracts, supplier management, manufacturing, aftercare, customer management, returns policy, user-manuals, training and learning from feedback. Each of these stages costs money that will influence your sales price. It’s a complicated world in and of itself, and you should look to hire an expert fairly early on in your journey. Be sure to examine what you learned during your market research, proof of concept and customer engagement activities. They will all feed into your approach, which will be different for each market and generally evolve over time.

Image: © This is Engineering

As few spinouts have the funds for an advertising campaign or marketing team, a good website is a great way to start. Even if you don’t have a product ready to sell yet, give potential customers a way to get in touch or register their interest.

“My more successful companies bootstrapped, so one lesson would be to think carefully what investment is needed and for what, and is there any way of getting customers to pay in advance.”

Academic entrepreneur

Growth

The growth phase of a company is very different to starting up. We won’t cover it in any detail, except to say that as your business grows in size and reaches new markets, the skills required at management level will change. It’s important to understand you will need to move people on, and bring in new staff according to the demands of the business.

Business skills differ from research skills, so once the initial founding team is confirmed, future appointments should be based on identified skills gaps rather than simply drawing from the wider research team. This may include the evolution of your own role and position, according to the needs of the business. Bearing this in mind is important throughout your journey; there may come a time when it’s right for you to take a step back for the good of the business.

“Get a good mentor – someone who has done it before, has lots of experience and is prepared to meet with you regularly, say every couple of months, for a proper sit down and a look at what you are doing.”

Academic entrepreneur

Image: © This is Engineering

The growth phase is a good time to reconsider any mentors you may have as well as the makeup of your advisory board – does is still contain the right mix of skills and experience for this phase of the journey, and are they all fully engaged.

The top tips we’ve identified for building your team are:

Don’t work alone. Use your network of partners, mentors and coaches to help you find a team.
Carefully consider the chemistry of your team and their complementary skills. You don’t want a group of people all good at the same things, such as all academics.
Hire the best talent you can. This will cost money, but so will an unproductive team.

“Get as much help as you can. Be determined. Have faith in yourself. Take all advice with a pinch of salt. De-risk to create value. Try to be realistic about timeframes and resource requirements. You must ensure that there is a market for your product, but ultimately when you are pre-revenue, you will be judged on how far you are on the product development journey. Take as much free stuff as you can. Hire people – they are the best. Good luck.”

Academic entrepreneur with three fundraisings of over £3.9 million

Customer engagement

This ties in closely to the work through early customer engagement, sales and proof of concept, so we won’t repeat those ideas. The key point is to keep an open mind, gather data and feedback wherever you can, and be prepared to pivot the business accordingly. This is where you learn what is valued by your customers about your product; what marketing, sales and aftersales processes are effective; and if there is a viable business here.

This feedback influences the product development roadmap – not your own ideas of what the customers should want. Unlike many of the activities described in this guide, this one will be a permanent feature of the business – you should never stop engaging with your customers. The data gathered here will be crucial in any fundraising attempts or growth strategies. It’s never too late to change the direction the business is heading in if that’s the best course of action – if a different market, use case or technology is identified.