Investing in Engineering Startups

By : Jim Pinto,
San Diego, CA.

Many technology startups are founded by engineers. But, the management team should include marketing, sales and finance. Investors look for a good balance of innovation, planning, drive and experience.

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Check out, July 2004

Many technology startups are founded by engineers. But, they seem to quickly run out of steam if there is no management team – including marketing, sales and finance. Investors look for a good balance of innovation, planning, drive and experience.

Creeping elegance

Engineer founders are notorious for becoming so enamored of their products, that they keep developing increasingly better features, without first selling the more-than-adequate initial products. It’s called “creeping elegance”. I know; I used to practice it. I’m an engineer, so I write from experience.

As an angel investor, I have seen small engineering companies go off the cliff into bankruptcy, simply because the founder was spending all the money on tweaking the product, rather than selling it. And it’s usually a product that the engineer "thinks" the customer should have, not what customers have actually asked for. The company publishes an expensive brochure, which describes in great detail all the wonderful features – in language that most customers don’t even understand.

I have seen too many software company founders give me long demonstrations, from which it is hard to escape. Clearly this guy developed the software and knows how to hit Control-C, Alt N and Shift-G when needed. And, if I didn’t make excuses to exit, the demo would have lasted a long time, treating me to endless, “amazing” features.

Good products must include only the features that customers want, not endless tweaks that delight the engineer and confuse everyone else.

Marketing & Sales – FABS & FUDS

This is where good Marketing comes in – finding customers, and filling their needs. It’s important to have things that have been specifically requested by customers – not just features that are imagined by engineers. Good marketers keep examining the FABS – features, advantages, benefits.
  • Features: Specifications, characteristics, size, shape, packaging, etc.
  • Advantages: Improvements over alternative ways of doing the same function.
  • Benefits: In consumer markets style and fashion may be benefits. But, in the business world there is only one central benefit – saving money. That does not mean just product price. Benefits include features and advantages that save money over other ways of doing the same functions.
Good marketing recognizes that features and advantages that provide no benefit should not be included as “standard features”. They might be included as options, at additional cost; let the customer decide whether it’s an additional benefit.

Next, equally important, is Sales – approaching target customers and convincing them to buy the product over many other choices. Good Marketing is relatively useless without Sales drive. Marketing may identify the type of customer – Sales has to find the customer, demonstrate the products, overcome objections and book sales. And that’s not easy – a sale is not a sale till the customer is satisfied, pays the invoice and buys again.

Good Sales people use the FABS to sell. Not-so-good sales techniques include negative selling – called FUDS:

  • Fear: Inserting false urgency – "Without this product, you'll be falling behind." "Buy now or you’ll lose the discount"
  • Uncertainty: Bringing up FABS that are beyond the customers understanding.
  • Doubt: Criticizing the competitor’s FABS; giving the customer negative feelings about not buying.
Just a touch of FUDS may be in order, before losing a customer. It's fine to show product comparisons against competitive products, but it must be factual. Outright negative selling makes customers uncomfortable. Good salesmanship should clearly understand the difference.

Teamwork wins every time

When I invest in a startup, the first thing I ask is – where is the team? I look for a balance between all the key functions. If there is no team, I quickly look for an exit. If there IS a team, I look for teamwork – people that complement each other, and are not dominated by one function to the detriment of the others.

If the founder is an engineer, I quickly turn my attention to the Marketing chief and ask, “Who needs this?” I look for a reasonable analysis of the markets and competitors. Is the market big enough or just a small, specialized niche with limited potential? There must be a sensible view of market-size and growth-rate. And I look for a dynamic and enthusiastic Sales driver who has broad experience with generating bookings.

What about the product price? If it's the cheapest, I get suspicious. Often the pricing is artificially set to be lower than anyone else – which is NOT reasonable. I look for the REAL advantages, to find out whether customers would buy this product even if it was twice the price.

And then I look for some financial savvy. Up to date measurements are important. A long time ago, as a budding entrepreneur, I went to see Bill Hewlett, the engineer-founder of HP, who told me, "Understand the numbers; if you can't measure, you can't control."

In an engineering startup, the financial person can be part-time; a good CFO can come later, when strong growth is under way. I look for the books to be kept up to date, not months behind. The founding team should have the ability to execute for the first few years – that’s when most startups fail.

More on the topic of developing engineering leadership in future articles. Stay tuned…

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Copyright 2003 : Jim Pinto, San Diego, CA, USA