What Drives the Growth of New Hi-Tech Businesses?

Tim and I are on the road for a few weeks at the moment. I think Tim is in Rome and I am at the Judge Business School at Cambridge University. Judge is a very large business school and is usually placed in the top 10 of any business school ranking. Just for this week, I am a guest of the Centre for Business Research, directed by Professor Alan Hughes.

Judge Business School: Cambridge University

Alan’s research group has been highly influential in shaping the agenda around innovation in the UK. I have written about some of their work that dispels some of the sacred myths surrounding innovation. Many of their findings are controversial but the quality of the research is first class. Despite the the mounting evidence of how innovation really happens, Alan says that he finds himself repeating the basic messages.

One of these important messages is that customers are a major source of innovation. We know this is true in many industries such as food manufacturing and sporting equipment but what about the high-tech industries such as life-sciences and IT?

In a major report from the Centre for Business Research, David Connell and Jocelyn Probert find that customers play an important role in getting hi-tech startups off the ground but the way that it happens is different from what most people expect.

Starting a new hi-tech business is risky and start-up capital is hard to find (even in the UK). In the Cambridge area where there are hundreds of hi-tech businesses, many of these started as ‘soft companies’. Rather than produce hard products they initially undertook highly customised work for established clients. These small consultancies are often the seeds of new companies but are easily overlooked.

The biggest advantage to the soft company model is that the cash flow ‘valley of death’ is much shallower and management skills can be developed over several contracts as the business grows. Without the need for venture capital these businesses can control their own direction and take advantage of opportunities as they see fit.

The key to the success of the soft company start-up is being able to access leading customers but often the founders of the start-up are also previous employees of these customer companies.

Again, this finding is another nail in the linear innovation model where an idea starts in the head of a tech expert. The soft-company start-up is a valuable business model for entrepreneurs and one that governments should do more to understand.