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April 20, 2000

ENTERPRISE: Overcoming clients' first-contract nerves: CUSTOMER RELATIONS: Innovation, ingenuity or plain cussedness may be needed to survive the early days of a start-up's launch, says Amar Bhide

When Tom Davis started Modular Instruments, US maker of medical and research equipment, in the early 1980s, prospective customers - wary of placing an order with a start-up company - would ask: "When are you going to go out of business?" 

It is a reasonable question for the customer to ask, and the success of a new venture can depend on an entrepreneur's ability to dance around such queries. My research among US companies* suggests that the founders of new businesses usually have little to lose: they do not necessarily put up much capital or leave high-paying jobs. It can be their customers who bear the greater risks. 

Clients who commissioned Facter Fox, a newly founded US direct mail company, to undertake a campaign were risking not just the fees they paid but also the more substantial costs of printing and posting the materials. Similarly, if start-up supplier Advent Software had gone out of business, its customers' costs of switching to another supplier of portfolio management systems would have greatly exceeded the purchase price of Advent's software. 

Possessing a unique quality, however, helps exceptional start-ups overcome their "liability of newness". 

"We had no track record and no commercial office - I was running the company from my home," recalls Prabhu Goel, founder of Gateway Design Automation. But, for some customers, Gateway's technology made the risk of dealing with the start-up "small compared with the risk of not solving the problem". 

Unusually well-capitalised start-ups can secure customers by giving away their product, but more run-of-the-mill ventures, that lack a compelling product or deep-pocketed backers, must rely on other strategies. 

Many entrepreneurs provide special incentives, such as extensive customisation and free training, to early customers. George Brostoff, founder of Symplex Communications, recalls that the company's first significant order, from Mead Data, took about four months of consultative selling: "As we demonstrated our products we helped Mead refine their existing data network, so whether or not they bought our component, they would have an improved system." 

Another "special benefit" start-ups can provide is to do business with customers with difficult personalities or poor credit risks that other vendors avoid. 

"When you are new and cold-calling customers," observes Fred Zak of Venture Graphics, "the business that comes your way is usually from customers who can't pay the bills or shop only on price . . . they are the kiss of death - unless you are physically very big and ugly." 

About 40 per cent of his early work, Mr Zak recalls, came from "deadbeats". He would show up unannounced and make it so "nerve wracking", that they would "pay us off so they wouldn't see me again". 

Some entrepreneurs create perceptions of stability by adopting the outward manifestations of well-established businesses. Julie Wang, of Wang Communications, "learned to use 'we' instead of 'I' when talking about the company". David Packard has written that he and William Hewlett called Hewlett-Packard's first product the Model 200A, "because we thought the name would make us look like we'd been around for a while". 

Entrepreneurs "frame" the way they present choices to the customer in order to minimise perceptions of risk and to put the best face on their limitations. 

The founders of ICT, for instance, emphasised the value of "safe" IBM PCs that they bundled with Autocad, a Computer Aided Design software package from Autodesk. At the time, Autodesk was a 17-employee company; therefore, according to ICT co-founder Harman Cadis: "We didn't tell people that the software was Autocad." Instead they emphasised that their system was "based on a standard IBM PC. If ICT went out of business, customers could still keep the hardware". 

Implementing such strategies requires ingenuity. Although many start-ups do not offer significant product innovations, creativity in securing orders for otherwise undifferentiated products can be the key to success. 

Steve Belkin used creative ways to preserve a facade of stability at Trans National Travel. Mr Belkin and his partner started the company in Mr Belkin's apartment. To get around the problem of not having an office, Mr Belkin "always met people at the airport, said I was just leaving on a flight, then waited until they had gone before going back home". 

Among other skills, an entrepreneur must have the capacity for effective selling. In addition to all the other risks they carry, entrepreneurs must sacrifice their pride and sometimes their dignity to cope with unreturned phone calls, long waits in reception, and cancelled appointments. The customer, however difficult or unpleasant, must be served. 

*The author is associate professor at Harvard Business School and author of The Origin and Evolution of New Businesses from which this article has been derived. To order this book for 16.99 + 99p p&p, call the FT Bookshop on 020 8324 5511 or visit www.ftbookshop.com for free delivery. 

Copyright © The Financial Times Limited 
 

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