They were set up by people who saw an opportunity, trusted their gut instinct and went for it.
Sage, the software company where I used to be chairman, was not founded by a technology guru but a marketing man in the printing industry, David Goldman. He used a government grant to pay for a visiting US professor to write him a printing, costing and estimating package.
Once this was developed, he decided to sell the package to other printers with limited success. However, a few customers had enquired about a simple accounts package, so David asked a young graduate from Newcastle University to write one for him. He then raised £250,000 to promote his new product.
Now you might expect that the company suddenly took off and the rest is history. Not a bit of it. Six months later the company was almost broke and morale was low. But then the most unlikely of heroes sprang up – the ubiquitous Alan Sugar and Amstrad’s first really cheap PC with a price tag of £499.
Goldman saw the product and within six weeks he launched a £99 accounts package – trusting his gut instinct and betting the whole company’s remaining cash plus a lot of his own to boot. Just how successful it was I can only describe as having to climb over mailbags of letters with £99 in them. Sales took off from £2,000 per month to £100,000 and all at a wonderful 98 per cent gross margin.
None of this proved to be the key to the company’s success. The clever part was when customers started to ring with questions on how to operate their software. Instead of giving their support away for free, David charged for it. That was unusual at the time as even Microsoft gave support away for free.
That started the beginning of Sage’s emphasis on installed base revenues – an absolute key driver in their success to this day and a great business model.
What Sage did was more than just pay lip service to their installed base revenues – they went the whole hog. Normally companies always treat their new sales teams as heroes with smart cars and lavish “top 100” sales events in some exotic location.
Not Sage. They appointed a separate MD for installed base sales and located the team in a different building. Critically, they paid the same salary and bonuses as they did to the new sales team and gave them the same marketing budget. Today Sage derives some 80 per cent of its revenue from installed base sales to existing customers.
At this point, Sage was still a UK-centric company with a market capitalisation of about £40 million. Our next step was to acquire companies all over the world and we were extremely successful. This was because we recognised early on that accounts programmes are not the same in each country. In other words we didn’t try and sell our software to other countries; we went for indigenous know-how and acquired.
Similarly, we were amazed by how many companies we came across which had lousy business models with no focus on installed base revenues, and a product rather than market led sales strategy.
A great example was Peachtree in the US. It had over one million active customers that we bought for $140 million. They made no money as they were always trying to compete with Quickbooks.
In reality they were in different markets and within 12 months we had an operating profit margin of 18 per cent which translated into an acquisition multiple of less than five.
Not every company will achieve this growth, but I can’t stress how important it is to be alert to what is happening in the marketplace. There will come a time when sales dry up and you’ll be at your wits’ end. One of my companies sold banking software and following the credit crunch sales dried up for six months. We cut executive salaries for this time, put money in and all personally guaranteed a large bank loan. We survived and this year we are hoping to £2 million profit on revenue of £10 million.
There is no formula to making a success of your business, except to show a constant willingness to adapt and embrace change.