From pilot project to commercial contract

There is a particular form of purgatory familiar to many technology founders.

Their company has a successful pilot with a major institution.

Everybody likes the product. The presentation went well. The innovation team is enthusiastic. There may even have been a joint press release.

But there is no commercial contract.

Months pass.

Another meeting is arranged. A further use case is discussed. Someone proposes extending the pilot.

The technology appears to have succeeded, yet the business is no closer to meaningful revenue.

Why does this happen?

Usually because a pilot has been treated as the destination rather than as part of a commercial process.

A good pilot should answer a question.

Can this technology reduce the cost of a particular process?

Can it identify fraud more accurately?

Can it reduce the time required to complete a compliance task?

Can it improve the experience of a particular group of customers?

The question should be specific enough that both supplier and customer can agree in advance what success looks like.

This sounds obvious. In practice, many pilot projects begin without clear success criteria.

That suits everybody initially.

The customer can experiment without making a significant commitment. The start-up can add the name of an impressive institution to its pitch deck.

The problem appears later.

If nobody agreed what would happen after a successful pilot, a successful pilot does not automatically produce a buying decision.

Founders need to think about this before the project begins.

Who owns the budget if the test succeeds?

Who has authority to sign a wider contract?

What procurement requirements will apply?

Will information security need to undertake a separate review?

Does the customer need evidence from operational risk or compliance?

How long is the likely contracting process?

Most importantly, what event converts the experiment into a commercial deployment?

These questions may feel premature at the beginning of a relationship, but they are precisely the questions that distinguish a commercial pilot from an interesting experiment.

The founder also needs the right internal sponsor.

Innovation teams can be extremely helpful in introducing new technology into large institutions. But the person who champions the pilot may not control the budget that would be required to deploy it.

The strongest pilots therefore involve the eventual business owner from an early stage.

This is particularly important in financial services, where the transition from testing to deployment can introduce additional requirements around resilience, governance and third-party risk.

As financial institutions become increasingly dependent on external technology providers, regulators are paying closer attention to those relationships. The FCA notes that firms need a comprehensive understanding of third-party dependencies supporting their important business services.

That means a pilot needs to prove more than functionality.

The supplier may also have to prove that it can operate reliably at scale.

This is why I believe early-stage investors should pay close attention to pilot conversion.

A company with twelve pilots and no commercial deployments may be less advanced than a company with three pilots, two of which converted into multi-year contracts.

Activity and progress are not the same thing.

At Rosary Capital, we are interested in the path to repeatable commercial revenue.

When evaluating an early-stage business, we therefore want to understand not merely who is testing the technology, but why they are testing it, what success would mean and how the customer would buy it afterwards.

The same principle should inform how companies use their capital.

It is easy to spend money generating more pilots because the announcements create momentum.

Sometimes the better investment is strengthening the business so that existing pilots can convert.

That might require a security certification, additional integration work, an experienced enterprise salesperson or somebody who understands financial services procurement.

Those investments are less glamorous than announcing another partnership.

They may be considerably more valuable.

There is nothing wrong with experimentation. The financial services industry needs environments in which new technologies can be tested safely, which is why initiatives such as the FCA Regulatory Sandbox and Digital Sandbox are useful parts of the UK ecosystem.

But for an entrepreneur, experimentation ultimately has to lead somewhere.

The purpose of a pilot is not to prove that a large institution is interested in your technology.

It is to establish enough evidence and enough confidence for that institution to buy it.