How to prime your start-up for investment through Future Fund: Breakthrough, the £375m scheme to encourage private investors to co-invest with government in high-growth, innovative firms.
The UK is solidifying its role as a tech leader, but there is a risk that world-class start-ups could be missing out on global growth as they are sold to deep-pocketed foreign companies before reaching their full potential. Less than 4 per cent of Britain’s fastest growing tech companies have floated in London in the last two decades, largely due to Nasdaq competition.
To address these concerns, the Chancellor’s Budget unveiled a £375m scheme to invest in promising start-ups. The Future Fund: Breakthrough adds to the more than £1bn already invested by the government and should help pave the way for homegrown growth. Access to capital is one of the top reasons businesses struggle, and The Future Fund: Breakthrough recognises the innovation and job creation tech brings to the economy, while addressing cash flow and talent retention issues.
Future Fund: Breakthrough – 6 tips for tech start-ups
With applications led by established VC investors, how can start-ups prepare and stand out?
#1 – Conduct a business model assessment
You need to know where you are before pursuing funding and releasing equity. Tech start-ups must map out a comprehensive situation analysis of the business, including a thorough assessment of what is and isn’t currently working. Implement weekly tracking and measurement around key performance and business indicators. Metrics are going to be the key markers to not only measure your current state but also to help decide what to do next.
Forecasting can be tricky. For a view on the best way to move forward, work back. Based on the patterns of the last weeks and months, estimate where the organisation could be in six, 12 or 18 months. Build out a handful of scenarios with small margins for error based on reality and a range of potential outcomes. Forecast for sales, expenditure and cash flow and regularly retest assumptions before you commit to pursuing funding.
#2 – Get your financial house in order
Start-ups must be prepared to provide financial data, meaning systems have to be capable of providing that. Investors and underwriters will want to see solid debt-to-equity ratios, sufficient market capitalisation and predictable revenue and earnings streams. Cloud-based ERP systems help provide the financial data and insight to demonstrate a company’s standing. Plus, by reducing manual reconciliations and data entry, a company can scale more effectively as the business grows in volume or complexity. The ability to analyse past performance and forecast future performance requires investment in business intelligence and analytics. A good business management system helps provide robust reporting and analytics around the key performance indicators that investors will likely want to see.
#3 – Know your company’s story and how to tell it
Effectively articulating everything from product roadmap to brand identity and growth objectives is key to investors. It’s not enough to simply have a good story. It is critical that the company’s leadership can tell a compelling narrative and back it up with data. That means having leaders and communicators that are adept at proactively conveying the brand. Company storytellers need to be armed with financial performance and KPI information, and details about the target addressable market in front of them. They need to tell the company narrative in a way that attracts customers and convinces investors that they are buying in to something with the potential for growth.
#4 – Show your top performers and how to scale them
Similarly, investors want to understand exactly where growth will come from. Take the difficult, but necessary, decision to switch off product or service lines which are unlikely to deliver a healthy return within the forecasts you have set. This is also a great time to analyse your database to ensure customers are tagged correctly in your customer relationship management (CRM) system.
Subscription or licence-based offerings may be more appealing to customers and prospects than large, one-off sales. Consider promotions that ensure cash flow remains consistent. At pre-revenue stage, the freemium approach is commonplace to attract customers. Investors want to understand how you are monetising your products and services if they are delivering continued customer value.
#5 – Develop risk management capabilities
Introducing outside investment can force a company to be accountable to a wider range of investors should it perform poorly. Being able to see potential problems before they emerge may mean the difference between long-term success and relationships going sour.
While not needing to adhere to the same strict guidelines as publicly listed companies, organisations with external funding can adopt a similar approach, such as ensuring legal counsel have a strong voice and that there’s a policy in place protecting the company against the acts of directors, investors and officers. This means being able to respond when an audit committee or the board of directors asks about management expenses, approving major costs, cash access or forecasting. A good management system should provide access to real-time KPIs and automated rule-based alerts needed to identify risks before they become real-life problems between investor and investee.
#6 – Establish good governance
Investors don’t reflect kindly on organisations that don’t have the ability to effectively govern themselves. Those considering funding should establish a governance framework that keeps board members and executive management accountable. Compared to their public counterparts, many private companies don’t fully understand the importance that governance plays in long-term success, and for those that do make governance a priority, they often underestimate the time and effort required to establish it effectively. Post-funding, self-governance should not be regarded as optional, and each director and C-level executive must understand exactly how they relate to one another as well as to the organisation and its stakeholders.
UK start-ups have options and the government has identified they will be central to growth. The ability to adapt fast, make decisions quickly, and find creative solutions, puts start-ups in a good position; especially with additional funding to supercharge those plans.
It is clear that the UK government sees a bright future for UK tech businesses, but success will only be found by those willing to stay ahead of the curve. Taking these actions will help improve the odds of success.