What advice would you give to Founders looking to raise funds in the current climate and what Terms should they focus upon?
Founders are naturally wary of lower valuations in the current climate, but this market reset should not spook early stage businesses. For SMEs that are hopefully years off an exit, valuations are not the ultimate mark of success and should not be overly embellished. With future financing, valuations will likely increase, and an accurate number will reduce the likelihood of a later down-round.
Attracting financing is crucial for any startup looking to grow, but founders should also take the opportunity to carefully select investors who can help guide their business and realise their vision. It’s a two-way street.
What do you see as the key pitfalls that can sink a startup?
All successful businesses meet the demands of a large enough group to form a core customer base – be it on the enterprise or consumer side.
Most startups fail to appreciate the lead time needed to attain those customers and overhype the addressable market they are targeting.
It’s always important to have a clear plan to scale that has been communicated to staff and investors. Otherwise, startups might grow their customer base far too quickly, overextending their team and marring their reputation, or ‘overhiring’, which burns through their funds.
A clear growth strategy is therefore pivotal. We have often seen companies try to do much too soon – always best to prove out one vertical and then take on the next.
Will the mounting pressure to focus on profit lead founders to increasingly pursue a short-term strategy? Patience or speed?
During negative economic cycles, there’s often pressure for startups to rapidly become profitable as founders and investors look to weather the storm. Although profit is important, there is little purpose in short-term profitability if it is not sustainable. In fact, a future drop in revenue may do more harm to a company in the long run.
Investors do not seem put off by businesses not yet being profitable, with only 3 of Europe’s 20 most valuable scaleups in the black (Sifted). These businesses have raised $25bn between them, yet 85% are backed without a net profit. Patience is crucial, and companies would be better off ensuring stability than rushing the process.
‘Brutal week for Big Tech as investors knock $550bn off market valuations’(FT 28.10.20) | Is it time to question the resilience of the digital giants?
Late-stage businesses are always hit first during economic downturns, and early-stage companies are often insulated from the worst effects for a few more quarters. It’s difficult to gauge the resilience of Big Tech when we haven’t fully seen how the market will affect smaller businesses.
Additionally, investor concerns affecting Big Tech are not necessarily rooted in economic uncertainty, but rather a response to specific business decisions or over optimistic forecasting during the pandemic e.g.; Meta’s unproven metaverse strategy.
What lessons and red flags did you learn in closing the first Funding Round in 2019 at Outward?
Resilience and clear positioning.
Outward was a first time fund with a new young team. Our belief was that the UK needed a highly connected, dedicated fintech fund at the early stage.
We had a lot of initial pushback – with most challenging our understanding of the sector, the value gap and why we needed to exist.
We always knew we would get there but it required a lot of self belief. It helped that we had a fantastic initial anchor in Investec – who we have a long standing and special relationship with – and who allowed us to warehouse some initial successful investments (Curve, Monese, Bud) to help us validate our thesis.
What were the key learnings you took from your time as a TMT sector banker at Investec?
I had a decade in corporate finance – advising fast growing tech companies in the UK and Asia. Two clear learnings I took were the importance of i) network and ii) the clear positioning.
- Network – There is no better way to build up a network than doing great deals together and I was able to build relationships across global venture, strategics and private equity– which has proved highly valuable for our Outward portfolio as they look for new funders, partners or clients.
- Clear Positioning – founders need to be able to articulate a clear narrative and be able to answer a set of fundamental questions when they pitch or present. The most successful are able to clearly address – i) why their business needs to exist, ii) what is their differentiation vs peers. iii) why their team can execute better than any other. There is no point meeting new investors if your answers to the above don’t satisfy yourself, your team and/or your board.
