What investors need to be looking for is a balanced portfolio in terms of the source of deals and sector exposure. Retaining focus on fundamentals is vital so revenue has to be a key metric with which to measure success in a portfolio of companies.
Investors must have a clear understanding of where the product or service will sit in the market, the route to that market, the right business model to deliver results and the milestones against which value inflections can be measured. This informs backers as to the capital needs and when those requirements will arise.
Alongside Seed Enterprise Investment Scheme and Enterprise Investment Scheme capital, there needs to be an awareness of available grant funding and the capacity to invest deeply in order to scale a business prior to disposal should circumstances dictate.
But simple cash funding for early-stage enterprise is not enough on its own. Businesses with disruptive technology and services aiming to tap into growing markets require informed investors and backing from a team with deep expertise in their target sectors.
Dovetailing a complete funding strategy with the requisite support and guidance to drive growth, while maintaining a strong source of deal flow, is the way in which early-stage investment risk can be mitigated.
There is no one single key to effective early-stage investment but having all the elements in place provides a combination with the potential to unlock successes.
Dr Mark Payton is chief executive of Mercia Technologies
KEY POINTS: Early-stage technology investing
Industry insight
In many cases, particularly when considering knowledge-intensive companies such as those spun out from universities, the founders may not have the requisite knowledge to build a business, be that from a marketing, accounting or recruiting standpoint. Nor might they be aware of the sector as a whole and what commercial opportunities exist there. So an investor needs to understand the sector in question.
Continuous deal flow
What deals are available? Does the search for start-ups extend beyond endless revolutions of London’s ‘Silicon Roundabout’? In other words, is the deal flow available sourced from trusted personal networks combined with venturing into new and fertile areas? Or does it mean following the herd? As an example, a current concern in London’s digital ecosystem is the large number of investors chasing a finite number of deals. This inevitably increases a company’s perceived worth and therefore reduces overall returns, should the business succeed.
Capital requirements
It is unlikely a company will need only one round of funding. As such, an investor must look carefully at whether follow-on capital will be provided, where it would come from, how it is accessed and what the total funding requirement of the business is likely to be.
