Venture capital money going into technology companies in the UK is at an all-time high. A year post-Brexit referendum, British tech firms attracted £2.4bn in funding.
To date this year, UK fintech companies alone have seen £825m of VC investment. So, what do investors look for in tech start-ups and how do you get a slice of this funding for your technology venture?
It really just comes down to seeing your tech start-up through your potential investors’ eyes. They’re in it mainly for the money so you need to know something about financials.
Look at it from an investor’s perspective
The question to ask yourself is: Are investors likely to be convinced you have the right financial lens in place and that you know how to use it?
You need to think about what investors are thinking about. This means first, that linking risk to the level of expected returns is what always underpins investment decisions.
Any investor that’s going to fund a tech start-up will look for a risk-return balance that tallies with their expectations. To do this, funders will consider how viable a concept is and the start-up’s capacity to grow successful operations in the longer term.
They’ll assess the tech start-up’s model and its intended market. So they’ll look to see perhaps whether the start-up can better execute something that already has an existing market. Or whether it advances an entirely new business hypothesis or sees a market ready to be developed.
Possibly, the product has lock-in capability with some exit hurdles for the consumer once they’ve adopted the product. It could be that the concept enjoys network effects offering the potential of fast business growth.
The investor will also assess the uniqueness of the technology and the level of product concept development before stepping in.
All these factors say something about risk-return characteristics and will require evidence though quantitative indicators and financial metrics.
Can the team deliver?
In addition, and all important, is whether the team is likely to be able to deliver. And this is key – what you know about tech business management will feed into investors’ risk-return analysis.
In particular, your capacity to show financial intelligence will positively feed into investors’ risk-return analyses.
What do you need to monitor specifically? You already know that your business has to create value just like any other viable business.
Can your tech business create value?
You’ll be judged on whether your business creates value, as well as whether it creates as much value as it set out to and whether it uses the fewest resources to generate the most value possible.
Basically: value created matters as does reaching value creation targets and the efficiency in doing so.
So, you’ll need accounting indicators to show all this.
How tech businesses are different
Entrepreneurs use accounting measures for this. As a tech entrepreneur however, you need a lens that enables you to line up the tech nature of your start-up activities to its financial objectives. Conventional accounting is just not going to offer you that lens.
Why not? Well, you know what differentiates your tech business from other businesses.
If you compare yourself to a conventional business structure, there are ample ways in which the financial circuitry of your tech start-up differs.
For instance most traditional industrial firms want to produce large quantities of output which bring in economies of scale. The focus is on supply, like bulk buying so that material and other resources come in at lower prices.
Also, production that is faster is considered desirable as are higher efficiencies – all of which set up the premise for becoming more profitable and gain in size.
This is not usually true of tech firms. It could be that you’re mobilising a technological innovation that rests on expanding networks. And the growth of networks becomes self-reinforcing as users get value out of connections and so connections grow.
Larger user bases grow the network which increases demand for the product further. Of course, this fuels even greater network expansion and demand.
Networks might even connect with other networks creating more and more value. So, for your tech business, transactions can grow where networks expand and that expansion is multi-directional – it defies linear pathways.
From a financial angle, this means that financial intelligence that only identifies with supply and revenues and that only reports linear paths of value creation is not going to work well – either for you or your investors.
Tech businesses in the ‘sharing economy’
Take another example. Say your tech business rests on a ‘sharing economy’ model where you get a cut when your customers make cash.
This type of business hypothesis homes in specifically on new sources of value creation that are produced into the market from existing supplies.
In platforms like Airbnb and Uber the object is to enable users requiring a service or product to link with suppliers that possess unused capacity, benefitting all parties.
Conventional suppliers like minicabs, taxis, trains and other traditional transport services originally needed to invest resources to start off their business model.
But a tech platform that enables existing supply sources to be unleashed generates supply out of untapped spare capacity from within the market. Then, when supply increases, the traditional players will have to share customer spend with your tech innovation.
As you grow, your business will drive prices down across the whole industry as more supply comes on stream. Key to value creation here is that some profits come to you as the new supplier of spare capacity and consumers end up with increased choice with lower price points.
You need to have a financial window with performance measures that show the uniqueness of your business innovation before you speak with investors.
Chances are you’re continually experimenting with your start-up business model. Tech innovations are not like traditional business ventures, where you determine the resources you need to satisfy a consumer market’s demand for a product with a known value.
Things have to be more hands on as your product-market fit is evolving. Your tech business may need to test out an altered product element, work with a new website feature, build relationships with influencers, experiment with a different pricing scheme, work with a mobile-responsive template, carry out new organic strategies to grow online traffic, and so on.
Some experiments trigger small business consequences and others set in motion totally new strategic-level pathways.
Show you’re astute at financial management
From a financial perspective, you’ll require unique insight to help track activities so you know what to action and when.
You’ll need financial insight to help you direct your start-up in a responsive way by tracking and judiciously manoeuvering your experimental activities.
So, ask yourself these questions:
- Do you know what drives financial results in your business?
- What control loop is at play?
- What indicators to track and report on the performance of your start-up do you have at hand?
A principal strategy to attract investors to your tech venture is to demonstrate how refined your financial management lens is.
If you can show you know how to manage your tech start-up and to relay to investors what they need to know, you’ve increased the odds of investor risk-return trade-offs in your favour!
About the author
This guide has been written exclusively for ByteStart by Professor Al Bhimani, Founding Director of LSE Entrepreneurship and Professor of Management Accounting at the London School of Economics. He is widely published, an established speaker, and author of Financial Management for Technology Start-ups, published by Kogan Page in 2017, priced £19.99.
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