Measurement helps with investment, management and exitI realised when I first started to write this blog that I have a bit of an obsession with measurement. About 500 words in, I still had not reach my first point and it was clear that I had at least six articles rattling around in my head. I have decided to spare readers for now and focus on just one thing, the importance of measuring when looking at the investment potential of a startup. Generally speaking, startup valuations lack any discernible frame of reference. Potential investors naturally fall back on financial projections because this is where they are comfortable or rely more on a gut feel about the product, the market and the people. There is no panacea which can make the future predictable for a new business but I believe non financial measurement should have a place in any startup evaluation. The basis for this view is simple. The digital revolution has not changed the principles of business but it has transformed a couple of things. Measuring is one of those things. For businesses selling online or in the software and mobile apps world, it is already possible to measure and track just about everything. Without spending any money! Much of what you need and what a business owner could only dream about a few years ago is available in a couple of clicks through a bunch of fee tools, most prominent of which is Google Analytics. If you have a website of any kind go check this out. Number of customers, source of clicks, usage rate, page dwell time, sales rate and much more is just sitting waiting to be analysed. Over time, as the tools become even better, as the mobile Internet adds location and other context data and as the Internet of Things starts to take a grip, the range of businesses for everything can be measured will grow and grow. Great but what does this mean for the potential investor? Three main things:
Startups will never be a perfect environment. Even online measures will be based on a small user base and a limited timeframe. Like any measure they will also reflect the past and in the digital world, the future will most certainly be different. However, measurement is a tool that every investor and every leader in a Startup should be using and it can make a big difference to the chances of success.
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What did I learn from EIE14?EIE 14 took place in Edinburgh this week. Organised by Informatics Ventures it has quickly become the premier event for Startups and potential investors in Scotland and one of the most important in the UK. This was my first time attending and I must admit I was blown away by the scale and breadth of the whole event. EIE stands for Engage, Invest, Exploit and despite the slightly creepy connotations of the last word, the concept works. The conference is focused in the Engage phase and is an opportunity for angels, VCS and other investors to meet with and hear from as many Startups as possible. The whole day is centred around the Startups and this year they were organised into three main groups, Technology, Biosciences and Energy. Most of the main sessions were devoted to pitches from Startups with a separate room for each group so attendees could focus on the sector of most interest. Pitches in turn were split between one minute "pop up pitches" and longer 6 minute pitches which had a panel asking questions at the end. I would be interested to hear the feedback on these sessions. For me, the one minute version was great, gave me just enough to decide whether I wanted to go and seek out the company pitching and find out more. The longer versions were a bit staged and less helpful. This may just be me. Sitting listening to people talk from a stage has never been one of my strongpoints. Luckily there was also plenty of opportunity to talk directly to the Startups. Companies from all three groups were gathered in one exhibition hall. There is no favouritism so everyone has a stand the same size and a huge throng of people just work their way round the room. I knew quite a few of the companies exhibiting and every time I went up to chat to someone I knew, they were engaged by at least one stranger trying to find out more. It was clearly working. It is well worth checking out some of the pitches and other material on the website eie14.com. However, I always find with these events that it is the buzz and messaging around the room that sticks in the memory. So what did I learn from EIE14?
Look out for some serious marketingEverything feels very optimistic and energetic. Although I focused on the Tech startups, there was an equal sense of urgency about the bioscience and energy stuff. On limited evidence, it would seem that this is indicative of the UK generally not just Edinburgh or Scotland. Just to reinforce this, the latest Tech Monitor from KPMG shows strong growth and especially the highest level of hiring in the sector for three years. The first part of the influx of funds is clearly being felt already.
I will be very interested to see the impact of the other part of the investment promise. One of my observations about the UK and especially Scottish startup sector has been lack of visibility in the wider public domain. My guess is that there will be a bunch of exciting and attention grabbing marketing from tech startups in the next 12-18 months. Hopefully, this will mark a big step forward for the startup ecosystem as a whole. Startup funding can be a delicate dance, especially when one or more angel investors are providing the cash. Like any complex set of gyrations, spoken and unspoken social conventions overlay the basic rules and provide much of the charm and frustration. Of course, the underlying purpose is very simple and never varies. The startup needs money and the investor needs to splash his or her cash. Don’t forget the second part of this. Every investor has limits and boundaries but fundamentally they want to find a reason to spend. Because of the rules of the game, one simple piece of information is often obscured or even totally overlooked. Crunch question for the founder/ CEO/ Chairman - how will you spend the money? If this seems too obvious, think about the follow up question which often causes much angst. Are you asking for enough? Amongst investors at least, this question usually results in a debate of knowing nods and wise generalisations. In other words, opinion and ego rather than answers. Startups teams take a different approach. The fundraising target often comes before any form of business plan so the story is designed to justify the numbers rather than being the outcome of any strategic thought. All of this arises because it is not actually such a simple question. Answering it requires an understanding of some big levers in the business model and an ability to make some tough choices. Both pretty valuable qualities for a CEO to demonstrate. I have just made an investment in Mallzee and the way Cally Russell, the CEO, answered these questions was a big factor in my decision. What was going through my mind? There are basically three ways to spend the money. Sales and marketing effort to achieve growth in revenues, developing the product to enhance user reach and engagement or overheads necessary to provide and managed environment for either or both of the first two. The key challenge is to understand how money spent in each category leads to revenue and cost. Remember, this can usually be predicted and measured in the online world. Initial estimates based on concept products, minimum viable products or marketing experiments may prove to be wrong. Seeing this, adapting and understanding are part of the growing pains but the startup should have some data to use as a starting point. Using this data should enable the CEO to predict how money invest in this area converts to revenue and thus make a direct link to the cash burn. Money spent on product development may be harder to measure. Sometimes, the link will be simple. Making a successful IOS app available on Android for example. In all cases, quality and reliability of product underpins user engagement and loyalty which in turn support stability and growth in the revenue line. Planned investment in development should at least be pointing in this direction. I can already hear teams complaining that success needs money in both these areas and in overheads to back them up. Very true. That’s where your startup turns from a project into a business. Choices, choices, choices. No-one has unlimited funds. The track record of business which have money to burn is pretty dreadful anyway. Such companies usually lose the focus and urgency which made them rich to begin with. Good businesspeople understand that their primary function is to make decisions. In most cases making the wrong decision three times out of four will outperform no decision by a very wide margin. So no easy answer but a crucial question. Any investor will tell you they invest in people ahead of product. For me, one of the key tests is how people answer this question. I don’t expect to see a spreadsheet with precise answers. I am looking for an understanding of the choices available and how to balance them as things unfold. How would you spend more money if you were offered it? What could you achieve with less? A final thought. How an investment is spent should translate into a financial outcome which in turn leads to figuring out if and when more cash is needed which naturally takes you to the next investment round and which ultimately gives a picture of what an exit might look like. Pretty important area to think through... As an investor, I see a lot of business plans for start ups. Everything from an idea to an operating business with a five year track record is supported by a plan. Everyone from the first time angel through syndicates to large venture capital funds places a lot of store by these documents. Quite often, the business plan is the only part of the pitch that has been prepared by a professional advisor and therefore represents spending some scarce cash. I know from talking to founders that the business plan is always the result of blood, sweat and tears. It would be generous, for all this effort, to describe the quality and coherence of startup business plans as variable. There can be huge gaps, numbers and measures are often unclear, markets and business models are poorly defined. It is one of the most frustrating experiences to talk to a startup team and find passion, knowledge and vision that are missing from the written plan. So what do I look for? This is not intended to be a ‘how to” manual for drafting a business plan. It is also a very personal view. There are five key things which stand out for me:
If you get these things right, you will have me hooked. After this there is only one question I need answered, what will you spend the money on? |
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AuthorKenny Fraser is the Director of Sunstone Communication and a personal investor in startups. Archives
September 2020
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