Ask the judges…

Matthew Cushen and Paul Soanes Worth Capital co-founders, investors and entrepreneurs

Ask the judges…

We gave our followers the opportunity to put their start-up investment questions to our panel of judges. Thanks to all of those who took part. Here’s our response to the six most frequently asked questions – we hope this helps.

 

What was the most important criteria for choosing your previous winners?

The cliched answer here is the team – and indeed we do need confidence that the team will have the smarts, the energy, the tenacity, the ability to prioritise and the compelling communication skills needed to build a business. Then it’s a big bonus if they have either experience in the market they are targeting or previous experience building a business.

Where we are a little different is that we put more weighting on the attractiveness of the market a business is wanting to compete in than we do their proposition or their business model. We are very influenced by new insight that points to an untapped need. We need to see that there is room in the market for something new, and that with effective marketing and communication the consumers in that market will adapt their behaviour – either shifting consumption from a competitor proposition or creating a whole new sub-category. We know that the proposition idea and how to make money from it can and will evolve and iterate over time, but it is unusual for a start-up to be able to completely shift out of the market they are in and into another.

What common mistakes do you see from start-ups in unsuccessful seed funding applications?

Our biggest bugbear is the templated business plan. It can be useful to use a template to guide you through the scope of what you need to consider when setting up a business. But that is not the same as what an investor needs to see. It is also an example of a second frustration, when a business does not put an effort into illustrating their brand, tone of voice and ability to communicate. If you cannot excite us with your materials how can we be expected to have confidence in your ability to motivate potential customers.

A business shouldn’t spend more space extolling the virtues of their product or service than helping us understand whether a customer would care (and therefore spend money). It’s a generalisation – but we see a lot of new tech that are lovely looking solutions that are desperately in search of a problem to solve.

One of the hardest jobs for an investor is to see the difference between a ‘lifestyle’ business and a business with real ambition. A ‘lifestyle’ business might be successful and throw off a good living for the entrepreneur. But not scale to the point of exit or delivering good dividends for an investor – therefore a highly unattractive investment. So, any applicant needs to illustrate they have real ambition for the business, with the plan, tenacity and drive to build the business and the intent to exit.

How do I know if my business is at the right stage for seed funding?

In simple terms – you need more cash to grow than the business is throwing off from day to day operations or that anyone will lend the business. It’s when funding (and the advice that can come with it) means you can grow the business more quickly, to a higher level and grab market share before others do. So, although you’ve given away a piece of the pie, the pie ends up much larger. Some slightly more specific examples:

  • you have a formula (‘business model’) that makes money – for example, your cost of acquiring new customers is much less than the lifetime value of those customers, so you know you will profit from each new customer. This means any cash invested in marketing is going to generate a return. If you are keeping a share of that return, as well as giving some to the investor, then you are making more than you would have without funding.
  • you have a product or service that only becomes valuable at scale – for example a soft drink that is competing against some globally strong brands with distribution in all shops and bars. In this case you need to be large to have production economies and therefore be able to charge a competitive price, and you need wide distribution to get a return from investing in advertising. Therefore, investment is needed to get to this scale.

What is a normal amount of equity to give away in exchange for seed funding & why does the start-up series require my business to give away a 7% share option to Worth Capital?

There is no ‘normal’ amount of equity. The value of a business, and therefore the equity given away, is dependent on the potential market, the experience & credibility of the founders and the stage the business is at. Ultimately the value of a business is as much as investors are willing to pay for it. Some businesses are no more than an idea, with no proof points, intellectual property or assets. Therefore an investor would only be attracted at a low valuation that gives them a decent amount of equity because they are taking a very high risk. Other businesses may have a product or service in market, some good revenue that shows a customer demand and may even be making some margin. Or they might have something else valuable like a patent or a founder with deep experience of a market or a record in building and selling businesses. There may even be competition between investors to get a piece of the action. All these mean the value an investor will put on the business will be much higher. A sensible and experienced investor will always want to leave the founders of a business well motivated, there is no value in an entrepreneur that feels resentment that they could have got a better deal elsewhere.

The share option is the is the reward for Worth Capital – for finding the businesses, raising funds, matching the two together and helping the businesses grow. Anyone involved in the investment scene has an incentive – sometimes called ‘carry’. We made ours very explicit and aligned – we do well when our investors and the businesses we invest in do well.

What support will my small business receive in exchange for equity?

One of the co-founders of Worth Capital (Paul or Matthew) would become a Director of the business for at least two years. Between us we have set-up businesses, built up brands, invented new products and experiences, worked with very large businesses and very small high growth businesses, know how to retail and how to create new consumer behaviours. Along with plenty of battle scars and learning from when things haven’t gone smoothly. We bring all this experience to help the businesses we invest in. At a minimum we demand bi-monthly board meetings. But more importantly will be on hand to help between the meetings – either on the phone or face to face. We find this goes in waves. Often, we do more at the start of an investment, for example, honing the proposition, building strategy, deciding priorities, creating the marketing plan. Then there is a period of intense execution where we are on hand to help solve problems but let the entrepreneurs get on with it. Usually our input increases when more funding is required and we can help create the investor story and find the funding.

Is your competition open to all countries?

The winner of the competition will only be a business that meets the criteria for a Seed Enterprise Investment Scheme (SEIS) investment, where the UK government gives investors tax reliefs to mitigate some of the risk of investing in early stage businesses. That means it has to be a UK business. There are also some other criteria to qualify for SEIS, broadly that the business has been trading for less than 2 years, has less than £200,000 worth of assets, less than 25 employees and is going to be a proper trading entity, not something that is just set up predominantly to benefit from buying assets (such as property).

 

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