By Matthew Cushen
The focus of The Start-Up Series has been on the earliest stage businesses – ready for their first or very early equity funding. The type of funding supported by the government’s Seed Enterprise Investment Scheme (SEIS). Where investors are encouraged to invest the first £150,000 of a company’s equity funding by being given generous tax reliefs – including 50% of the investment being knocked off their income tax bill. The businesses funded might only have an idea and some market insight to give a sense of the potential. Or the business might have bootstrapped a product or service launch but still be in the foothills of growth.
From this month onwards, we are extending the scope of the Start-Up Series to growing businesses. As well as SEIS investments we will consider Enterprise Investment Scheme (EIS) investments. This means that businesses that have already used up their £150,000 SEIS allowance or are over two years old have a chance to win the competition and qualify for significant equity investment. Investors here are still supported by the government. But the package of tax relief incentives, including 30% relief from income tax, is less valuable, which reflects that a more mature business should be a lower investment risk.
The amount of funding and the amount of equity in return is agreed with the winners as part of the process. For SEIS qualifying businesses, typically Worth Capital look to invest most of the £150,000 funding allowed – and then make follow on investments as the business grows. For more mature EIS qualifying businesses we may invest up to £250,000, either as the sole investor, leading an investment round or alongside other institutional investors.
When considering a growth business for investment our criteria for the same for the earliest stage businesses, but the bar is higher.
Market: this is our first consideration, is there empathy with and fresh insight into a market and has this uncovered an unsolved need or new opportunity to improve lives? Whilst a good argument might cut it for a pre-revenue business, for a growth business we would expect some strong market validation in the form of actual demand for the product or service, users paying the expected end price and an emerging track record of retaining customers.
Team: as well as showing skills relevant to their business model we’d expect a growing business to be more aware of how the founding team’s strengths are working and where there are gaps that need to be filled – with the solid recruitment plan to fill those gaps.
Big idea: for an early stage business, the big idea might just be that, an idea on paper. An investor excepts the risks associated with actually getting a product into production or building out a new service. For a later stage investment, we’d expect that heavy lifting to have been completed or well underway – with a proven supply chain, an operation that is scalable and some good reviews from customers that are illustrating that they can see and value innovation in the idea.
Marketing & communications: when a business has yet to be launched we look for clues on how clearly a proposition is described to us and how the benefits are shown as being a proxy for the team’s ability to communicate clearly to potential customers. For a growing business we’d expect to see well-honed communications, that have been constantly improved based on customer feedback.
We’d expect that early marketing experiments have resulted in a reasonably well understood ‘marketing playbook’ – a clear idea of the target consumer and the plan for where, when & how to communicate to them – i.e. how investment in marketing is going to directly translate into new customers.
Business model: whilst it is fine for the earliest businesses to be a bit fuzzy on how they are going to turn a well communicated idea into cash, we’d expect a more mature business to have worked out their commercial model. So we can see a direct route from investment, to revenue, to profit, to an exit and to a return on investment. For a potential investor, confidence is gained here by seeing how responsibly earlier funding has been spent and how traction and momentum has been built.