By Matthew Cushen
It’s been 14 years since I made my first investment in a start-up business. A £58k investment returned me £376k after 4 years. So I carried on seed investing – after all, what could go wrong? As it happened – all sorts. Although, along with a few battle-scars, the 14 years has been largely successful. Some good choices and highly attractive tax reliefs has made for very healthy returns.
From that experience has evolved the five criteria that we apply within Worth Capital, illustrated here with some investments last year and this year.
Market: Our heads are turned by empathy with, and fresh insight into, a market. Pointing to an unsolved need or new opportunity. The founder of RentalStep, Mike, is a landlord. He saw that when his tenants paid their rent on time and in full, it was not getting recorded against their credit score and not increasing their credit worthiness. He cared about his tenants, but he also spotted that motivated tenants are attractive to landlords. He’s used this basic insight to construct a freemium subscription connecting & servicing tenants & landlords – one that tenants tell their landlords about and landlords recruit tenants into. So, whilst he is competing in a crowded space of fancy tech that disintermediates traditional estate agents, his insight is leading to a much lower cost of customer acquisition. It also led to a recent award of £450,000 from HM Treasury to help continue his good work in helping improve credit worthiness for tenants across the UK. An award that has doubled the value of the business since we invested.
Team: Founders with experience in their chosen market and with the skills that are relevant to their business model help reduce the risks as a start-up grows. It is also helpful to have experience growing a start-up – as the multi-tasking, pragmatism and tenacity needed are very different from skills gained in established businesses. So we were super impressed with Jess, the founder of Outfox – a range of adult soft drinks that taste great, are low in sugar, low calorie and that keep the feel-good experience and rituals of drinking alcohol. Jess had been on the Kraft graduate training programme and benefited from their comprehensive sales & marketing training. But then she joined a couple of start-ups to very deliberately gain experience in high growth businesses. This included 5 years as Head of Sales during the explosive growth of Vita Coco. It was clear she had deep experience in exactly the most critical element to influence whether Outfox will live or die – the ability to get big supermarket buyers to list her product. It didn’t hurt either that in her spare time she ran the Marathon des Sables, the six-day, 251 km ultramarathon ran through the Sahara Desert. We thought that was a pretty convincing (& intimidating) benchmark for the tenacity needed when building a business.
Big idea: True innovation is differentiating in the market and is often able to be protected. The accommodation market is highly congested, but it is also highly fragmented and makes up a huge $667 billion global market. So there is room to build very large businesses by creating a different consumer behaviour. Nightly are doing just this. The founders, Santiago & David, saw that when booking a hotel, sites like Booking.com & TripAdvisor etc. just return the hotels that are available for the whole of the dates searched. They created an algorithm & user experience (at ‘minimum viable product stage currently) that instead returns pairs of hotels that have partial availability. So the traveller has the choice of switching hotels during their stay. This usually saves significant cash (as the unloved availability is usually cheaper) or unlocks an upgraded experience within the travellers’ budget. This is also bang on-trend for experience hunting as two places to stay gains extra perspectives and experiences of locations visited.
Marketing & communications: Even the best innovation is worthless if a business hasn’t got the talent to articulate their offer in a compelling way to the right audience. Unsurprisingly the ability to excite potential customers is directly related to the ability to excite potential investors. So we look early for clues on how clearly a proposition is described to us and how the benefits are shown. Also for a clear idea of the target consumer and the plan for where, when & how to communicate to them. Not Dogs is a vegetarian fast-food concept. The founders, Katie & Jane, grew up in marketing jobs and had a digital marketing consultancy. So it shouldn’t be a surprise that the materials they sent us – packed full of mouth-watering photos and enticing reasons to love their brand – got us excited and soon on a train to taste the product in their first restaurant in Birmingham. But they also had a very clear sense of their market – for ‘meat reducers’ as well as the growing population of vegetarians & vegans – and how to target them.
Business model: Sometimes a business is pretty simple and makes money the same way as everyone else in their sector. But a business model that has changed the rules of engagement to create a much lower price point and/or higher margin is impressive. Moto Tattoo creates bespoke motorcycle helmet designs. Currently it takes 4 weeks or so and costs upwards of £800 to have a motorcycle helmet custom etched and painted. They have taken techniques from many different industries to create a new process that will make custom helmets available to the masses. Quicker (2 days), cheaper (£99-£149) and with a process completed with unskilled labour at a highly attractive margin.
Any start-up is only going to be as good as its weakest link, so a business has to perform strongly across all five criteria before we would invest. However, usually, as with the examples above, there is one thing that shouts to us and has us diving into the detail.