UK start-ups need to prove their financial credibility
Attracting investment for your start-up is not just about proving you have a good idea, but proving that your idea can make money.It may sound obvious but, when inspiration strikes, the temptation is to put all your energy into product...
It may sound obvious but, when inspiration strikes, the temptation is to put all your energy into product development, and the 'business' side of the business can often get neglected.
However, a stripped-down version of a product that is on the market and making money is a far more attractive business proposition to venture capitalists than a sophisticated product with all the bells and whistles that has no market traction.
“Recently more and more businesses are starting up through agile methodologies which means getting a basic working product out extremely quickly,” said Matt Evans, director of the Solid State Group and founder of the Hoxton Mix.
“This means that when looking for investment, you can actually demonstrate a working income stream, albeit minor. Some VCs actually request this before considering investment.”
Having an income stream also means that finance through loans becomes a little more viable. Many of the mainstream commercial banks in the UK make it very difficult for start-ups to get loans, but being able to demonstrate a clear business plan is a significant advantage.
Evans said that he approached a number of banks for financial help when founding the Hoxton Mix co-working space and, with the exception of Coutts, all of them were bitterly disappointing to work with.
“UK banks need to open their eyes and step beyond the standard 'computer says no' mentality that currently reigns,” he said. “Coutts have a dedicated media team and I can discuss my business with my bank manager over beers at various Silicon Roundabout networking evenings.”
This kind of personal interaction and specialist expertise is sorely lacking in the mainstream banking sector. Research released last month showed that the majority of UK entrepreneurs are sceptical about the benefits of venture capital and its fit with the entrepreneurial mindset.
“Negative perceptions around the nature of venture capital and how to work effectively with these investors - which don’t reflect the true experience of those who have done this - are likely to cloud the judgement of entrepreneurs,” said Andrew Haigh, executive director of Coutts Client Propositions.
However, the demand for flexible finance alternatives within the UK tech start-up market has led to the emergence of niche services, such as the Silicon Valley Bank, which offers commercial banking services for technology start-ups around the world.
Such developments should eventually encourage mainstream banks to re-examine their VC strategies and become more open minded. In the meantime, however, entrepreneurs need to make sure their business plans are clear, easy to interpret, and supported with meaningful sales figures.
Winning investment is never going to be easy, but establishing your financial credibility is a good place to start.