Saturday 10 December 2016

How to guide start-ups through the 'valley of death'

Early support and investment is vital in getting a start-up company focussed and objective, so it can build and move on to the next stage, writes Ben Hurley

Ben Hurley

Published 31/05/2015 | 02:30

STARTER’S ORDERS: Ben Hurley says that a volume of new start-ups is important because it is a key engine of growth
STARTER’S ORDERS: Ben Hurley says that a volume of new start-ups is important because it is a key engine of growth

It's been estimated that today you can get a technology product to its initial market for as little as €20,000 capital investment. With open-source software, cloud computing, social media marketing and crowd-sourced design, traditional barriers are significantly reduced. A technology start-up can be capital-efficient, and adopt a lean and agile approach to its development. As a result, the number of people starting up technology businesses has grown significantly in the last number of years.

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For the economy, a volume of new start-ups is important because it is a key engine of growth. By definition, a start-up is pursuing a growth opportunity with international scaling potential. Start-ups add jobs at higher rates than established companies. These jobs are digital-economy jobs which have in the order of 4x ripple effect on other jobs in the economy. And this all starts with someone choosing to make a job rather than wait for one.

But is relying on serendipity and entrepreneurial spirit enough? Despite the economic imperative and lower barriers, getting a new, innovation-led company off the ground is really tough. For entrepreneurs as they set out, they have a sense that they have a good idea, but beyond that, often all they have is a collection of uncertainties, of possible paths to take and pieces of advice to listen to.

The key to deepening Ireland's ability to enable these new ventures and tap the latent potential in the economy is investment; not simply capital investment, but also investment of time and resources from people with the relevant experience.

Seeking to achieve commercial grade returns from investment at the very early stage or 'pre-seed' stage is not easy because the risk is so high. Some commercial micro-seed investment firms are setting up in London and the US as a way to unearth new investment opportunities. They are willing to accept these small and early investments in areas of strategic interest to them or as loss leaders to attract founders in an increasingly competitive-venture investing market. Similarly, corporate initiatives in the space tend to be a blend of marketing and business development rather than venture investment.

As a consequence, private investment in the space is frequently shorter term in its focus, and driven by strategic interests rather than economic-investment interests. Without a longer-term foundation, the private money can be fickle. This singular commercial lens means that some of the benefits to the economy of early stage investing are missed.

There is, however, a third way.

The approach that NDRC takes is to invest and take a stake in the company's potential, providing modest amounts of capital and high amounts of hands-on support to early-stage companies. By doing this, the companies we invest in get a real partner, not just a service-provider.

This way of investing and enabling requires capital; a unique blend of capital from both public and private sources that combined recognises the downstream benefits that a successful economy built on indigenous technology companies and innovation will mean for the country as a whole.

With public funds providing the long-term continuity, discovery funds from private sources have a better environment in which to experiment and invest. So the key is to scale both hand-in-hand at the early stage, providing both with welcome leverage in this very early phase, and also enabling both to engage in a high-risk endeavour with the risk somewhat ameliorated.

Is it working? Some of the companies NDRC has worked with include Soundwave, a music discovery app that secured multimillion euro international investment and was ranked "best of 2013" in the App store, to SilverCloud Health, a web-based therapeutic programme which today counts the NHS in the UK as a client and has recently launched in the US market. In 2014 alone, NDRC portfolio companies secured almost €37m in private sector follow-on investment.

The effect of investing modest levels of public money is to ensure that the numbers of successful indigenous businesses being built in Ireland is higher, and the number of high-value jobs being created is coming from a sustainable source within the economy. NDRC has learned from our time with entrepreneurs that well intentioned economic policy to encourage a higher number of start-up businesses is not enough. We have to enable them, not just with education and skills (though building alignment right throughout our economy is also important), but with real hands-on, sleeves-rolled-up support from people with a perspective from which entrepreneurs can benefit and accelerate.

And what does this look like? Firstly, ensuring start-up teams focus on what's important, secondly enabling them to validate the opportunity with the people who will pay money for it, and thirdly introducing objectivity to a team that is eating, sleeping and breathing the idea, all the while continuously ensuring that the venture takes ownership of the decisions that they make.

There are not many who would reflect over the last decade and suggest that we should not be developing our own indigenous companies as a cornerstone of the new economy. Unless you've worked side by side with a team like Soundwave, who initially came into NDRC with a different proposition, were turned away with feedback, and then returned with a better-honed idea and worked with us to secure international investment and millions of users across the globe, it's hard to appreciate how vital early support and investment is in getting a company over the valley of death and on to the next stage.

If we don't recognise this, we will fail to ground the economy for the long term with sustainable, innovation-led entrepreneurial activity.

Ben Hurley is CEO of NDRC. NDRC is an early stage investor in innovation, making ventures happen by investing in start-ups, and improving the environment in which ventures can grow

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