Saturday 16 December 2017

Product value is key factor in start-up investor confidence

TWO much-promised finance schemes for start-ups are due to launch this summer, Richard Bruton's Department of Enterprise assures us. With almost 1,000 new firms setting up each week, any new backing will be welcome.

We asked people on the ground -- an entrepreneur, advisors and funders -- what the landscape is like for high potential companies that want to make it big.

The VC veteran

Walter Hobbs worked in venture capital for years and now advises companies on raising money and backs some of them himself -- so he has a handle on both sides of the equation.

"The good news is that people are able to get to market on a lot less money than some years back," he says. It takes anything between €300,000 and €1m in seed funding to get going in first-round funding now, he estimates. The bad news is, funding is limited.

"Getting started is hard. There are private individuals throwing money around but there are some canny investors around. Principally there are four seed funds that are very busy: Delta, Enterprise Equity, Kernel and ACT.

"Banks never were in the business of providing equity. My calculation is less than 10 per cent of start-ups are getting money from seed funds. So there is an enormously high hurdle to get funded, but the stable of companies that have been backed are doing well."

There is State funding to be had but it often has to be matched with private money. "Enterprise Ireland is very hungry to sign High Potential Start-Ups (HPSUs), but €250,000 in preference shares from it usually has to be matched by €250,000 coming from private sector. Quite a few companies are struggling to do that. The reality is quite a small percentage of HPSU approvals raise private sector equity."

With the banks not really being players, what Hobbs sees happening is family and friends funding and big personal sacrifices being made by the entrepreneur to fund a fledgling company.

Hobbs says that a major drill down into balance sheet projections isn't as important as other things when making your pitch to a VC. "Focus on financial side wouldn't be a major issue. It's convincing on your product, your market and niche, that's where the heavy conversation will be. The mentor

Eoghan Jennings is a founder of Startupbootcamp, which provides early stage companies (mainly techie ones) with seed funding, mentoring and other supports, backed by multinationals including IBM, Nokia and Vodafone. His events are well attended by VCs searching for the next big tech thing.

"What they want to see is evidence of a big market," says Jennings, who has worked in the private equity field as a chief financial officer. "They're not interested in markets that are local or regional, or lifestyle business that will just pay salaries and little more than that.

"So that would knock out many service businesses that can grow but only work because you throw more bodies at them."

"It's about scalable businesses that will have a large global market and be export oriented," he says.

Sheer personality dynamics play a major part, according to Jennings.

"It's one thing the VCs would never say themselves, but they've got to like the people. If they're going to spend years seeing these people, they better enjoy spending time with them. I think the most common reason business don't get funded is because of the team, if they don't believe in the team or don't find them trustworthy."

Interestingly, Jennings doesn't rate financial projections that much. "I spent years as an excel spreadsheet jockey telling investors where it's going to go in five years -- it's all a bunch of crap, not even worth the USB stick. What is important is how much are you going to sell this thing for, who's going to be the buyer, who's the customer?"

The start-up entrepreneur

James McNamara of Clevermiles is in the thick of things at the moment, competing in start-up accelerator competitions and pitching for funding, as well as expanding into Britain with his safer driving software. "Scaleability is the magic word for start-ups," he says.

What investors want to see at pitch can vary. "Business background types like to see an entire business presentation -- business plan, model, revenue forecast, while tech people want to know how it works.

"Overall it's about giving some nugget of information they can relate to, a clear, strong message. Don't pitch every single detail about your business, condense it down and stay on point."

Down the line, if a VC has taken you on, you'll need to drill into the financials. "That's when there are hour-long meetings that go into 15-page business plans, five-year forecasts and euros and cents."

The growth consultant

Paula Fitzsimons advises companies on growth. "About 1,000 individuals a month are setting up a new business. Each of these has a new story as they sit around the kitchen table.

"While the Dragon's Den dream might be angel and VC investment, in reality most entrepreneurs are self-funded starting off."

To make the very early set-up steps, way before seed capital even, the amount people need to start up is relatively small, says Fitzsimons. "Estimated total finance required is €10,000-€20,000, of which €5,000-€10,000 is self-funded. Entrepreneurs are putting up about 50 per cent of finance they require. So they have to find the rest."

Sunday Indo Business

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