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A decade worth of events have happened within two months in our lives, which sometimes feels as if Nature has sent us back to our rooms to contemplate what we have done. There is much to reflect on our past behaviour and be the change we want to see in the world. At the same time, there’s value and a sense of urgency to continue building the future we want to live in. Startups are and have always been one of the most important drivers of that creation and they’re in dire shape now which needs our attention.
There is already a public list of Investors who are still open to consider new opportunities, but thanks to the efforts of many industry leaders such as Brent Hoberman (Founders Factory & Firstminute Capital) and COADEC’s Save Our Startups Campaign, we now have the framework by which the government will support startups in the form of the Future Fund. Except the eligibility criteria, the details of the selection are still up for debate. We celebrate the decision to support the companies who will build the future and believe it presents an opportunity to grow the ecosystem in a better way.
Future Fund Decision Loop
We think this is the right moment to rethink the current investment analysis model and come up with a better perspective which could be applied to the decision making process. We’ve put together the below decision framework, which is a loop process as the different qualification buckets are not sequential but individually rated and lead to a cumulative decision.
1. Founders & Organisation
Founders are Made, not Born
The idea that all successful startups are founded by stars is a flawed one which is highly influenced by the hype that’s created around a few such examples in the news. Founders are changemakers and can make or break a great idea; however, it’s wrong to think they do this alone; they are not ‘super(wo)men’. The team that’s gathered around them, the expertise they receive from their investors and mentors, the partnerships and alliances that surround them, the network they develop in time (sometimes transferred from their previous occupations) and many other factors contribute to their success. Perhaps the ‘coachability of the founder’ and taking into account all the other factors that make a founder a ‘star’ is a better criterion to look into.
Wider Lens - Support the Quality Startups Wherever They are
There are innovative startups everywhere built by strong teams and supported by involved investors outside of major hubs like London. The decision to support startups should be location agnostic so that startups in Manchester, Glasgow and Bournemouth can benefit too.
2. Finances
Extending the runway is the #1 priority at the moment, but good runway management should have already been the priority before the crisis. Instead of looking for exponential growth at all costs, reasonable plans to generate revenue on day one not only increases the bargaining power of the startups but also helps them survive in times of economic downturns (at least lessens the amount of sacrifice they have to make). This doesn’t mean that startups who don’t have enough rope should be excluded from the support plan now, but it should be considered as a strategic criterion.
3. Business Plan & Governance
Business plans are valuable for all businesses - startups as well as mature ones. The initial thought process and planning pays forward in helping them make the right decisions on all fronts. Startups who have put pen on paper to outline their business plan should be given more weight with regards to the support that would be provided. Companies who have taken into consideration how they will pivot in the short term to navigate challenges like Covid-19, how they will reinvent and/or reposition themselves in the new world, how they will cross the chasm when the time comes in the long term deserve to be supported.
4. Sector
In times of crisis, where there’s fire in the house, the priority is to put out that fire first and ask the questions later on. So long as the allegory goes, the support to be provided to the startups should be sector agnostic; however, some sectors are deeply troubled, for instance travel and leisure. Potentially these sectors will be ripe for paradigm shifting changes such as policy (physical distancing applicable in the long term) and expansive health regulations. That being said; human beings are social animals, they will continue to travel, meet each other, eat out, play and sing together. There is an opportunity for the right startups who have a plan to be ready for that world no matter their sector.
5. Product & Future Proofing
Beyond the standard product metrics like product-market-fit, growth channels, etc. we believe products should be scored based on the nature of their impact on the future. Paradigm changing startups (i.e. disruptive technologies) should be supported; however, companies who help develop a new audience by helping them migrate from an offline world to the online one (i.e. bridge technologies, transformational solutions) should be supported as well. For example, a startup which mirrors the offline fair experience on an online platform constitutes a bridge solution or an after-sales service company developing a predictive maintenance algorithm using machine learning capabilities is a transformational company which deserves to be supported. The teams who work on these companies will be the ones to build truly innovative platforms in the near future.
Below is a summary of the decision buckets along with the main questions that would need to be assessed:
Testing the Decision Loop on a Hypothetical startup in Travel: ‘Little Steps’
Based on the above circular decision tree, here’s an example of a successful applicant for Future Fund:
Founders & Organization:
Little Steps is a 2-year-old startup which set out to eliminate the middlemen in the travel industry with regards to financing and insurance. The two founders have extensive knowledge of insurance and travel sectors, but this is their first startup. They are ambitious; they gathered a great team. They spent the first year of the company running extensive product market fit experiments and managed to build a wide network of business partners in the finance and insurance sectors as well. In their second year, they launched their product as an app, but they haven’t invested yet to grow their base. The team is very motivated, and they have received £300k private investment so far.
Finances:
Little Steps have always acted responsibly about their finances; runway alongside their customer funnel have been the first thing the entire team reviewed everyday. This was the time they were supposed to invest in growth should the crisis hadn’t happened. So they now need to pivot, spend more time with different product features, and perhaps acquire a different set of clients.
Business Plan & Governance:
Little Steps team are very diligent in thinking through all possibilities and challenges in their business plan which is a living document. However, everything that they have imagined is invalid right now because of the crisis. As they are used to thinking this way, they sat down as a team (every member of the company) and developed a plan for the short term pivot (9-12 months) and how this affects their long term strategic plans. They are aware of the fact that they have a responsibility to their funders to deliver their promise, and they plan to do this in a respectful and transparent way. They realise this is a team play including their investors.
Sector:
Travel is one of the biggest casualties of the current crisis. There’s a lot of ambiguity as to how the new world of travel will be shaped.
Product & Future Proofing:
As part of their business plans, they stick to their main principles of MVP, testing and iterating, talking to their customers. They have a plan on how to reach out to their existing and new clients albeit in a manual way, cold calls, the script that will be used by each member of the team, etc. They run simulations for their long term plans and how their product will change in those scenarios.
The Verdict: APPROVED
SUMMARY
While this government support is a welcome start, we see further opportunities for the startup investment world to shape a better ecosystem which is open to innovation, diversity and accountability. This is mainly because there are existing discoverability & matching problems in the current investment approach between investors and startups.
There has always been a segment of startups within or outside of the major hubs who were underserved meaning despite their great ideas, founder profiles, organisational and market strengths, they never managed to get in the radar of the right funders for many reasons. On the flipside, if and when they are discovered, they are not approached with the right strategy and understanding stemming from a mis-reach problem. Likewise, many investors - institutional or individual - can’t find the right startup opportunities to get involved in which are more suitable for their dreams and skills. Having a technological solution that brings investors and startups together is not enough to create the best synergy and outcome. If we don’t use the current sea change and the opportunity to shape the support mechanism for the ecosystem, we believe this will reinforce mis-reached economies.
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