Investing in the Disruptors of Tomorrow

Martyn Holman, Investment Partner at Forward Partners outlines what he looks for in a disruptive start-up

Over recent years in particular, investment in Europe has undergone a radical transformation and institutional Venture Capital investment has never been stronger in the region. There are now 47 European businesses which have achieved billion dollar valuations. These results have fostered a new entrepreneurial environment with talent, resources and support for early businesses now beginning to rival that in Silicon Valley.

As might be expected, an environment embracing entrepreneurism has attracted ever greater levels of capital. 10 new large institutional funds have launched in Europe in the last 5 years alone. Just last month Atomico, the growth fund founded by Skype entrepreneur Niklas Zennstrom, announced a $765m fund to invest in European tech, perhaps to capitalise on the opportunities currently being swallowed by the larger US VC funds which presently account for an estimated 70% of true growth capital (later stage) rounds. In short, the number of venture funding rounds in Europe has exploded in recent times, now numbering nearly 4 times what they were just 5 years ago.

Funding options for businesses with some form of traction have consequently burgeoned, relatively unhindered by recent noise and uncertainty created by Brexit. This blossoming landscape for younger startups has been incredible to witness, particularly on the back of such challenging times only a few years ago. But the massive headline growth in early stage European investment masks an extremely fractured landscape for startups at the earliest stages of evolution.

In general, institutional investors have been rather ill equipped to embrace entrepreneurs in the true sense of the word – passionate disruptors who arrive at the door armed only with a burning idea and a killer slide deck. This has traditionally been because even the earliest institutional investors, those at the so called “seed stage” have generally required stringent proof points to minimise the execution risk of otherwise very risky investments; a product in the market, a backable team with appropriate experience, a well defined go-to-market strategy, commercial traction and often, early revenues.

Idea stage, or “pre-seed” stage startups, in general have none of the usual proof points required by later stage (seed and beyond) VCs. Usually they are simply well researched ideas addressing significant gaps in large markets, often gaps which the entrepreneur has personally experienced. There is generally only one person in the team and due diligence is limited to the market opportunity and the track record of the individual. And they are the kernel of all innovation, the true beginnings of tomorrow’s industrial and technological landscape and a rich seam of opportunity for investors with the right tool kit.

Embracing propositions at the idea, or “pre-seed” stage therefore requires a different VC model, one that serves to fundamentally reduce the key execution risks. The principal challenge is getting the idea to market with speed, and with sufficiently guaranteed quality. Providing space and strategic advice (the traditional levers of VC and accelerators) is obviously a part of the puzzle, but by itself is not sufficient. Pre-seed VC investing requires a more proactive approach – the development of an in-house operational capability, in particular with product, development and marketing functions. Providing these facilities directly facilitates rapid go-to-market without the need for an entrepreneur to outsource or seek to build early technical teams which are inappropriate to the profile of the business at the time.

With a rapid acceleration of the key execution skills – product, code development, and marketing at high quality, founders are free to think about the critical challenges of testing and building a business without delay. Over time the operational unit builds knowledge and specialism in a wide variety of deployments, they standardise their approach, reduce errors, and further increase their efficiency. Faster market validation not only delivers more rapid growth on the upside, but also reduces investment exposure for the VC on the down-side. The lean business requires lower levels of capital to succeed. Everybody wins.

This is the model we have adopted at Forward Partners. To qualify for this level of support there are three key things that we look for in our target propositions. First and foremost we back people; people with a talent and passion to match. It’s always impressive to see entrepreneurs who have already made an impact or have achieved great things in their personal and professional lives. One of the most remarkable entrepreneurs we’ve invested in recently is Tamara Rajah, Founder & CEO of Live Better With, the first curated ecommerce site for those suffering with the side effects of cancer treatment. Tamara was the youngest ever Partner at McKinsey & Co and had led the group’s healthcare strategy globally. It was clear from the first meeting that not only was she passionate about her idea, she was also committed to and deeply talented within her field.

Secondly the idea will have a crystal clear value proposition. This means that the application of the idea will obviously improve a current market gap. The ‘need’ for the product or service is clear for a range of customers, and access to those customers can be clearly mapped out. Underlying this will be an existing problem for which the idea is clearly a better proposition.

And finally it’s about the market in which the idea is deployed.  We look for every company to be capable of driving significant returns to our fund. Generally this means a business that has the opportunity to generate significant revenue with justifiable and practical assumptions on market penetration. Even world class ideas are fundamentally less valuable in small markets, and not all are appropriate for VC support. So we look for large and/or rapidly growing markets, and preferably those where access to a global pool of customers is without fundamental barrier.

Martyn Holman is Investment Partner at Forward Partners