mind the gap

Posted by in Investing, Opinions

I’ve immersed myself in the world of young/start-up media and technology businesses for over two years now (quite literally as the 2nd birthday of my small company Preparation Capital has just passed in a flash), this is my 50th Blog post and I am reflective on what I have learned.

The short answer is a lot, and I’m learning more each day. I’m glad, however, that I still rate it as the most exciting and dynamic work I have ever been involved in.

Stepping back with an honest appraisal, the world of start-ups and early stage is not a lot more complex, or fraught with difficulty, than any other stage of company I have been involved with. In fact you could say it faces significantly less complexity as there is generally less bureaucracy, initially narrower responsibility and very rarely, in other businesses, can pure vision, creativity and drive have an opportunity to carry businesses so far.

It’s just that the challenges are that much more stark. Survival issues are measured in much smaller cause and effects (I think you measure this by the level of £’s you round down to when budgeting – I have been in companies that rounded to the nearest £1million, others more commonly the nearest £10,000 and now it’s all about the nearest £10/£100!). Equally everything is that much more personal because the majority of participants have a very real stake in the success of the company and have invested a lot more personal risk and emotion in their ventures.

Basically cash is tight, emotions are high, vision and belief carries you far but everything is being done on the edge and everyone seems to think that external investment is the answer to everything. A different set of challenges to those found in other enterprises.

It may seem an unusually banal series of things to have appreciated over two years but it is the analysis of these that interests me the most as it points towards what I perceive to be a very real gap in the ecosystem. That gap isn’t the commonly covered capital, more it is the provision of long-term (emphasis on long) support and counsel. I will put myself out there to say that the majority of the >180 businesses I have met in two years have needed advice and capital in equal measure yet nearly all have opened conversations with the need to raise capital to then buy in that (sometimes short-term) advice rather than seeking less capital coming with more relevant and sustainable counsel attached.

The commonly referred to ‘equity gap’ is reasonably well covered and it is certainly true that historically there was a dearth of start-up capital. However I think that, thankfully, this has become less of an issue over the last few years due to:

– the maturity of the private equity sector (where true ‘undiscovered gems’ are now rare due to the weight of capital, demand exceeding supply, lack of leverage and advisor coverage of the market) pushing focus back down onto emerging businesses;

– successful government initiatives (EIS, Business Growth Fund, ECF Funds and soon SEIS), providing attractive investment incentives and tax breaks;

– the economic environment pushing some very talented people either out of their previous employment or making them consider their options more carefully (when being self-employed has marginally less downside than being employed and employed has less upside potential then the decision matrix changes);

– the very real success of some notable young digital companies (we all know them) attracting people to the start-up sector in the belief they can find/be the next ‘one’; and

– the emergence of private and corporate venturing ‘organisations’ (accelerator programmes, seed funding initiatives, seedcamp, oxygen accelerator….). All of which are bringing to bear reasonably well priced capital and imprtant early stage support.

However I believe that what’s lacking in all of the above is long-term, operational and strategic decision making support. Filling intellectual and skill-set gaps for a meaningful time period. The truth is that most of us know a few things very well, some things reasonably well and a good number of things not so well. This is as equally true for entrepreneurs as it is for VCs, CEOs…….. I believe businesses need regular, sustainable and affordable support to cover off the challenges.

Being more specific it is the counsel and support to help manage cashflow (rather than purely managing the investment), help see past the emotional decisions that surround ownership (provide objectivity), provide process and support around the vision and belief (to make it scalable), to provide access to in-fill skills that are required (or currently unaffordable) and moreover to be there to try and help the entrepreneur every time they come near to the edge. The growth and challenge pahse is measured in years and not months.

I’m not saying that all the current market participants have failings across the board, just that there are potential areas for improvement as the gap is moving from capital to counsel. Seed programmes and accelerators are great – except that they tend to focus on an intensive period to ‘get you ready for capital’ rather than journeying with you. Structured capital is fantastic with deep pockets and access to counsel – except you can only access the advice if you take (and justify) the capital investment and the advice can tend to be less personal and more paid for/ad-hoc. The capital pays for the advice.

I am beginning to think along the lines of the need for what I am terming a ‘nurture’ style environment. I originally called my business Preparation Capital with this idea kind of in mind but not fully finessed. Preparation over time – nurture. Name aside I think it is the model I will strive for over the next two years, results to follow…….in a flash no doubt.