18 Jun 2019
During the 15 years Northstar has been investing we have seen a huge range of businesses across multiple sectors and invested in over 200, in amounts ranging from £10k to £2m.
Investment Director Alex Buchan briefly describes what we look for in investment opportunities and what we believe management teams should explore to make themselves attractive investment opportunities with the right balance of risk and reward for our funds.
Firstly, at the stage we are investing it is unrealistic to expect management teams to either be complete or have all the answers. What we are looking for is the ability to analyse and understand the issues facing their business and make realistic assumptions about how to proceed.
At all stages you need to convince investors that the following stack up:
• The idea / technology
• The team
• The market
• The customer
• The competition
• The funding journey.
All of these are important but, above all else, it is the team which is the critical success factor.
To run through each of these in a bit more detail:
The Idea / technology - Investors need to understand what it is you are proposing and what it takes for it to become ready to sell. This is not just the technical development required but any other hurdles (e.g. regulations) that need to be overcome. As important is the understanding of what you need to do to convince people the technology works and is of value to them.
We will also want to see that you have considered routes to market and have sensible strategies in place to sell the product. Last but not least we will want to understand the IP position; this is not just patents but all the other defences that can built (brand, know how etc.) to protect your place in the market.
The Team – Who are you? And who does what? These are the first critical questions. We want to see a clear structure of roles and responsibilities so that all the jobs get done. We want to see both that the team has the requisite skills and the understanding of the skills that are lacking. Investors can help fill the gaps.
We look for an open collaborative approach with a readiness to seek advice. One of the most telling aspects of a team is the ecosystem of advisors providing ad hoc support. Above all we are looking for passion and commitment and a real sense of a team rather than a collection of individuals. Building a business is tough and you need to rely on each other.
The Market – at this stage investors are looking as much at the way you analyse a market as at the data you present. We want to see that you have investigated it thoroughly and have a clear understanding of what the Total Available Market (TAM) might be as well as the segment you can address with the product in its current form (Serviceable Available Market – SAM). To do this you need to be dispassionate about your product and segment the market to understand where you really fit.
A fundamental mistake that start-ups often make is to assume they can take a small share of a large market simply because it is a large market (they won’t). If your product is as good as you think it is it should be able to take the lion’s share of the market segment where it really fits. Ideally, we want to see new product in a fast-growing market, or a disruptive product which can overturn an existing market.
The Customer – Investors want to understand who really buys the product and who influences the buying decisions. One of the critical mistakes start-ups make is to try and sell to the wrong person. You need to find out who is the end customer (for example is it the doctor or the patient), who has control of budgets and what are the buying cycles. For larger ticket items where there are multiple stakeholders you need persuade someone to be your champion within an organisation. Companies in general and start-ups in particular mostly don’t talk to their customers enough. You need to persuade investors you do and that you are responsive to continuous customer feedback.
The Competition – Do not make the mistake of thinking that there is no competition even for a new and disruptive product. By default, the status quo is the competition. Teams are generally bad at analysing competition, overestimating the strengths of their product and underestimating the strengths or positioning of competitors. You have to be objective and global in your analysis (even if your initial market is local). The classic comparison matrix where your product is all ticks and the competition always has multiple crosses always feels like a fix rather than good analysis. You really need to understand your USPs and more importantly make sure they actually matter to your customers.
The Funding Journey – One critical issue to investors is what is required to get the business self-sustaining and ideally on a fast growth trajectory. This is likely to involve multiple rounds of funding, so the company needs to raise sufficient capital at each stage to achieve the milestones to take it to the next round. This means the teams need to understand their costs in detail and be realistic about what can be achieved for a given amount of cash. Early stage funders are particularly vulnerable to this requirement as generally they take their investments only so far. The overall funding requirement is therefore critical to any decisions investors make on whether they can or how they might participate in a round.
Hopefully this has given some pointers as to what investors look for in the propositions they see. As I mentioned above, we are looking to see that teams can think through these issues and pull out the key issues facing them, not that they have all the answers. The journey of a start-up is never a straight line so how you deal with setbacks and the changes in positioning you will need to make is key.