Digital Tech: When is it a worthwhile investment?

Authors: Jack Livsey & Jason Teng

On 1^st November, Potter Clarkson collaborated with Pro-Manchester and Bruntwood to host an event including panel sessions with investment and start-up experts.  Here are our top take-home messages for tech start-ups.

Growth is king

 We asked our panel of investment experts which key performance indicators (KPIs) they look at most closely to determine a high quality investment.

“It all boils down to growth.”  (William Chappel, Head of Growth Credit, Palatine Private Equity)

A company that can demonstrate growth and present a strong case for that growth continuing will be an attractive investment proposition.  In order for the growth to continue, it must be sustainable and investors will analyse a company’s cash flow to determine this.  For example, one indicator of sustainable growth is whether products are being sold for a profit.

A slight exception to the ‘growth is king’ mantra is the IP-rich start-up with a strategy framed around licensing or even selling the IP once it has reached a critical mass.  In these cases, it may be very difficult to demonstrate growth in the typical ways (e.g. number of customers, quarterly revenue, profit per sale, etc.).  Instead, a well-maintained and well-documented IP strategy can indicate growth by demonstrating the ongoing generation of IP, how it is being protected and how it can be leveraged in the market.

Is there (still) a market need?

Our panel of investment experts also shared that investors will spend a lot of time validating a company’s proposition in the market.  For example, an investor will speak directly to customers to analyse whether there is a need in the relevant market for the product or service that is being sold.

However, almost all start-ups are founded on the basis that there is a market need for their particular solution, so what is happening to that market need by the time that potential investors carry out their analysis?

Our panel of start-up experts explained that the market need around which a start-up might be founded is often based on assumptions from the founder. This is fine in theory, but it is important not to advance too far without validating the assumed market need.

“7 out of 10 businesses that fail, do so because they don’t understand the needs of the customers.” (Jessica Grocutt, Enterprise Acceleration Manager, Natwest Group)

 Our panellists recommended having an open dialogue with customers (or potential customers) to understand what is needed and how that need can be fulfilled.  The digital space evolves incredibly quickly and, as a result, so do the needs and wants of the customer.  Therefore, particularly in the field of digital tech, staying up-to-date on customer needs through regular customer interaction will help validate the market need as it continues to develop.  You can then be confident that the market still needs your product when pitching to potential investors.

More information:

If you are a tech start-up looking to attract investment and would like help with refining your IP strategy to demonstrate growth, please contact us to find out about the services we can offer.  (https://www.potterclarkson.com/footer/contact-us/)

We would like to thank Pro-Manchester and Bruntwood for assisting with our event, ‘Digital Tech: When is it a worthwhile investment?’.  We would also like to thank our expert panellists:

• Claire Bennet, Director of Sales and Partnerships – IN4Group
• Emma-Louise Fusari, Founder/Clinical Director, In-House Health
• Jessica Grocutt, Enterprise Acceleration Manager – Natwest Group
• Manoj Ranaweera, Founder, Techcelerate / SkilledUp Life / Deal Lite
• Mark Lyons, Investment Director, Puma Private Equity
• Samuel Davies, Director of Corporate Finance, Cowgills
• William Chappel, Head of Growth Credit, Palatine Private Equity