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The Challenge Of Attracting Early Stage Investment

Early stage finance is notoriously difficult to get your hands on. Here's how one young, innovative company raised £40m from investors.

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Early stage finance is notoriously difficult to get your hands on. Here's how one young, innovative company raised £40m from investors.

Guides

The Challenge Of Attracting Early Stage Investment

Early stage finance is notoriously difficult to get your hands on. Here's how one young, innovative company raised £40m from investors.

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Attracting investment in a new business can feel like an uphill struggle. If you’re working on something that’s going to transform your industry, then convincing others to support your venture requires more than just the energy and persistence to make that climb.

You need to have your story straight, the right people in place and a sure route to the top.

Financial investment isn’t the only investment that you will need to attract. In fact, before you start presenting yourself to the financial community, you need to convince talented people to join you, investment their time and potentially their hard-earned reputations in your company and its innovation.

The company’s idea is only as strong as the team that will deliver it. In order to get those people on board you need to appeal to their curiosity and desire to work on the Next Big Thing.

For a company like ours, set up originally by a Formula 1 engineer to remaster the technology behind diesel engineering, we gained interest early in our promise to develop a first-of-its-kind 300hp diesel outboard engine [the result pictured above].

We were looking for imaginative problem-solving specialists with the right track record to see our innovation from design through proto-typing and testing to launch.

It’s not just about paying their wages, your staff needs to be motivated throughout the journey, becoming advocates to what’s being worked on and committing their insight and passion to the job in hand.

Your company will need a wide range of talent from technical, finance, operational, communication to entrepreneurial skills. A well-balanced team is a team with ‘linked arms’ – one that supports each other as needed through the highs and lows, holding together successfully as you move towards the end goal.

A great team with credibility and capabilities to deliver will have an impact on the financial investment you’ll be able to attract. We have raised £40 million so far and continue to raise funds to develop our innovative diesel engine.

Most of the money raised to date has come from people who “just get it”.  They share our belief in the engineering innovation and believe in our ability to make it happen.

Of course, you will need to have your financial projections and research in unshakeable order, however, any investor’s decision will be influenced by your responses to these four questions:

1.     Does the market want it?

2.     Can you prove that your offering meets market demand?

3.     Will your product work?

4.     Can you protect your product?

An investor will carry out due diligence checks but they will also need to feel secure in you and your team. You need to have a team that they can feel confident it, that has worked on similar ground-breaking activities, that is proving that they can work as a unit to get to a well-understood end result.

The company must be clear about its ambitions and the work that it is undertaking that needs financing.  We are always transparent about our operations.  Despite being privately-owned, we run Cox Powertrain like a PLC with all the checks and balances required.

This certainly helps our company run smoothly, but it also provides clarity to current and prospective investors.

Your future market and the distribution channels you will use to make back the return on any investment need to be clear and well-researched. You’ll be questioned about your route to market and the potential desire for your product.

We spent a good amount of time and resources on market research to back up our views that the workboat market was hungry for a 300hp diesel outboard engine.

And, by establishing a network of credible distributors and support centres, we were able to show that the company is ready to deliver financial returns. The distributors and resellers’ commitment to our product is an industry endorsement in what we’re trying to do and it certainly creates a comfort factor amongst the investment community.

Explaining your story and showing off your company’s organizational talents requires you get in front of the right investors - the ones who ‘just get it’. This often takes the help of a well-connected intermediary.

Our Chairman and broker both have an enviable network that they can draw upon to set up the meetings we need.  It certainly helps if you can avoid the ‘slush pile’ of the many hundreds of other small innovators looking for investors.

A financial advisor who filters prospects for their clients can be a difficult starting point because they are employed, motivated and rewarded to find opportunities that bring in a good return and minimise risk.  Many are unlikely to recommend an investment in a new market or with a first-to-market product whatever the potential upside.

What you’re looking for is patient investment. Unfortunately, the majority of private equity firms require cash back in relatively short amounts of time. Many are not structured to support and finance innovation through each stage from R&D to delivery.

Innovators need investors who seek a longer-term return and are not just looking to make a quick profit. The Government’s Patient Capital Review aims to identify the most effective ways to improve the availability of patient capital for growing businesses.

Like other innovative businesses, we’re intrigued by the findings of this review as we see this as a really positive step for innovative organsiations like Cox.

Funding is available. In fact, the UK Government is good at encouraging entrepreneurship and there are incentives for technology companies like ours, such as R&D tax credits. The EIS scheme is another example of an initiative that has been pivotal to helping us raise capital.

The Autumn Budget promised to increase the cap that is currently in place on the EIS scheme, which is great news.  At the moment, we feel it’s set too low for companies like ours that are game changers and require substantial capital before getting into production.

Too often innovators get caught up in the technology and what remarkable feats of science they are able to achieve, giving less thought to how they will commercialise their ideas. In reality, getting a product to market – and properly supported – is a challenge every bit as daunting and time-consuming as that of the innovation itself. You need to prove you understand this.

You don’t have the luxury that some larger innovators have, to experiment with the technology without your eye firmly on the market opportunity. It’s important to get your patents written and in place early too. That’s all part of the commercialisation process and you’ll need to ensure that your innovation cannot be copied legally if you want any investors to take you seriously.

And, at every stage, it’s vital that you communicate. With your staff and partners, to your existing shareholders, to the market and industry and to the City. Keep everyone updated on your progress. Keep building the buzz.

Convincing the market and the investment community that you are one to watch doesn’t happen overnight.  You need to establish a strong talented team, prove your technology is in demand, and communicate in a way that creates excitement based on the reality of your progress.

Mark Palethorpe is CFO of Cox Powertrain.

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The Challenge Of Attracting Early Stage Investment

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