Mark Lyttleton is an experienced angel investor and business mentor who helps early-stage companies to grow and scale, focusing on enterprises created to achieve a positive planetary impact. This article will look at early-stage investing, exploring routes for the uninitiated to become involved with an investment ecosystem that supports young companies developing ground-breaking new products and business models.
Early-stage investing is an asset class that centres around injecting capital into businesses during their early stages, enabling them to develop, grow and expand. People often fall into the trap of regarding early-stage investing as an act of charity, or even gambling, due to the high risk that attaches to investing in businesses in their infancy, when they are still much of an unknown quantity. However, although the practice is inherently risky, investing in early-stage companies presents the potential for significant rewards later down the line.
To secure the backing of investors, leadership teams must carefully engineer every step, carefully checking internal and external factors as they go. Before approaching a potential investor, they need to gain a thorough grasp of what the investor is looking for, as well as considering wider issues, assessing whether the market timing is right and whether they are asking for the right amount of collateral.
In terms of securing investment, preparation is crucial. Different investors focus on different demographics. It is hugely important for founders to do their homework to save all parties time and resources, keeping in mind that each investor has their own niche focus.
Financial criteria are key. For example, some investors concentrate on start-ups seeking to raise £250,000 to £500,000, while others only consider investment options already generating over a £1 million in turnover. Fundraising can be an incredibly time-consuming activity, and it is therefore important for leadership teams to ensure their business will not suffer while their focus is elsewhere.
In crafting their investment presentation, founders must focus on quickly conveying essential information about the business, including its proposition, scale, market differentiation and executive leadership. Pitchers also need to be clear about what they are asking for, ensuring they have all the relevant facts and figures to hand.
Typically data-hungry, growth investors will need an accurate picture of various aspects of the business, including financial forecast models, customer acquisition costs, sales productivity, customer churn, market size, competitor overviews and lifetime value models.
Pitching teams should avoid falling into the trap of trying to tell the investor how much money they will make from investing in the business. Rather, it is for the investor to worry about this, as they are the financial expert, after all.
From the investor’s perspective, focusing on early-stage companies presents scope for significant risk but potentially huge rewards. Take for example an investor backing a small tech start-up in its early years. If the company folds, they could lose all of their money.
However, if it becomes the next big market player, their investment could generate an astronomical return. In reality, many start-ups run out of funding before reaching profitability or simply fail to gain traction. It is therefore imperative for investors to carefully consider the potential and track record of the start-up before providing their financial backing.
When investing in early-stage start-ups, mitigating risks and maximising returns is crucial. Investors in early-stage companies need to weigh up a variety of different factors in their investment decisions, key among them focusing on the founding team and assessing their level of experience and track record of success.
Investors need to conduct thorough due diligence, as well as assessing market potential. For investors seeking to diversify their asset portfolio, investing in multiple early-stage companies or a portfolio can help to minimise risk, particularly where they spread investments across different geographies and industries to hedge against potential setbacks or industry-specific challenges.
