Investing in Early Stage Tech Companies: What to Look For

Posted on Jun 2020

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The importance of early stage businesses continuing to have access to funding during the lockdown is stark. According to a study conducted by Oxford Economics, employees at companies backed by angel investment and venture capital are 60% more productive than the total UK private sector average, and, once supply-chain impact is factored in, these businesses contribute a total of £37.7 billion of GDP to the UK economy accounting for 570,000 jobs. The significance of early stage businesses has been recognised with the introduction of the Future Fund - a scheme for providing government support to companies that are also receiving funding from private investors.

Intuitus is proud to support investment activity in this area and we thought that this would be a timely opportunity to compile some of our thoughts on important areas to examine when assessing early stage technology businesses. These insights are based on trends we have witnessed over the last 18 months since we launched a dedicated service for supporting venture capital investors.

Key person dependencies

It is not at all uncommon within a growing enterprise for key members of the management team to be juggling multiple roles and have an extremely long list of responsibilities. This is fine for a short amount of time but can very quickly become a bottleneck as the company scales. It also poses a business continuity risk should one or two key people end up leaving. The issue can be particularly prevalent in technology companies where a very small group of people may have written the majority of the code, or you have a CEO who is doubling up as a CTO. Always be on the lookout for these when evaluating target companies and be prepared to invest in hiring additional resource to mitigate this issue. Putting clear guidance and process documentation in place also ensures that roles can be covered by different team members.

Scalability of platform

At Intuitus, we often examine start ups where there has been so much pressure to launch the initial minimum viable product that future scalability has (understandably) not been a key consideration. As part of our assessment, Intuitus will carefully examine whether or not the software platform is built to scale, not just over the next 6 months, but throughout the expected investment holding period for the business. Where there are gaps in the technical roadmap and underlying architecture we will make pragmatic recommendations so that the target company and investor client alike can be confident that the software is able to adequately scale to meet anticipated future demand.

Defensibility of the Technology

With every emerging technology business, the barriers to entry and the defensibility of the technology offering have to be considered. If a technology platform can be replicated within a matter of months, careful thought should be given to whether first mover advantage will be enough to put others off entering the same market. The Intuitus consultant team is made up of ex CIOs, CTOs and IT Directors, people that have real world experience and industry knowledge. That means that they are in the position of being able to give a view on how unique the offering is within a particular industry as well as being able to assess the technical barriers to entry that are embedded within the technology.

The above are just some of the items that we have seen frequently arise when assessing early stage businesses. There is always a lot to consider but right now there is a wave of exciting early stage technology companies that are looking for funding. If you are working on one such transaction and would like to speak to us about our Early Stage Assessment Service, please do not hesitate to reach out to one of the team.

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