I have grown up in business, and I have ‘grown up’ in business. Throughout my childhood, I moved around with my parents as they explored and often succeeded in their business ventures, from pubs to cafes, an off-licence to a deli and sandwich shop, it was my education to a degree.

Now it’s fair to say that as a child I would not have really understood how tough this was, but I worked in every one of them and quickly picked up that you needed to make more than you spent at the very least.

Google ‘how to set up a business’ and you will find lots of advice starting with getting a good idea, almost always including research and pricing strategy. Why is pricing important? Because you need to make more than you spend. The price of your service or product must be considered to cover all your overheads and then hopefully you will be left with enough to take a salary. If you want to grow and develop the business then you need to reinvest in it and you may look at expansion and marketing, you wouldn’t normally do this until you have proven the concept.

At some point you may consider an investment – now things get interesting. For most this is scary and probably the first time they will really sit down and work out whether they have a business worthy of investment. For some it’s all about selling, convincing people that you can do it, your concept is spot on and with the right marketing, the right team and the right investment this business of yours could be huge. Now it comes down to the investor, ultimately this is their line of business and they will make the decision based on their own process, however, they all want to make more than they spend.

What if this isn’t how you do it though? What if you start with the investment?

 

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I’m getting old!

See the way I have described things is for me the way I would WANT to do it. I would take more pride out of any achievement this way. Not every business will take the world by storm, will make you millions, will change lives and not every business has to.

Over the past decade, I have seen ideas get huge investment just for being an idea. I have read the headlines as businesses posting huge losses year after year announce a merger, acquisition, takeover or investment all in the name of growth and often ‘undisclosed’ amounts. Companies listing with crowdfunding platforms with a fantastic sales message, phrases like ‘unicorn’ and ‘disruptor’ and I feel old.

A great business should provide either a great product or a great service and there should be a need for it in one way or another. Unless your business is based on raising investment then raising investment should not be your main goal. Selling your product or service and proving that there is a need for it should be. After that, you may conclude a need for investment to facilitate growth or development.

There is a new breed of founder/entrepreneur and I think they have been mis-sold the notion of both. In any case, it is spreading like a virus across all sectors and the damage it is having on business and investment is yet to be properly realised. There are of course many reasons that things don’t work out and I am not saying that there is only one way to do things, it is ok to get it wrong – but is it ok to get it spectacularly wrong?

 

Drawing the line

As I said earlier there is a hotly fought route to success using investment as the label. For some gaining investment is a success and an awful lot of founders are not sure what to do once they have it, partly because this becomes the ambition and partly because they didn’t plan for beyond the investment.

Now in the pursuit of success and raising investment (in my eyes the two are independent of each other) some become blinkered. Selling a vision or a dream is fine especially where you sell it to professional investors, after all, they must have done their due diligence, they have weighed up the risk and decided it is worth a gamble. Any investment is good, right (in the case of Powa Technologies and Wellington Partners, perhaps not)

Topless dancers, champagne and David Bowie: Inside the crash of London’s $2.7 billion unicorn Powa

Wrong – not all investment is good, most founders will need a considerable amount of support to deliver a return on that investment, some will need further investment as they underestimate the requirement and others may not really need it at all. Investment is more than just the money, it is skillset, introductions, access and so on. Pairing with the right investor is as important as any cash amount…understand your real requirements.

Then we have the investor themselves, when do they become a victim of overzealous belief? One might suggest certain fundraising platforms have lots of these ‘victims’ especially as they make it the job of the investor to verify everything that they allow to be displayed on their sites. If a company makes a claim on this platform and this is also reported in the national press, then it must be true. The only problem with this is that by the same notion of a mis-sold entrepreneur label there is also a mis-sold notion that you can put £100 into something and make a million, it’s just all about timing. This leads to fundraising platforms having more non-professional investors and they need more support in their decision to invest (unless they are punt investors investing in exchange for market intelligence rather than for economic return).

The line then should be drawn at knowing your pitch is just a sales pitch and there is little to no chance of it becoming a reality. At this point you should stop selling the vision and move on without taking any more money from either professional or non-professional investors, if you continue then you are no longer doing this for the right reasons.

 

Getting it all wrong

Getting it wrong is fine, part of the learning but it’s how you handle it that sets you apart. Take the collapse of Emoov, at the helm, was a passionate founder with a lot to say on the rise of online agencies in the UK PropTech sector. With a vision to disrupt the estate agency sector and eventually being focused on challenging the online market leader Purplebricks, Emoov set out on a path of rapid growth which required significant investment.

A reported investment total in excess of £20m, the most recent coming from a Series B investment round in Aug 2017 raising £9m and then an Equity Crowdfunding round closing in July 2018 of £2.62m. The second crowdfunding round came just a couple of short months after announcing a merger with two online competitors, Tepilo and Urban.

eMoov’s crowdfunding campaign raised £2.62m

At the time of the announcement, a statement confirming a further £15m of investment was made, this has since turned out to be untrue but was highly likely to have generated significant interest in the crowdfunding round which was heralded as the ‘last opportunity’ to obtain shares before a planned IPO. In fact, the company announced financial difficulties some three months later and went into administration two months after that. Is this getting it wrong or getting it spectacularly wrong?

Who owes a duty of care to the investors? The journalists publishing those releases making bold claims without corroborating? The platforms which list the investment opportunity and repeat claims or the CEO and board making these claims despite knowing the investments were not actually agreed?

Would Emoov have been better understanding the market and developing the service or product required? Was it a victim of dream chasing? Did it blindly follow the market leader in the hope of achieving the same ‘success’? We will never know, only those involved will but one thing that is known is that ordinary people were hugely affected with job losses, no wages, customers losing out on services that had been paid for and a huge amount of investment lost.

At the start of 2018, the Telegraph reported a four-year high in the number of businesses going bust throughout 2017 with one in every 213 companies falling into liquidation. Demonstrating just how tough business is when you add in external investment you have a whole new layer of pressure.

 

Summary

Manoj Ranaweera, Founder of Techcelerate commented,

Unfortunately “fake it until you make it” has become the motto for a large number of founders/entrepreneurs within the tech ecosystem. This sets a dangerous path where jobs and partnerships are concerned. As history shows us this attitude can result in the loss of significant investment capital. Professional investors have not been immune from such disasters when hype overtake substance and Fear of Missing Out (FOMO) removes safety measures built into investment criteria.

We at Techcelerate want to ensure we carry out due diligence as much as possible before we represent a tech company. For us, trust takes precedence over monetary returns. We would rather help a company with traction who is unknown in the market to those who have significant hype and cool tech but very little sales if any to prove the value of their proposition.

 

Update

Since publishing this post, friends and strangers alike have reached us with similar spectacular failure stories. Below is a selection of few:

  1. Roomi (USA): Behind Roomi’s ruin, allegations of reckless spending and nepotism – Reason for failure: The title says it all.

  2. Wonga (UK): Wonga collapses into administration – Administrator was appointed on 31st August 2018. Reason for failure: Misjudgement of forthcoming regulations.

 

 

Image credits: Daily StarBusiness Insider and The Negotiator

Article by Alexandra Morris – Head of Techcelerate Network 

In addition to running MakeUrMove, Alexandra is responsible for the growth of Techcelerate Network from a mere seed to a thriving network demonstrating unparalleled value to Techcelerate customers as well as Members of the Network.