By John O’Connell, above, Founder and Executive Chairman, ScaleUp Group
Last year a Deloitte survey revealed that the number of scale-ups confident in obtaining required funding had dropped, and that the valuation of three in five had been negatively impacted by the ‘current economic situation’. There is no sugar-coating the fact it has been a tougher climate for scale-ups, founders, and entrepreneurs hoping to attract investment and grow their business.
However, the Deloitte survey also showed overall confidence for growth remains high. And for some sectors, it’s far from doom and gloom. According to Crunchbase, “Although venture investment continued to slow down in 2023, that was not the case for the AI sector. Generative AI and AI-related start-ups raised nearly $50 billion in 2023.” Moreover, Sifted reported that the biggest tech deals in 2023 were all climate infrastructure.
Notwithstanding the sector and economic climate, a good proposition will stand up and attract interest. The key is understanding what investors are looking for in your scaleup, when (or if) to go for investment, and what makes you stand out in your market.
What are investors looking for in a scale-up?
For Funds, the biggest challenge at the moment is trying to distinguish between hype and reality. Investors are not looking for any more AI, software or deep tech companies. There are plenty of those. Investors want to know how you are using your product or service to provide a tangible benefit to your target market, enterprise or society as a whole.
Don’t be a solution looking for a problem. Instead, pick out the challenges your target market is facing and work backwards. Then you can build a service that tackles an issue, hone in on your USP and create a go-to-market strategy. To really get specific with your proposition and put yourself in the best position possible for funding, you need to ask yourself three questions:
- Why are you doing it?
- What is it that sets you apart?
- Why now?
If you can answer the last one in particular, then you will have an audience of investors. But as an advisory service, we would make sure that you can thoroughly answer all three before standing in front of a Fund. The important part is to explain the benefits you can provide to your target market (and don’t say you have no competition or guess what your market is worth).
Scaling your business sustainably – and where investment fits into that
Investment of course has financial and advisory benefits that can take your company to the next level. However, if approached ill-advised, it can also be detrimental and lead to more problems further down the line. It’s easy to get seduced by money, but it can be harder to get out of a Fund than a marriage! This is why you need someone on your team or an adviser who can help you decide what a good investment looks like and when you should go for it.
Your first point of call should be friends and family and angel investors. Then, you can consider a seed Fund.
This considered and balanced approach to investment feeds into scaling your business sustainably for long-term success. Scaling too quickly for your capacity can leave your business disjointed, with some departments growing quicker than others or too many hires at once changing your culture. Likewise, not latching onto opportunities when they arise can also impact a sustainable approach, leaving you with too much ground to make up.
This is why understanding your market’s challenges is key. It can help you to establish your goals and outline the areas where you want or need to grow. You might need to focus on building your public profile to help attract clientele or new hires, or you may need to spend more time on your product to keep it relevant. Sustainable scaling optimises your resources to responsibly grow the business in line with your objectives.
Navigating the VC landscape
Some founders may be caught between going for funding now or waiting another year until the economic outlook is better. If you have experience, understand your market’s needs and your proposition stands up, you can attract investment. There are still plenty of Funds and money out there.
I was recently at an event for AI scaleup founders and entrepreneurs to share my thoughts and advice on investment for this market. 1,100 AI companies were founded in the last year alone. Clearly, standing out in a crowded market has never been more important.
We have so many AI companies, to the point where it is creating cynicism amongst Funds over people who say they are an ‘AI company’. Therefore, most importantly, rather than become yet another AI company, entrepreneurs need to focus on what problems their target audience is grappling with and use AI to solve them. Otherwise, their voice will simply get drowned out by the bigger giants in the AI world, many of whom will have deeper pockets and be able to ‘shout’ louder. The same principle applies to any tech scale-up.
Another topic to emerge from the event was whether the lure of the US or China as the largest investors is something to consider. Well, there are a lot of things going for the UK: the EIS is a phenomenally creative scheme to help founders raise money and grow their business, and it has created some real world champions; we have two of the top 10 universities in the world; and we are the largest AI market in Europe and third largest in the world. So, I would say focus on your home market before thinking about conquering others.
The bottom line
Founders’ confidence in getting funding may be mixed, but the investment market is still full of opportunities – if it’s approached in the right way, at the right time.
For scale-ups looking to differentiate, they have to focus on the benefit they are providing to their target market. By identifying the problem you are solving – and outlining why you should be doing it and why the time is right – you can create a specific proposition that goes beyond generic platitudes. You also need to be aware of when you should go for investment and understand the various opportunities and trends in the VC market.
Each scale-up is unique, and that means you will need a tailored funding strategy. But being able to understand and articulate to investors what makes you unique is exactly what will help you stand out.
