New Innovate UK study shows investors and businesses fail to see eye-to-eye on what drives innovative companies to attract private investment and successfully scale up.
British businesses are missing opportunities to secure investment, grow and scale up because of misunderstandings in what investors are looking for, according to a new report published by Innovate UK.
‘Scaling Up: The Investor Perspective’ compares the views of investors and scale-up business leaders on the key factors for success and includes the views of investors both in the UK and internationally.
The report finds that business leaders consistently underestimate the value investors place on ‘softer aspects’ like chemistry (78 per cent investors versus 53 per cent businesses), poor communications (84 per cent versus 46 per cent) and resilience – which were cited as deal-breakers. Out of the investors surveyed, 87 per cent said a lack of adaptability and resilience was a key deal breaker. Only 58 per cent of businesses thought this was a deal-breaker for investors.
Both investors and leaders of innovative scale-ups believe that a strong management team is the most important ingredient for scale-up success (96 and 82 per cent respectively), with drive and passion cited as the most important qualities.
When it comes to investment decisions, almost all (97 per cent) of investors surveyed agreed that a weak management team was the number one deal breaker. Interestingly, 74 per cent of investors have turned down an investment opportunity based on gut feeling.
Chris Wade, venture partner at Octopus Ventures comments: “I have been developing a 20-year thesis that nothing works out from a company pitch; their products or services always end up taking a different direction. A strong team can build a company, but a weak team – even with a brilliantly compelling idea – wouldn’t be one for us to invest in.”
The aim of the Scaling Up: The Investor Perspective report was to identify how investors, government organisations and advisors can better support innovative UK businesses to scale and export. It comes at a time when innovation and exports have become a central part of the UK’s industrial strategy.
Dr Ruth McKernan CBE, CEO of Innovate UK comments: “Attracting investment is often a key challenge for innovative businesses and the brilliant people at their heart. At Innovate UK we are increasing our focus on connecting innovators with both government grant funding and venture capital investment, to turbo-charge their journeys to success and the UK’s economic growth.”
Dr Jeremy Silver, CEO Digital Catapult, added: “Digital Catapult helpa UK companies of all sizes grow and scale their businesses through digital innovation. We want to help more companies grow faster for longer, rather than rushing to trade sales. We recognise that this requires entrepreneurial and investor confidence. We run projects to help companies achieve those goals; recent successes include Nymbly, Cambridge Bio-Augmentation Systems and Smartify. We recently launched Dimension Studio last week which sees Digital Catapult partnering with Microsoft and Hammerhead bringing world leading volumetric capture technology to the UK. This new report on scale ups will inform and engage the key players in this sector.”
The report highlighted further disconnects when it came to understanding what both UK and international investors look for in innovative businesses:
- Two thirds of businesses (65 per cent) thought timescale to exit was a deal-breaker for investors while less than a third (28 per cent) of investors said that they had actually turned down an investment opportunity for this reason.
- 70 per cent of investors felt cultural fit was a deal breaker, versus only 50 per cent of businesses.
- Businesses (74 per cent) overestimated the importance of fit with the investor’s portfolio, with only 55 per cent of investors saying it was a deal-breaker.
International expansion was considered as important, and encouragingly, 92 per cent of UK innovative scale-ups currently or are planning to export in the next 12 months – but that does come with challenges. Lack of local market knowledge and having the right contacts are seen as two of the biggest barriers for scale-ups looking to grow internationally. Fortunately, the UK is seen as an attractive target for international investors, with 47 per cent saying that UK scale-ups are more attractive than those in other countries.
Innovate UK will use the results of this research to inform and improve its work on follow-on investment and the formulation of innovation loans, which it intends to launch during November 2017.