INVESTMENT – IS IT ALL IT’S CRACKED UP TO BE?
First published on the Engine Shed website, and reproduced here with their kind permission.
The British Private Equity & Venture Capital Association (BVCA) produced a report in 2013, the year Engine Shed opened, called “Tech Country“. It used a model that used the strength of a tech cluster in terms of culture, networks, knowledge, and finance, to compare a number of clusters in the UK, including Bristol.
In that report, Bristol scored 100% for culture, over 80% on both knowledge and networks, yet around 50% on finance. So despite there being an almost perfectly fertile environment for growing technology businesses, and a top-notch supply of startups coming through the two SETsquared incubators and others, there was a finance gap. For that reason, we have put a lot of effort into stimulating the investment environment here. And not just for technology businesses: whilst our host incubator, SETsquared, is tech focused, Engine Shed is sector agnostic.
We have been reflecting over the last few weeks on what the landscape looks like, and we have surprised ourselves. Although perhaps it’s not surprising, given the fertile base, that the depth and breadth of world-class investment deals over the last 12 months shows that the amount of finance available offer to enterprises here is now quite stunning. We have mapped what’s on offer to enterprises looking for investment here. Much of the recent investment has not been sourced locally so there’s still more to do, but just look here at the amount of investment-related events coming up.
What you’ll notice is that the sources of funding are not exclusive to tech, nor to purely for-profit enterprises. It is increasingly the case that the blend of investment opportunities – on both supply and demand side – is just that, a blend. It’s not one-size-fits-all nor is it black and white. For example, the new Bristol City Funds will be exploring taking in money from both philanthropic and “I want a return” investors to fund societally impactful enterprises, which themselves will be a mixture of “I need a grant” and “I’ll take your money and deliver a return”.
This shouldn’t be a surprise – especially not in the Bristol & Bath area, where we are renowned for a diverse economy and an innovative approach to everything. I have been working with 100s of entrepreneurs since 2005 helping many of them raise investment, though many have not – after all, revenue is the best source of cash.
With colleagues more widely, we’ve been exploring the investment needs of businesses in other sectors such as creative industries, and helping design investment-readiness training. The fundamentals are the same: a business is a business and needs to be clear about what it’s trying to achieve, what is needed to achieve that, and what the likely outcomes (for the founders, company, and investors) are. I think the really interesting area is what ‘return on investment’ now means to different investors, and where social value fits into that.
The social impact of a business or its products, and the values by which it operates are increasingly important to investors, not least because of the increasing understanding that this leads to more sustainable growth. I think ROI from yield, in smaller businesses, will play an increasing role over capital growth and the currency of social value will increase. Of course, investment is a people thing, so it boils down to the beliefs and values of the investor as much as the investee.
It’s fair to say that we have seen some positive change in the behaviour of investors. The late Kenn Lamb, an erstwhile SETsquared mentor, coined the phrase “Carnivorous Sheep” in describing the investor community in their behaviour of being quite risk averse and much keener to follow others, yet trying to devour whatever they can get their teeth into. It’s not like that anymore, mostly.
The investors we deal with are far more likely to understand the interests and needs of the entrepreneur/CEO and to understand their distinct responsibilities as shareholder and director or observer. We used to see examples of VCs appointing ‘Observers’ in company boards, which then contributed to board discussion thus risking becoming (in the eyes of the law) Shadow Directors. The investor-appointed director has to understand their responsibilities as a director over and above that of a shareholder. It’s inevitably a conflict of interest – eminently able to be managed – but a conflict nevertheless, especially when it comes to follow-on funding and valuation. But as I say, most investors we meet now understand that. They’d be breaking the law if they didn’t.
We are also seeing more London-based investors sniffing around these parts – it may be because US investors are looking at London for dealflow and scooping up opportunities there (with them big wallets and geographic myopia) and with Bristol & Bath being the next richest seam of investment opportunities, investors are looking west. Who knows…