AXIAL CAPITAL

I had coffee recently with a good friend and entrepreneur who had come out into the daylight after many (many) long months of building out his latest venture. We were sitting at the window bench of a great little west London coffee & vinyl bar that we like to meet at to talk over life and business, and he made a comment that struck a chord: “sometimes you just need to know when to draw a line. And accept that even by investing more hours, more weeks of work, it simply isn’t a good enough venture to pursue in the long run”.

He was referring to his recent venture, and he was talking to the right people to become supporters of that new venture, but the committed buy-in he wanted from those people to fully validate the business model ultimately wasn’t there. As a many-times founder he’s experienced in building businesses and is aware of how important validation and a supportive corporate structure is, early doors, if you hope to deliver and to make a viable and sustainable business from a new venture.

And now to drawing a line on DD. As a corporate-led investor we have an investment model on our Ventures side of the business, and we tend to stick to it. So it was a sage reminder of how to most effectively use (invest) time when my friend said that sometimes you just have to draw a line – particularly as we receive 40+ requests each week across our Ventures and our Corporate Finance desks.

Whilst DD is a series of financial, technical and human reviews and typically involves many hours of combined efforts to agree that taking the journey together make sense, it must start with the founders of a business having an understanding and appreciation of what it really takes to build a lasting business – and not to become one more of the 80%+ of founders that see their business fail before it ever truly succeeds. At the centre of any good investment is aligned interests and a managing team that understands the value of a strong corporate structure. And it’s that critical acid test that we apply at the early stages of DD to gauge whether a business (and its founders) can see those realities and will be truly backable, which allows us to draw a line and to walk away when a founder tells us all they want is the money so they can ‘go it alone’.  

Just as we value the collective DD process that we often undertake with our co-investors, we also put more focus on those investment opportunities where the founders put value on building their business with a robust corporate structure in mind from the earliest stage of growth. And those future leaders are to be celebrated!

As a corporate investor that backs growth-stage businesses with operational capital as part of a funding round, we have always advocated for good business fundamentals just as much – and in fact as a priority – as the focus on burning through investment just to achieve unsustainable growth.

Here’s a good reality check for founders striving for success. Businesses have to make money to survive and to succeed, and investors are increasingly losing patience with the tried, tested (and often failed) attitude of ‘growth through negative burn’. In a recent survey of founders at the time of writing this article, 84% said they were under more pressure (from their investors) to prioritise profitability. An unsurprising sentiment given the tighter early stage investor landscape – it will be interesting to know what others think?

The upside being that founders have mostly followed that advice, with 64% having cut back on new hires and 57% trimming staff costs; and 49% have also made savings on office costs.

Increasingly founders have said they’d like more help with fundraising and industry connections and customers, which is exactly the strategic support we believe investors, whether cash or corporate in their model, should focus on when backing growth-stage companies.

The survey also found that 71% of startup founders feel like their relationships with their investors have gotten worse, not better over the past year with 44% of founders acknowledging that many VC investors were not helpful when it came to business strategy – meaning that founders, often first-time leaders, are left unsupported in executing on the growth initiatives that all stakeholders have ultimately bought into by backing the business. It’s high time that founders and funders alike leverage the real value of ‘better together’ when scaling for success.

Big salaries don’t always equate to big opportunity, and for the right talent with the right ambition a growth-focused company that needs your skillset can be the right opportunity. And if you’re a founder then you already know what we mean! When we commit our resources to a portfolio company it’s usually when that company has proven that a substantial market exists for their service or technology, and it’s usually at a time where just a couple of founders are juggling much of the operational growth – and the headaches. This is where growth investing comes into its own.

The balance to be struck for a founder is to get the best possible skills and know-how into the business at a time when cashflow is often at its tightest. And for those with the talent to generate the accelerated results that an early stage business craves the upside needs to be attractive enough for the effort required – with an aligned objective to make big things happen for the business. So, how to square the circle?

The team that ultimately builds a business is often not just the founder and a core group of employees. To create a camp of knowledgeable or well-connected shareholders and advisors, along with operational team members that share your vision and will benefit when the business does well, can serve a business well to accelerate growth. That shared vision and shared reward-for-effort can (and often should) be a fundamental component of the returns that each member of the camp will work toward, and tying equity to that involvement is the ultimate reward mechanism.

Aligning equity accrual and income upside for your supporting ‘camp’ will keep everyone focused on the blue-sky objectives of the business, and at the same time will encourage more engagement on challenges and opportunities – and importantly, ideas and solutions to keep the momentum you want. Once you create alignment that encourages a win-win culture for everyone who supports your business, then you’ve created a collective vision that everyone can buy into.

So what next? It’s time to think about what skills and value-add you’d like to bring into the business, then think less about how much cash you want to raise to ‘buy’ those skillsets, and instead think about how to align interests for everyone so value is earned and shared. Talk to us about it, we take that approach across our portfolio every day.

We recently read that since 2015 almost a third of European companies who expanded to the US did so even before they had raised a Series A. That’s a big step at such an early stage. Expanding to the US is a strategic decision for a startup, and expanding too soon could potentially be at the expense of continued growth on your home turf. But expand too late and you risk losing the US market to a competitor.

The ideal scenario for any scaleup is to get traction and to position yourself both in your home market and in further growth markets – at the same time. Getting your business to a place where you have users in a target market already engaging with you, rather than going in cold with full commitment and a big investment risk, can make executing your growth plan a lot easier. And that’s a strategy that can pay dividends if it’s executed the right way.

Axial Capital has established a presence in key markets including the US and Europe to support our portfolio companies with a lean platform for accessing these new markets, providing a soft-landing approach for accessing the international marketplace. The creation of a US subsidiary will immediately bring you within the US tax net in one sense or another, so a soft-landing approach can be the ideal way for ambitious business operators to spearhead in-country market testing and business development ahead of making a more substantial commitment.

By investing our resources in first phase US expansion for British and European scaleups – or vice versa for US businesses that want to enter the UK market – our portfolio companies can manage this expansion from their home operating base until it feels right to ‘follow that growth’ with a new corporate entity in-country. As the post covid-era of growth businesses increasingly have a tech-enabled bias and are scalable by nature, the obtainable market for so many of them is as exciting as it’s ever been!