INVESTING

Needles, haystacks and how to attract early stage investment

Needles, haystacks and how to attract early stage investment

By Mark Palethorpe, CFO, Cox Powertrain

Mark Palethorpe

Mark Palethorpe

How do you find a needle in a haystack?  And, if you’re the needle – in our case a UK based engineering business developing a first-to-market innovative new diesel engine – how do you structure yourself to be found?  Attracting investment can be particularly challenging when you are working on something that has not been done before.  What you need is to create a business that will stand out from the crowd and stand up to scrutiny, communicating effectively every step of the way.

Investment comes in all manner of guises.  The obvious, financial investment, isn’t the only investment that you will need to attract. You will need to convince talented people to invest their careers with you, professionals who are going to dedicate their working hours and potentially stake their reputations on your innovation.  The most innovative companies will attract the curious and that works well.  You will need imaginative people who bring skills, insight and practicality into the business. Furthermore, you will need to take everyone with you on the journey.  It is one thing for an employee to make enough money to pay their mortgage but people want to feel proud of the work they do and their organization.  If your team is motivated as you get through design, testing and prototype stages, you will find them turning into vocal advocates for what you’re doing.  This attracts more talent willing to invest their time in your business.

The company’s idea is only as strong as the team that is going to deliver it.  Your company needs to have a depth of technical, finance, operational, communication and entrepreneurial skills in place.  A well-balanced team supports each other, understanding the goals and everyone’s part in the challenge.   Investors will see the teamwork and recognize how a team with ‘linked arms’ can hold together successfully when one area needs more focus.

Financial investment is clearly vital to any company.  We have raised £30 million so far and continue to raise funds to develop our innovative diesel engine.  Most of the money raised to date has come from people who inherently “just get it”.  Although you will need to have your spreadsheets in ship shape and your plans well-proofed, an investor’s decision to finance a new product often comes after you respond to these four questions:

  1. Does the market want it?
  2. Can you prove that your offering meets market demand?
  3. Will your product work?
  4. Can you protect your product?

An investor will do their diligence checks but they will also need believe in you and your product.  Having a credible team is vital.  Does the team have experience in this area?  Have they achieved something of this magnitude before? Does the way they work appeal to the investor?

An investor or adviser that isn’t put off by a higher risk opportunity wants to see that the company has corporate governance in place and is transparent about its operations.  Despite being privately-owned, we govern ourselves like a PLC with all the checks and balances required.  Not only does it help our company run smoothly, it provides transparency to current and prospective investors.

Due diligence will be done before any investment and you need to have your processes working well and the right people on the team so that investors see you are ready for when the time comes to go to market.  Your route to market will be questioned.  We spent significant time and resources on market research to back up our views that the workboat market was hungry for a 300hp diesel outboard engine.  We also established a network of contracted distributors and support centers, providing a ready route to a large international market.  The distributors and resellers’ faith in our innovation is another endorsement in what we are doing and provides reassurance to an investor that we’re working with the market in mind.

Once you have your story straight, getting in front of the right investors – the ones who are also going to ‘get it’ – takes care and often a well-connected intermediary.  Having a broker with an extended network of investors who understand the risk/reward opportunity your company offers will be invaluable.  Our Chairman and broker both have an enviable ‘rolodex’ and their ability to establish contact directly with investors saves us from getting stuck in the sifting process of financial advisors.  A financial advisor who filters prospects for their clients can be a difficult place for an innovator to traverse.  They are established, motivated and rewarded to find opportunities that bring in a good return and minimize risk.  It means they can be less likely to recommend an investment in a new market or with a first-to-market product despite the significant potential upside.

The investors’ fourth question ‘can you protect it?’ needs to be addressed early.  Get your patents written and protected as soon as possible. It is worth working with experts, as needed, to ensure that your innovation cannot be copied legally.  Few investors will want to move ahead without that assurance.

Innovators can too often get caught up in the technology and pay less attention to how they will commercialize their ideas. There is a lack of appreciation of the fact that getting a product to market – and properly supported – is a task every bit as daunting and time-consuming as that of the innovation itself. Any funding source is less likely to engage unless you can convince them that you understand this.

Communication is vital at every stage.  You will need to communicate effectively with your staff and partners, to your existing shareholders, to the market and industry and to the City.  You need to keep everyone updated on your progress.  You need to keep the buzz burning.  When you get a chance to step in front of a prospective investor, be ready.  The elevator pitch is more than a cliché – it’s a vital tool of the trade.  Potential investors need to understand what you are doing in the first five minutes, and then want to buy in within the next ten.

Product innovation needs patient investment.  Unfortunately, most private equity firms require cash back in a relatively short amount of time.  They’re not geared up to support innovation that requires investment through each stage from R&D to delivery.  Innovators need investors who are comfortable with a longer-term return and not looking to make a quick profit. The Patient Capital Review, announced by the Prime Minister in November 2016, sets out to identify the most effective ways to improve the availability of patient capital for growing businesses. The review will explore options to address the factors constraining quoted companies and fund managers from making longer-term investment decisions.  Like other innovative businesses, we’re watching this review closely and with bated breath as we see this as a really positive step for innovative organizations like Cox.

The UK Government is good at encouraging entrepreneurship and the company needs to be up to speed on the support available.  There are incentives for technology companies like ours, such as R&D tax credits.  There are also tax incentives for those who invest in innovation. For example, the EIS scheme has been pivotal to us raising capital as we have progressed along our journey from concept and early design stages towards market launch.  While we are advocates of this incentive we do feel that the cap for EIS investment is set too low for companies like ours that are game changers and require substantial capital before getting into production.  However, the EIS scheme has been a positive mechanism in the past for companies like ours to gain access to capital.  Our company is geared up for EIS investors and we ensure that our communication references the scheme when we raise funds.

As a relatively small business, it can feel like you’re a needle in a haystack.  But it is possible to find a needle in a haystack with a metal detector.  If you can establish a strong team, prove your technology is in demand and will do what the market is hungry for, and communicate in a way that creates excitement based on the reality of your progress, it is possible to make yourself a very attractive investment proposition.

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