Why we decide to provide innovative startup advice at cost and align on success

THE CORPORATE INVESTMENT TIMES

MAY 2020 | WORLD‘S TOP NEXTGEN INVESTMENT MAGAZINE

USHERING THE NEXTGEN

www.CORPORATEINVESTMENTTIMES.com

AFS provides consulting services and execution for innovative small and medium enterprises or startups. One venue of raising capital for such clients is the Horizon 2020 initiative of the EU. The EU through its European Innovation Council provides grants of up to 2.5 million euro and equity investments of up to 15 million euro to accelerate innovations with sufficient technology readiness level and bring them to market.

In late 2019 we decided to offer our advisory services for innovative start-ups at cost and align our motivation with their success. I took this decision by chance without expecting COVID-19 global crisis that was to follow. The VC finance for start-ups, let alone innovative ones froze to virtually zero since the outburst of COVID. Even transactions that were pre-committed were postponed or even cancelled. Ours turned to be a lucky decision, the Horizon Accelerator programmes remained one of the few sources of fresh cash for startups. Providing services at cost meant that SMEs did not have to expend their well-considered limited cash resources in order to gain access to the programme. We truly believe that we benefit a lot and that our clients gain even more and this yields a win-win partnership indeed.

First, our original was motivated by the wide-spread lack of liquidity at most of the small and medium enterprises striving to develop something meaningful and bring it to market. The more complex and challenging their initiative was the less cash they had. In addition, the more advanced in their development the more acute was the cash problem. Usually the last stages of a development are periods when the cash needs grow and exceed all the original estimated made by the entrepreneurs.

Second we were enchanted by the idea to attract a wide range of startups, at different stages of their development, with versatile sophistication of their approach and a ranging capacity. Our main goal was to engage early in the development process in order to add value and prevent most common mistakes. As a bonus, we would also assist and match SMEs to the most suitable funding sources whilst also leveraging our network of contacts in the family offices and HNWI segments. The most advanced startups get directed to the Accelerator programme, the VCs and institutional investors.

Third, creativity and enthusiasm does not necessary imply free-style management but they often come paired. Our experience shows that a lot of startups fail because of lack of discipline, process and systematic approach. Hence, we wanted to impose.

Fourth using the analytical framework of the EIC is a very good tool to form a systematic view, approach and process of running a startup. It also pushes the startup team to be market-centric and not tech-centric. The customer is the king and the source of cash. We make startups grasp the whole picture, not only what their innovation is about.

Fifth we pace the startups to work within a clear and realistic self-set time frame so that they progress towards the market as fast as possible.

We review the whole offering, check and assess its realism and RoI for each and every element in it. This is when distractive, non-core goals are to be better postponed or left out completely. We also  explain the importance and require that they set measurable objectives.

 

What are the characteristics of a successful investment proposal?

First the startup must possess the operational capacity to carry out the project and communicate it in effective way with facts, clues and signals.

The SME should demonstrate and provide convincing description of substantial demand and customer willingness to pay for the innovation. Demand generated by new ideas, with the potential to create new markets, is particularly appreciated.

In order to support the above  a credible and convincing description of targeted users of the innovation must be presented together with how their needs have been addressed, why the users or customers identified will want to use or buy the product, service or business model, against what is currently available if anything at all.

Another must-have is a realistic and relevant analysis of market conditions and growth-rate, competitors and competitive offerings, key stakeholders, clear identification of opportunities for market introduction, market creation or disruption.

All of the above should be featured against the backdrop of a realistic and relevant description of how the innovation has the potential to scale-up the applicant organisation and its business. This should be ideally supported by a well-versed and argumented business plan with a clear timeline, and complemented, where possible, by a track-record that includes financial data. The commitment of the team should be demonstrated with clues, signals and where possible facts. Highly appreciated are proven commercial and management experience, including understanding of the financial and organisational requirements for successful execution and scaling up of project and business.

A key part of a successful proposal is a realistic and relevant strategic plan for commercialisation, including approximate time-to market or deployment. Activities to be undertaken after the project to make it long-term sustainable should also be discussed in support of the overall go to market strategy.

In order to increase the realism and long-term sustainability of innovation, the proposal should ensure the freedom to operate the innovation, communicate a well-developed knowledge-protection strategy, including current patent protection filing status, know-how ownership and licensing issues should be communicated in the proposal.

Statistics show that high-risk/high-potential innovation idea projects that have something unique that nobody else has usually score highest. Ideally the innovation should be better and significantly different to any alternative. Game-changing ideas or breakthrough innovations are particularly highly valued. This high degree of novelty comes with a high chance of either success or failure and there is no downside in clearly stating that. On the contrary this is exactly the type of projects that get support from the programme.

Realistic description of the current stage of development  and clear outline of the steps planned to take this innovation to market are not only necessary for probability of success and realism of overall plan, but demonstrate in an objective way the level of experience and maturity of the key execution people, especially top management of project.

Characteristics that score high for the proposal include highly innovative solution that goes beyond the state of the art in comparison with existing ones, including on the basis of costs, ease of use and other relevant features as including climate impact, the gender dimension or any other benefits for society.

The proposal should also make sure that its objectives as well as its approach and activities are consistent with the expected impact in terms of commercialisation or deployment resulting in company growth. Project outcome should also relate to measurement indicators and criteria for success.

Availability of resources required including human, facilities, networks, to develop project activities in the most suitable conditions are also taken into account by evaluators.

Finally all of the above points made should be addressed in a mutually compatible and reinforcing way with any conflicts between them eliminated or explained.