Securing investment for your IoT business
Getting the right investment at the right time and from the right partners is a vital step in scaling your business to be able to capitalise on the significant market opportunity in the internet of things (IoT). But having a good product is not enough: prospective investors will consider a raft of criteria before they put their hands in their pockets, and the product itself comes far down a long list.
Investment in the UK’s tech scene is at its highest ever level, but what can UK IoT companies do to ensure they get a piece of the action?
Stuart McKnight, Managing Director of London and Edinburgh-based Ascendant Corporate Finance, believes that IoT is no different from other sectors when it comes to securing venture capital (VC) funding. Technology may be the competitive advantage a potential investment must deliver, but that is not a given. He says: “Investors invest in businesses with technology, not technologies that might eventually turn into a business.”
Our research suggests that this view is widely supported by other VCs, and we’ve identified a broad range of key requirements that those investing in UK tech companies look for:
- People: Expert, passionate and ambitious founders who have built up a strong and capable team with the right skills and the drive to succeed.
- Market: A clear and significant addressable market, with a credible plan for future growth.
- Traction: A proven business model with material revenues, rapid revenue growth, satisfied reference customers and the potential to be highly profitable.
- Scalability: The ability to scale rapidly and globally – ideally the business has been designed to do so from the outset.
- Investors: Most VCs seek long-term relationships with the companies in their portfolio, and are interested in working with quality existing investors that will continue to participate in subsequent funding rounds.
- Challengers: VCs are always on the lookout for the ‘next big thing’ and IoT companies could have an advantage with the potential to disrupt and transform large markets, or create new ones, which they can dominate with unique products that solve real-world problems.
Although Angel CoFund tends to invest at an earlier stage than VC investors, Tim Mills, its Investment Director (a role he also fulfils for the British Business Bank)considers that a compelling commercial business case and having a team able to execute on it is as important as the product or service itself.
Millswill turn down interesting proposals if he’s not confident that the team can successfully execute, and vice versa. Echoing VC commentary, he believes that the people maketh the product. “It’s generally easier to work with a strong team and evolve a proposition than it is with a weak team where you need to get involved in the complexities of making changes and hiring people,” he says.
And what sectors are particularly hot? It’s tricky to pigeonhole many IoT companies into specific tech categories, but it’s fair to say the sector as a whole is seeing unprecedented investment activity. For Mills the focus has shifted from connected consumer products to IoT for business use cases. “The value proposition is far easier to make in a business context,” he believes. “Take a large petrochemical company with multiple refineries as an example. If it can make the business case for one refinery then it can probably make it for all of them.”
There are plenty of willing investors out there and so there is money in the pot for the right SME. Ascendant Corporate Finance has long tracked investment in UK and Irish tech companies, and its data shows that investment levels have grown substantially over the past few years. The combined value of investments worth over £0.5m surpassed the £1bn mark in 2012 and exceeded £2.7bn in 2016. While the numbers are skewed by some large investments (the 10 biggest in 2016 accounted for 27% of the funds invested), nearly 650 companies received funding from some 540 investors, and 60% of the deals were less than £2m in value. And while London-based companies accounted for 57% of the number of deals and nearly 69% of the funds invested, there are pockets of strong activity elsewhere, with Ireland and Scotland the most active. Encouragingly, strong investment activity continued in the wake of the Brexit vote: in October 2016 alone, 77 companies were financed, the highest number of deals per month in 20 years.
So, look beyond your product and service and ensure you have the appropriate people, plans and processes in place to make sure your business is one that receives funding to take it to the next level.
IoTUK will be holding an IoT Investor Day on July 17 at the Digital Catapult Centre in London with the aim of matching startups with investors. The free event will bring together investors interested in funding IoT startups and 10 startups that will pitch to them on the day.