Securing Investment as a Start-Up: Interview with Christian Kumar, Part Two
Here, we continue our interview with Venture Capitalist Christian Kumar. Read part one here if you haven’t already. In the second half of our interview with Christian Kumar we delved deeper into the Board, the connections and the people needed to demonstrate to an investor that a start-up has the ability and the drive to scale and succeed.
We know that all of this cutting edge research is happening in Universities and research facilities across the globe, but like you say, if you don’t have the device to get that research and that technology into someone’s hands or into someone’s house, then they’re not going to feel that effect. That’s the part of the picture that doesn’t get the same publicity. We hear all the headlines about breakthroughs in research and new technologies that have massive potential, but there isn’t then that conduit to get it into people’s hands and houses. And that’s something that we’re really excited to work on, and I’m sure that’s similar for you as an investor?
Absolutely, and for us, it’s also not just about making the investment, it’s then about mentoring that Client, growing them through the different iterations of a business lifecycle. Because the founder of today is not the CEO of tomorrow – everyone has to play at their strengths. This is the hardest part, when you we’ve got a great talented founder, to break the news to him that unfortunately, you’re not the CEO, we have to bring someone in from outside to drive the long-term vision of the business.
‘It’s not just about making the investment, it’s then about mentoring that Client’
When you’re looking at investing in something or someone, how much of a bearing does the person have and their ability to be able to take that idea to market? What you’re saying there is the fact that you’ll bring people in and provide that mentoring and put the right people in the right place, so does that mean that the qualities of the person looking for investment maybe don’t have such a bearing? Or is it still important that you invest in someone who’s got a proven track record, how much influence does that have?
Fantastic question actually, you come back to the product. In our world, it’s a diagnostic or a device but if you come back to the product or the service, as I said at the outset, it’s that need – if we know there’s a need in the market. I’m not much of a soccer fan, but you have to have different people to play different roles: the goalie is not the best striker and the striker couldn’t defend. And here, what you’ve got to do is have a scientist that’s willing to accept that he can’t be everything. In some rare occasions it does happen, there are people who develop one piece of technology, go back and learn from that and develop a second. And because they’ve honed their business skills, they develop over and over again. But often, it’s a one trick pony; it’s a piece of tech that works and you’ve got to build the team around it. That’s one of the things I look for – the board, the advisors. Is the board functional? Do they have the right experience? And I will rip into that, especially when I see that on a slide deck, they’ve got two slides of people who are helping. People think that putting names on a slide is important, what I want to know is what do those people do, the same way with the technology, it doesn’t matter how it works but I want to know what it does.
‘That’s one thing I look for – the board, the advisors’.
Are there certain qualities or people that you’d be looking for? Are you looking for someone with expertise in certain things? Are there certain kinds of profile positions that you’d be looking for?
Absolutely. So, if you break it into three parts, you’ve got the idea – you want a team around the idea itself, does it have the right engineer, physicist, lab person to drive the technology forward? Then, there’s the entrepreneurial team – let’s start the business. So, you want somebody on your board that has at least done one start-up or two start-ups. But then you want other influences on the board that have the industry contacts that can help them scale the idea bigger – so you’re leveraging. If you look at Dragon’s Den for example, how many times have you seen someone make a pitch of a very good business that just wants the Dragon for publicity, to drive market share. When you look at the board, even though all those people won’t be there on the day they present, this is how you form the board. And my job as the early stage investor is to make sure all those moving parts are there or can be built upon.
‘This is how you form the board’.
Obviously, we’re talking quite a lot about early stage investment because what we do is new product development, so we’re involved in that early stage, often prior to first prototype or prior to manufacturing. As someone who’s putting the investment into a start-up or new company, you’ve said that you like to see a plan of what the money’s going to be spent on. Are there certain activities that you would look to support, so getting to first prototype or getting through certification? Are there certain activities that you’d expect your money to be going into?
Yes, it’s something called the tactical roadmap, and if you had time across the bottom and cost at the vertical axis, you can spend so much on research, development and prototyping. The spend and the time have to get you to a certain point, which I call the milestones in the business. The point of cash generation is the benchmark, that’s the point you want to work back from. How much time in research, development, proof-of-concept and prototyping does it take? On top of that you want to layer the routes to market: creating the market, getting the publicity, the PR – everyone forgets that. Everyone forgets the journalism behind the product, they wait until the product’s in the market to do the news splash. NO, do it now! It’s that tactical roadmap; you want to know, at what point cash collection starts, at what point does the business generate enough cashflow to grow itself. You’ve got to feed a business up to a certain point and then, you want the business to feed itself. These are the things that I’m looking for. These are the things that when someone comes to me, I sit there and I map out this tactical roadmap.
‘It’s that tactical roadmap; you want to know, at what point cash collection starts, at what point does the business generate enough cash flow to grow itself’.
Are there things that you would look for, so like you say, people having considered the marketing prior to getting to market release, having done all of those journalism and PR activities? If you see that someone’s put the work in to enable their business to feed itself when it kicks off, does that make you more inclined to invest?
Yes. Because what happens, the first day you get an investment memorandum or a pitch deck, you’re going to Google the guy. What I would like to see is that in the six months prior, he’s written an article. That then allows me to see third parties talking about the industry. Look at the comments under a blog, when I go to LinkedIn and I see a really great post, I’m looking for who’s commented underneath, I’m looking for how much traction has that post had. It gives me comfort to see that the product or service or person has made an effort in getting themselves known.
‘It gives me comfort to see that the product or service has made an effort in getting themselves known’.
Where do you sit on having reached proof-of-concept prototype? If you’re going to invest in something, would you want to be able to see that prototype and touch it and feel it. Because often the people that we work with talk about the value of having something tangible that you can take to an investor? Is that a prerequisite for you, that you want to be at that point before you’re going to invest?
Not always, we have this view that a lot of our investments are post-concept and pre-revenue. What does post-concept mean? This means there’s a prototype there, there’s an idea there and there’s a need in the marketplace, so that’s what I mean when I talk about post-concept. Pre-concept is the idea; that’s somebody going to Gethin and saying, I want to build this, what are your thoughts? There are a stage of investors that want to be at revenue. Whereas, in our case, we’re still building the revenue model, the needs, the approach to the marketplace. That’s where we get the best growth and the best valuation of our capital going in. The more it’s de-risked, the less return on capital you expect; at the very early stage you expect to have more equity in a business. That’s why we pick this window of post-concept, pre-revenue, that’s where I can add the most value. Then, on the other side of that, you think about the investee. He’s trying to get it further down the pipeline so he doesn’t have to give up as much of his company. You can put in what are called collar options, triggers that at a certain point in development, the founding stakeholder can get some of his shares back. We joined the United Nations Global Compact and Principles for Responsible Investment for that purpose; we wanted to make sure that we didn’t stifle the entrepreneurs. We wanted to make sure that the science is treated fairly, that the products have a fighting chance and the inventor ultimately has a return for his hard work.
‘We pick this window of post-concept, pre-revenue, that’s where I can add the most value’.
Something we talk about a lot is people being afraid of that risk and not acting. As an investee, how would someone know that they’re ready to reach out to you as an investor? Is it when they’ve got their proof-of-concept and have mapped out their roadmap?
We’ve had people that just have an idea, they’re a student in a PhD programme, or in a master’s programme and we’ve had people that have built an idea and they’re looking at their second product. We talk about bubbles. I think when you’re creating something, create an innovation bubble. This isn’t people necessarily to help, but people who are on this journey so you can grow with them. And so, a lot of the accelerators and the programmes that are available around the world today are to tick social metrics, to tick government guidelines, I find very few of them functional. What we’ve created is private equity based. Being private equity based, we’re incentivised by helping those ideas grow. And one thing that matters is to get people on the same journey. If we can put four or five companies into a room at the same time, in different periods of their growth strategies, they’re going to help each other. So when we say we want to create a fraternity of likeminded businesses, it’s just that.
Fear kills more dreams that any other thing I know. So, what’s our role, as someone that’s been an entrepreneur and an investor and someone who has also raised money for himself, the one thing I can say is, embrace the fear and deal with the challenges.
‘Embrace the fear and deal with the challenges’.
With the demand-based criteria of looking at the market demand to be able to invest and to be able to evaluate an idea. How would you prove there’s a demand? Because we talk to a lot of people and they’re really passionate about their idea, they’re convinced there’s a demand. So is it something that you make that assessment yourself or how do you assess the level of demand that might exist in the market?
I’m fortunate that I’ve got two amazing researchers on my team. One’s come from an engineering background and one’s come from a macro economic background. And they’re very good at getting under the skin of what makes up demand. They research the component element of demand strategy and say, right in this industry, these are the areas that are missing, these are the solutions that do or don’t work. It’s not always affordable for a start-up idea, but there is a lot of support. You can go to a local university and for very little money talk to the Head of Department and say, can I put a small grant programme together and have a piece of work done? You’ll find that a lot of universities will jump right on that.
Another thing – get a business mentor, that’s the first thing. Get people who have work the t-shirt, people that have had to make a decision on whether to feed their staff or feed their family. This is the raw end of entrepreneurship, the emotional lifecycle. One day you’re on the floor because something’s not working, the next you’re riding high because you think you’ve got an investor. Then, something happens in the shareholder agreement and it falls off the edge. Part of my life is being a psychologist to my clients, keeping an even temperament. This has come from twelve hard years, just in the last three years we’ve seen 144 different projects from 11 countries and we’ve chosen 8.
‘Get a business mentor’.
Any final thoughts, or anything else you’d like to share?
We are both in the same space; Gethin knows this, I know this. We are at the absolute forefront of innovation. People come to us when, for me – they need money or a plan; Gethin – they need a prototype or a product. We are in a position uniquely to be able to mould and grow other people’s dreams.
‘We are in a position uniquely to be able to mould and grow other people’s dreams’.
gethin@iterate-uk.com
holly@iterate-uk.com
Contact: 01291 408283
