Securing Investment as a Start-Up: Interview with Christian Kumar, Part One
Through our work with numerous entrepreneurs and start-ups seeking to breathe life into new ideas and deliver disruptive products to market, at ITERATE Design + Innovation we’ve seen our fair share of intelligent concepts. We’ve also seen too many ideas left unrealised due to the challenge of securing financial investment and we’re on a mission to change this.
Funding for new product development is undoubtedly the biggest barrier encountered by Clients, which is why Gethin Roberts and Holly McSweeney from the ITERATE team recently set out to unmuddy the pathway to securing venture finance as a start-up. We interviewed investor, Christian Kumar who offered fresh insights and welcome optimism on the subject of successfully attracting investment. Our interview unveiled exciting synergies between the considerations that underpin new product development and the priorities of investors. It also resoundingly confirmed that the appetite to invest in new product development is certainly there. Christian’s core hope is that with more connection and communication, entrepreneurs can “embrace the fear and deal with the challenges” to secure investment.
Christian’s thoughts stem from extensive experience in the industry. Christian is CEO of Capital Kinetics, a corporate finance firm which provides corporate and funding strategy to businesses across a range of market sectors. In recent years Christian has become increasingly interested in supporting MedTech innovations, not least as CEO of MedTech Makers Lab, whose mission is to connect like-minded businesses that are focussed on advanced device development. The purpose of MedTech Makers Lab is to provide both a virtual and physical space for early-stage MedTech and healthcare companies to grow and receive mentoring. Providing a range of services extending from planning to commercialisation and funding, MedTech Makers Lab aims to support and scale the most innovative new businesses that are changing the future of healthcare as we know it.
First of all, Christian could you give us a little bit of background to you and Capital Kinetics, when you founded the company and what your history is?
By education I’m a mathematician and by career an investment banker. When I exited my wealth management business in 2008 I really didn’t know what I wanted to do; it was just at the start of the credit crunch and I thought, the entrepreneurs of the world were really getting stuck. So, I started the business initially in 2008 as a partnership and we were setting up a fund. Later on, it became a Limited Company and a regulated corporate advisory firm, so we’ve gone through the battles of a post-credit crunch recovery, we’ve seen the dynamic growth, we’ve seen the implementation of several different banking regulations, making it more restrictive for entrepreneurs to get started. But at the same time, we’ve seen lots of Governments putting in schemes to promote entrepreneurial activity.
So, what do we do today? Well, three years ago we started focussing into a particular sector; the sector we chose was medical tech. We started alongside the South East Wales Academic Health Science Partnership and Monmouthshire County Council. Now, with Covid, some of those relationships have changed and some have grown. But today we are a full blown corporate finance firm; we have our own peer-to-peer funding platform and our job is to finance and grow innovation.
‘Our job is to finance and grow innovation’.
It’s interesting to hear that you’ve specialised in medical tech, that’s one of the areas we’ve seen a rise in in terms of people looking to develop a new product in that space. In terms of the companies that you’ve invested in in the past, what does that look like?
All the way from basketball teams to panelised construction systems to Software as a Service, the sectors have been quite broad. Most recently, we’ve focussed on even a small section of MedTech which is diagnostics and devices. If I take you back in history, and I say history, let’s say back to 2018, 19 there was a Bloomberg report that said that there was going to be more money in medical, health and wellness technologies in 2019 and 20 and it was going to outstrip fin tech. This was all before Covid and what Covid has done and what the world has done – accelerating vaccines, accelerating treatments – it’s just brough MedTech to the forefront of investors’ appetite. Think of Black Rock, the biggest Venture Capital firm in the world. I couldn’t even tell you how much capital they have, it’s over a trillion dollars. Recently, they have made noises and certainly then followed up with actions on investing in social impact investments, which medical tech, diagnostics, innovation is part of that. So, there is bigger attention on new tech, environment, impact and certainly what we’re seeing is, there are smaller companies that are at the forefront of leading that charge. It’s no longer the large companies in their R&D departments, you’re now seeing lots of entrepreneurs and technologists popping up in garden sheds and garages.
‘What Covid and what the world has done – accelerating vaccines, accelerating treatments – it’s just brought MedTech to the forefront of investors’ appetite’.
On what you were saying about opportunities for new products and companies focussed around either medical innovations that are obviously supporting wellbeing or that positive social impact side, how would someone looking for investment evidence that? There’s a lot of talk at the moment, there’s a lot of greenwashing and people using messages that they’re not actually following through on. Are there ways you would financially measure that, or would you look at social proof? What are you looking for to make that credible?
It’s very simple actually and I refer back to the Stanford Institute in the 80s or 90s. They had a four-step approach to evaluating an idea. I teach this now, at accelerators and at academic programmes in Italy and Poland: we talk about demand-based planning. My biggest phrase and I love to use it, is don’t create a solution to a problem that doesn’t exist, there’s no point. The first thing we look at is the need, what’s the need in the market? And then, the second part is your approach to that need. And once you’ve got the approach, how does your product or service benefit the approach to addressing that need? Finally, people think competition is often a similar product to yours – but often competition is apathy. Because if it’s not broken, why do I want to fix it? If it works today, why do I need to get there faster, quicker, stronger? What I’ve just illustrated is called NABC, demand-based business modelling. The need, the approach, the benefit and competition. I can get overwhelmed by technology; some of the pure avant-garde professors can spend an hour talking about how something works but failing to tell me what it does. You’ve got to really grasp that; it’s not necessarily about how it works, it’s what it does and do people need it? So, that’s my approach to evaluating an idea.
‘A four-step approach to evaluating an idea … the need, the approach, the benefit and competition’.
We often experience a similar thing, where someone wants to develop a new product and it’s easy to get caught up quite quickly in how to make that product work before they’ve fully thought through whether they need it to work. So, often we’ll take a couple of jumps back in the conversation to actually try and understand that need a bit more and whether that demand is really there. It’s interesting that that plays out in investment as well.
It’s the mindset of the investor. So, a lot of investors today are people with surplus cash. Regardless of where we think the economy is, there’s lots of money sitting in bank accounts and unfortunately and fortunately, interest rates are at an all-time low, they’ve been low and they’re going to stay low. So, in order to return something on your capital, you’ve got to start thinking outside of the mainstream investment management vehicles. So, you have to develop an attitude to risk.
‘You have to develop an attitude to risk’.
Part of the reason that we wanted to do this today is because a lot of the people we speak to, whether that’s start-ups or entrepreneurs, don’t have that understanding of what goes on in a Venture Capital Firm. So, you’ve said that you’re specialising more now in MedTech, but in terms of how new product development fits with Venture Capital Finance, if someone’s developing a new product, how would they go about finding someone that might be interested? Obviously, not all Venture Finance firms are interested in new product development, so how do people navigate that?
The first thing is I would look for supportive grants and there are plenty of those – not just in the UK, all over Europe – where you can start framing the idea. The biggest issue is the unknown of the cost. I think there’s got to be a framework at the outset and a bit of grant funding gets them a long way. We have a wonderful scheme in the UK called the Seed Enterprise Investment Scheme (SEIS) which is an amazing tax incentive for an early-stage business which is capped at around £150,000. Then, if you can deliver the programme, secure the intellectual property which is paramountly important – secure the intellectual property, create a barrier to entry before you take it to the next step and go for larger funding. I’m going to ask that question, where is the IP? I need to know that it’s documented, I need to know that there’s a barrier to entry, I need to know what your plans are to protect that. Now, protecting the IP going forward might not be patents in every country, it might mean another iteration of the product. That’s very important, in order to get the right investment into a very, very early-stage idea, make sure the idea is positioned well in the market and is positioned well in growth.
‘Make sure the idea is positioned well in the market and is positioned well in growth’.
It’s interesting to hear you talk about building that brand loyalty. So, with IP and I suppose specifically patents, would you invest in something if there was no patent, or is that a no-go? So, if someone had those future iterations of a product, they had a pipeline to be able to build that loyalty, but they didn’t have a patent, would that be attractive to an investor?
I’d want to see the plan around that. In the business plans, it’s called a “Use and Application of Funding”, so how much money are you raising and where are you going to spend it. Even if the patent is not there, what I’d like to see is a plan for the patent to be put in place, or to show me that this is so unique that if I disclosed it by a patent it might be copied, so therefore we want to keep it as a “trade secret.” The formula for Coca Cola was a trade secret for decades, and then they changed the formula and there was huge backlash. That was one of the biggest mistakes Coca Cola ever made because then they had too many products in the market. So, brand and market positioning is very, very important and certainly, investors want to grow with the company, they want to be able to hook into milestones. So, it could be an idea today, and £20,000 gets them to a prototype and £50,000 gets them to a pre-production unit and £150,000 gets them to light production or outsourced production. I’d like to see that plan – your company here, you do a lot of this work. I’d like to have seen a scientist get some external advice to validate the underlying technology and what it might cost.
In Coventry, I don’t know the name of the organisation, but they actually put in full prototype production lines for factories. You might have an idea, there’s a company that was making reconstituted Welsh slate that I met a few years ago in Cardiff. And before they built a factory they actually went to this organisation in Coventry and put in a full factory line and said right, producing this many slates per hour is going to cost so much money. For an investor, it’s the unknown that’s the scariest part. I know from my history that scientists will develop and develop and develop without coming to market with a first stage minimum viable product that benchmarks the need. Until then, you’re perfecting a solution without identifying the need.
‘Investors want to grow with the company, they want to be able to hook into milestones. So it could be an idea today and £20,000 gets them to a prototype, and £50,000 gets them to a pre-production unit and £150,000 gets them to light production or outsourced production. I’d like to see that plan’.
In terms of scalability and that growth potential that you’re looking for and having that thought-out, quite often we’ll talk to someone about developing a product and there might be the hardware product and then they’ll have an associated app with that product. Through that app they’ll be looking to create a community around the product, so they offer additional services with which to use the core product that they’ve made. Having an app where you can build a community around a product, is that kind of thing attractive?
What the app does, is it creates a subscription model. But, as you’ve seen, we have app apathy. In my head, almost every app in the world that needs to be developed is already there. So the app itself isn’t as unique or as valuable a proposition as the device it attaches to. Now, medical monitoring is a part of it, then having an app to manage the history of that monitoring and to give data or AI, now that’s important. So, an associated app with a product I think is more valuable because it’s almost like the complete package. Whereas, just a wellness app, a lot of them do the same thing. Those that attach to remote diagnostics, that’s a different method and that’s the type of thing that we look for.
‘We have app apathy’.
You talked about post-Covid and how your business is looking more at diagnostic devices and that you were actually looking at that prior to Covid happening and the lockdown happening. How long do you think that’s going to last, that interest in MedTech, diagnostic devices, more preventative healthcare and faster diagnosis? Do you think that’s something that’s here to stay now?
If you look at some of the NHS stats right now, they’re looking at almost 5 years to catch up with the backlog of non-urgent patients. I think what we have learnt throughout the pandemic not just in this country, but in other countries as well, is that when there’s a need, we act. But why not now act to prevent? And I think that you’ll see a lot of preventative care, remote diagnostics, patient monitoring products and services coming to the marketplace to take the burden off our own National Health Service. It’s not just our National Health Service, it’s also Germany, France, Italy – anywhere where there’s social medicine they’ve got to address inefficiencies and build efficiencies. We have a National Health Service founded in Wales that budgeted for 45 million people but we have stretched it to 67 million people. Now, the only way we can maintain those efficiencies is by bringing in more modern technology to reduce the frequency of visitors to healthcare facilities, to be able to monitor them remotely and to be able to provide proper diagnostics. And that sector is huge and we’ve got to look around the world to bring the technology into the UK to make our healthcare system more efficient.
‘When there’s a need, we act. But why not now act to prevent?’
Not only reducing pressure on the NHS and ensuring it can run at its optimum efficiency, if you think of certain cancers that if they’re not detected and diagnosed early, the outcomes are so much worse. How important is it then, to be able to track things and identify when there’s a symptom that you should see your GP about, having the ability to do that at home and if there’s anything that is flagged up, you can use the services accordingly?
We’ve seen a piece of Italian technology that has identified the biomarkers for prostate cancer that can be detected from urine. But that’s only half of it, there still has to be a device manufactured, tested and sold to take that idea and those biomarkers into the market. I’ve seen some amazing things in the past three years. Breast cancer is a big issue across Europe and the current methods are archaic. They take breast tissue and squeeze it between two plates, whereas machines developed in Michigan put patients in a prone position, upside down and they provide the radiology from underneath. Now, this improves early detection. These are the types of technologies that will reduce the burden, the long-term treatment and aftercare of patients. The South East Wales Academic Partnership which cover the region that you’re based in, they have been really really excited about us bringing these collaborative relationships; not only bringing technology into Wales, but providing a platform for Welsh companies to grow. I’m really excited about getting over the border and getting set up.
‘We’ve seen a piece of Italian technology that has identified the biomarkers for prostate cancer that can be detected from urine. But that’s only half of it, there still has to be a device manufactured, tested and sold to take that idea and those biomarkers to market’.
Part two of our interview with Christian will be released shortly. Our conversation continued to cover many key questions when it comes to securing financial investment as a start-up, particularly relating to the board and connections needed.
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