Entrepreneurs need to leverage the link between people and capital performance if they are to secure funding and deliver exponential growth
By Jan Lozek, CFO innogy Innovation Hub
I spend my life working with entrepreneurs who are looking to bring brilliant innovations to market. They all require the same thing, money.
Yet in their search for investment many entrepreneurs don’t do enough to leverage the link between human capital and financial performance. While entrepreneurs may see financial modelling, projections and addressable market as the key metrics they need to prove, the investors will also be looking for something more intangible: People.
Having the right talent, in the right roles, focused on the right tasks and in a culture that frees people to be the best they can be and add value to a common mission is what investors really want to see.
If you get that right, then success is a far more believable outcome and investment becomes a more compelling proposition.
In my role as a CFO the conversations that entrepreneurs often want to have with me are about fund-raising and how they present the commercial case for their business and innovation. Many are surprised when I ask them about their people, their talent strategy and their culture.
Finance leaders in businesses need to provide a framework to assess performance through regular dialogues about commercial, people and organisational development. The role involves control and finance leaders are often known as the people in their business who say ‘no’.
I would encourage finance leaders and the wider leadership teams at entrepreneurial businesses to start to let-go, to say ‘yes’ because that is the key to uniting capital and human performance.
Adopting emergent leadership styles that give autonomy to people and help build a framework within which talent can shine and thrive makes their business more investable. If they do that then the power of the people will shine and the investment case for the enterprise will become far stronger.
Creating an environment where the performance metrics and the talent can equally shine also helps address one of the most common challenges that entrepreneurial businesses say they face. Gaining the right funding at the right time to scale-up the business can take huge amounts of time and energy which can feel like it is distracting the entrepreneur at the precise moment they need to be most focused on building their business.
To overcome this entrepreneurs need to understand how they leverage their people and capital performance at each funding stage, because the needs for each will be subtly different:
Seed capital, second stage and scale-up finance requires innovative start-ups to engage in beauty parades with potential investors and to focus considerable amounts of time on creating business plans and fund-raising rather than building their core business.
If they focus on what really differentiates them, their ideas, innovation and people, then the financial case for investment becomes far easier to make. Too many entrepreneurs under-sell the value of human capital. To succeed entrepreneurs need to look beyond the numbers and for the three core investment phases (seed capital, second stage and scale-up) they need to understand what makes them stand out from the crowd at that specific point in their growth cycle.
At this stage entrepreneurs won’t have years of financial data (or sometimes any actual accounts) to prove the investment case. Modelling financial performance is often an obsession at this point, with entrepreneurs trying to demonstrate the growth potential and market they can target.
It is often at this point that they come unstuck; either by asking for too much funding at an early stage or through failing to offer an enticing equity share or commercial case to the funders.
At this point it’s critical that the start-up focuses on its core asset – the innovation, the people and the market opportunity. Seed-capital investors don’t expect to see perfect financial modelling, they’re buying potential, people and IP. Demonstrating how the team works together, why the business innovation, and the IP or unique proposition creates a gap in the market and showing that the concept has growth and profit potential is what matters at this stage.
Investors want to buy the dream and a key part of that is a dream team that is believable with clear direction and drive.
Second stage funding:
During Second Stage Funding the money matters more but so does the professionalism of the team.
The entrepreneur needs to show that they have built on their innovation and created a revenue stream and a client base. They don’t have to be making profit but they need to show that the idea has commercial opportunity that is being realised by the management team, and they need to show growing support among their client base and prospects.
At this point the people need to sound like business leaders; they need to be more than visionary, they need to be professional. Each leadership team member needs to have a clearly defined role and responsibilities and needs to focus on demonstrating real value in what they do, and how they collaborate to deliver the common goal.
Here the entrepreneur almost goes back to the future. At scale-up phase entrepreneurs will have financial performance, balance sheets, clients and a business that functions and performs. At this stage they are again selling high growth potential and the founder and team have to demonstrate their vision. Much of the value will be measured in the quality of the people and the management team. Much as at seed capital stage, the investor is also looking for something extra. The financials are a given, they are what gets you through the door to have the meeting in the first place. The investment is made based on the credibility and talent of the team, the innovation and ambition they show, and the passion and drive they demonstrate in creating a bigger business that offers investment opportunity. In reality entrepreneurs need to look beyond the finance when they are looking to secure funding; they have to see the enterprise they are building as a marriage between financial performance and human capital. Yes, the business plan, financial modelling and evidence of performance matters, but it isn’t the ‘secret sauce’ that will secure the investment.
Entrepreneurs also need to ensure that their investors stay the course and don’t sell-up as soon as the obligatory ‘hockey stick’ curve in the presentation starts to move into the upturn. Businesses that have talent as their central selling point are more likely to attract investors who will back them into the long-term and through their investment and growth cycles. Entrepreneurs need to understand the strengths each member of the team brings and create a culture that allows people to be the best they can and add value where their greatest strengths lie.
That requires a high performing team with a rounded set of talents, including strategic thinkers, implementers, influencers and relationship builders. Those businesses that don’t achieve this may get acquired, they may secure some additional funding, but they will rarely go on to flourish and thrive.
Even in a technology-centric business the power of people is the key to success. Capturing that ‘power’ and describing the potential that the team offers is the way that entrepreneurs will gain funding throughout their growth cycle. They need to look beyond the numbers and make the case for the human capital.