Time is Money: Will your Start-up Survive?

13 APRIL 2017

In the world of start-ups, time really is money. Every week/month that goes by while you are pre-sales and pre-break-even, is another month of burn of your finite capital.

This capital has probably already come at the cost of having been a huge distraction to your very limited resources and focusing on running your business.

We often hear statistics such as ‘one in every four start-ups will fail’. The Kiwi start-up community has become complacent about accepting this as the natural path for the course. But this doesn’t need to be so.

Yes start-ups do fail. Sometimes it’s because their product simply doesn’t cut it, or the business model is not viable, or perhaps they didn’t have the right team and skills to execute. But they also often fail because they simply did not have sufficient capital to complete the journey.

The most commonly experienced peril is running out of funding before they’ve had a chance to prove to the world they have a great product and establish a successful channel to market.

Three things that greatly influence this equation are;

1. Taking too long to reach reduced or break-even cash-burn, ie too long to get to sustainable scale;
2. Lack of follow up funding in NZ’s investment capital eco-system;
3. Poor capital planning.

Of course its different horses for courses; ventures that can set-up and develop its offering on extremely low overheads (eg software) can stretch a pre-commercialisation stage longer than a very overhead intensive business model. For example those with technology/products requiring significant R&D, and particularly those with a manufacturing business model that has to fund inventory, speed to break-even is more critical.

Global from Day One

Locus Research engages with many start-ups and the angel investment eco-system in New Zealand.

We frequently see NZ businesses leading with a commercialisation strategy that goes like this;

1. We’ll use the NZ market as the test ground to validate the product because NZ is a) manageably small and isolated from other markets, yet commercially advanced enough, b) our environmental and legislative conditions are often harsh enough to put our products through their paces, ie if it survives NZ conditions it can survive anything.
2. Once proven in NZ, improvements can be made from lessons learned, then we will expand to Australia, and from there move into other OECD regions. IE a staged regional approach.

This appears to be a very sound stage-gated strategy and lowest risk approach.

The only problem with this is it often translates to a very long path to break-even and comes at great risk of running out of capital before you get there.

This regional approach also limits the exposure of your business to multi-national corporations (MNCs) that are an important part of any international strategy. MNCs are greatly lacking in the Australasian landscape. They bring;

1. Your supply and distribution channels
2. Scale and resource
3. Access to follow on capital
4. Access to corporate R&D funding
5. Breeding ground for your key personnel

If we don’t have them in NZ, then the next best thing Kiwi companies can do is to partner with offshore MNC’s to create the same benefits.

Taking a ‘global from day one’ approach is key for success if you want to create a global business.

This fits with the mantra “if you are going to fail, better to fail fast” which is a view I subscribe to.

Kiwi start-ups and investors have a track record of failing slowly – we call them the ‘walking dead’ amongst our start-up funding community. When a business is not tracking well, we have a tendency to keep on tipping more money in hoping that things will come right.

Our ecosystem is characterised by few successful exits and languishes with a large tail of the businesses that are just not going anywhere with no exit in sight. This in turns stagnates the recirculation of angel money within our start-up capital ecosystem.

So what does global from day one mean?

Plan to enter your key market(s) as your initial market entry strategy. This doesn’t mean you shouldn’t do any smaller scale validation locally, but the latter needs to be kept fast and lean. It also doesn’t mean launch everywhere at once – focus is still essential when you have limited resources, but choose initial markets that have the scale needed for sustainable success.

This approach also widens your exposure to international sources of potential growth capital much sooner.

Capital Planning

It’s a big ask to convince a start-up it needs to be planning for follow-on capital rounds before its even raised its first seed stage. But understanding the reality of follow-on capital requirements, and where the most value-added source of this might come from is essential to the strategic planning. Those that understand what will be required for this and plan for this earlier are streets ahead of those that don’t.

Lessons from Israel

Sir Peter Gluckman’s (Chief Science Advisor to the Government) talk about ‘Lessons from Israel’, parallels this view from a tech sector perspective. Sir Peter participated in a 50-strong mission to Israel in 2016 to learn from their world-leading innovation ecosystem, hoping to develop ideas that could contribute to the unleashing of New Zealand’s potential.

Israel was chosen due to its similar demographics to NZ (population <10m). Israel has an advanced economy that is achieving higher GDP spend on R&D than NZ. We have long looked to Europe and other OECD countries to adopt technology/business growth frameworks but these have been proving unsuccessful when down-scaled in a NZ context.

Below are some of the drivers that he believes contribute to Israel’s strong and growing tech sector.

• Start-ups thinking global from day one. For incubators, accelerators and investors alike, if the founder is not thinking global from inception then they move on to the next deal. Like NZ, Israel is too small for great ideas to be successfully commercialised with a local or regional stepped approach.
• Good network of MNC’s and international VC’s.
• Major private spend on R&D, higher than public spend.
• University policies toward Intellectual Property are now focused on the good of the idea, not the entity. They are not in the business of owning IP (something NZ is yet to embrace).
• R&D tax regimes and taxation of ESOP schemes have been overhauled to better support start-ups.

Locus Research

We work with a wide range of businesses across different industries; from start-ups to corporates and CRIs. With our multi-dimensional approach to product innovation, development and commercialisation and our multi-disciplinary team, we can work with you to determine the best path to market for your next innovation. Get in touch.

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