An investor view: What to consider when analysing the opportunity in volatile markets
The government’s ‘mini-budget’ announcement in September had a huge impact on the stability of UK financial markets. In the months following, the value of the pound plummeted and interest and borrowing rates rose substantially. The continued uncertainty within the UK economy has meant that some investors are beginning to question whether now an appropriate time is to invest in UK start-up businesses. However, what’s clear is that there are still fantastic opportunities in the UK.
This is particularly true in cybersecurity – which has seen significant demand and growth in the last few years, owing to the evolving threat landscape. Despite the undercurrent of volatility that has remained within UK markets, the UK’s cyber security industry is one that has risen to that challenge. Cyber security threats don’t simply stop in a recession, so companies can no more stop using cyber tech than they can cut off their electricity.
While these opportunities are present, competition is fierce and new start-ups in the space need to be perfectly optimised for success. As such, it’s increasingly important for investors to look beyond the macro environment as the core indicator of business success. While the general health of any financial system is important, investors should take a very close look at the businesses they are considering for investment, and whether they are facilitating social change. As an investor, I should question whether I am able to add genuine value and expertise. This has been the core of my investment strategy in recent years and was a major deciding factor in my investment in Venari Security. As a rule, I only look to support innovations and ideas that have a lasting impact, even if it’s in a small way. Beyond this, there are several key indicators which can demonstrate whether a start-up is properly set up for success and longevity.
Leadership is important
Often, the leadership of a company can ensure its successful navigation through instability in financial markets, particularly if the product or idea is of high value. Ultimately, leadership can determine the long-term viability of a business. Strong leaders will demonstrate an obvious understanding and enthusiasm for the company and the industry that it is operating in. They will also ensure they are evolving in line with the requirements of their workforce.
Leadership Development – the goal of building workplace meaning and relationships, and interpersonal competence – is a crucial factor in the success of a start-up, according to a study from the Journal of Business Venturing Insights. Additionally, the World Economic Forum found that vision, patience and tenacity were all leadership traits most indicative of business success. While previously, investors may have looked solely at market and financial details to ground investment decisions, these fail to account for the level of leadership present at a company.
Personal investment can also be a particularly useful indicator of stability and commitment from the leadership of an organisation – both important factors for long-term sustainability. A company with a hired CEO or leader could find that they are more willing to leave at difficult junctures, compared to someone with a significant stake or investment.
When finalising any investment decision, building up a realistic picture of the background and traits of a company’s leader is crucial. A leader with a personal investment, that can demonstrate their commitment, a clear plan for navigating financial uncertainty and present their company’s values and story with avidity – all of which are highly desirable traits from an investment point of view.
Connections make the difference
Personal connections and influence are almost as important as the profile of a leader. Having strong industry connections and the ability to get in front of the right vendor or partner can be the ultimate difference between success and failure. A leader with a vast network, that they can use as a launchpad for a product or service, is extremely valuable.
In essence, a healthy network can assist in business growth, even in difficult markets. Having a pool to source investment and business advice from will lessen the impact of market shocks and improve resilience. Angel investors themselves will bring a range of different experiences and their own networks, meaning start-ups can immediately access the support and knowledge then need from a variety of different sources.
Research from Computers in Human Behaviour found that social connectedness was the ultimate predictor of successful funding for start-ups, and this had a correlation on the level of financing sourced. With this considered, founders who have a well-developed network of experts to call on for advice or for future investment, are well placed to ensure the viability of the start-up moving forward.
Understanding target market
Financial instability can enhance competition between start-up businesses. As such, investors should carry out sufficient due diligence on each company before they invest.
Even in markets that are particularly healthy, companies should be able to outline a very clear understanding of their customer and what problem their product or service solves. Companies should be in a position to answer key questions about their audience profile, including: Why are they interested in your product? What do you offer that your competitors don’t? And ultimately, what specific issues are customers looking to solve by engaging your company? It’s very hard to justify investment without sufficient answers to these questions.
Venari Security is a perfect example of a start-up business that had cognisance of its target market, and was able to demonstrate this as they sought investment. The cybersecurity market, in which Venari Security sits, has ever evolving risks and legislation, like the rise in encryption. Venari has a very detailed understanding of the market, and was able to develop an Encryption Traffic Analysis tool, which prevents malicious cyberattacks hiding within in encrypted traffic – a significant business problem. This ensures they are a valuable option to security teams across various industries and therefore are a very attractive proposition in the eyes of investors.
Workforce is key
When investing into a company, you’re also investing into the workforce and the expertise they have in completing tasks on a day-to-day basis. A diverse workforce that can collaborate to overcome professional challenges are those most likely to deliver business growth. On the other hand, a business with a high turnover of staff may have poor leadership, or work practices that are unethical. This not only presents a risk to business growth in the immediate term, but can also lead to reputational damage and the inability to recruit talent later down the line. As outlined by Harvard Business Review, two thirds of start-up companies fail due to problems within the workforce.
Diversity is also a key consideration in evaluating the potential long-term success of a start-up. Interestingly, research from Gartner found that performance improves by 12%, and intent to stay by 20% in workforces that are considered diverse. Those companies with a range of different people, thoughts and opinions are best set-up to tackle business challenges, sustain future growth, and ultimately make the most attractive investment propositions.
Predicting future success
Of course, stability in the financial markets is an important consideration when making any investment decisions and should be examined before of agreeing any deal. However, this is not the only indicator of business success in the long-term, with a myriad of other factors equally important to viability. The best investments are made when markets are considered alongside other predictors of business success, like leadership, and the product or service being able to solve a vital business need.
Investors should carefully consider all of these points, and what value they might also bring to an organisation when making investment decisions. While risk always exists, these can help investors to predict whether a business is set-up sufficiently for future success.