By Guy Mucklow, CEO and Co-Founder of Postcode Anywhere and a board member (representing SMEs) of Tech UK
Looking back over the last five years, as the Prime Minister’s Enterprise Advisor Lord Young remarked, we are witnessing a ‘golden’ age for start-ups and small firms.
The UK is home to more startups than ever before. In 2014 alone over half a million businesses were registered with Companies House placing the UK in fourth place in the Global Entrepreneurship Index leaderboard.
The digital world has brought down barriers to entry, helping people to turn good ideas into viable businesses and enabling them to reach customers around the world from their kitchen table.
In the budget, Chancellor George Osborne made reference to Tech City UK’s Tech Nation report, a survey of digital businesses across the UK that demonstrates the thriving entrepreneurial spirit and the array of innovative start-ups underpinning our economic growth.
It’s not surprising that venture capitalists and private equity investors want a share of the action. Figures from London & Partners showed that London’s digital startups received £416m in funding from venture capitalists in the first three months of 2015, an increase of 66% compared to the same period in 2014.
The previous record quarter for venture capital funding was the final three months of 2014, suggesting that investors are increasingly looking to tap into the UK tech scene with overall funding predicted to rise to well over £1bn by the end of 2015.
Whilst the landscape is evidently ripe for investors, it is important that entrepreneurs question whether taking venture funding is in fact the best option.
Indeed, from my experience what may seem like the easiest option isn’t always the right choice in the long run.
When my co-founder, Jamie Turner, and I were searching for support for our software start-up, which became Postcode Anywhere, we followed what I, rather naively believed was the most appropriate route to getting the business launched.
That was to develop the idea, hopefully sell it to a few customers and then go and raise finance on the back of our initial success.
What I hadn’t bargained for was how our lack of a track record would be viewed and the impact of dot com crash, which effectively shut the door on any potential fundraising.
Whilst it was very disappointing and worrying at the time failing to raise external capital was, in hindsight, the best thing that ever happened to us as it forced us to take a very close look at our business model and more importantly to become exceptionally disciplined in how we executed our plan.
In short we were forced to cut our cloth to suit our circumstances, which made us ruthless about how we spent our own money and exceptionally focused and pragmatic about what we were trying to achieve.
When you’re effectively paying the price of a new car every month to keep the company going, it forces you to become very disciplined in relation to how you run the business, which is not something that I see in many VC backed or even some AIM listed companies who seem to be singularly focused on growing revenue as opposed to proving that they have a viable, profitable business model.
That hard discipline of spending your own money is not something that you see that often in business, however, there’s a lot to be said for it.
It tests the courage of your own conviction, because you would never do it unless you were 100% sure that it was the right thing. It helps to strengthen the founding team, because if you need to be able to rely entirely on each other in order to survive. If one party are not pulling their weight or worse still not able to deliver, you will fail. And finally, the absence of external investors allows you to focus on the primary task in hand, which is to get the business going.
It is a sad fact that many businesses that fail to get off the ground are those that have been showered in funding at a premature stage, before optimising the model or proving the feasibility of the project.
There’s a lot to be said about going to the “school of hard knocks”.
Not only will you have the satisfaction that it’s all of your own work and no one else’s but, more importantly, the equity will be all yours to choose what to do with it.