Business incubation support is vital to our economy – but it needs to be better

Awareness of the investment process

  • Investable businesses have a good idea that delivers significant value growth, with proven product-market fit, backed by a world class management team. Where elements of this are missing, incubators and accelerators support to help fill the gap. If they aren’t successful, it usually means one of two things: 1) the programme is not good enough or, 2) the business is not strong enough for VC funding.
  • True Venture rounds are often £2m+, involving due diligence, shareholder negotiations and legals; for businesses to successfully complete the deal they will likely need professional advice. Many pre-True Venture founders lack knowledge going into this process and are not able to pay the market rate for advice, or sometimes don’t understand why the advice is important. Accelerators particularly, therefore, have an important role to play in aiding this understanding and adequately preparing businesses for the scrutiny and negotiations that are involved in the process.

A possible solution

Founders need to understand what VC investable businesses are and are not, and that both are okay. However, if you try to grow as True Venture when you are not, then both will fail. Incubators, and reinforced latterly through accelerators, need to teach founders these differences, because unfortunately the thing they want to do may not realise enough value to meet what is required through VC investment.

Improve the quality of management teams

At the pre-True Venture stage, the element most likely to be missing or under-developed is the management team. Not unreasonably, management team strength is a commonly cited reason why VCs choose not to invest, given it is tough to expect an equity investor to fund something not knowing who the key people are going to be.

Realistically, businesses at this stage will not be able to pay market rate salaries for good people and even share option schemes are not always enough to attract even the most enthusiastic candidates, particularly if they have families and mortgages to consider. Consequently, many businesses look to hire top-class people once funding has come in. However, if you’re trying to convince investors to part with money for shares, yet you can’t convince somebody to join for share options, then this argument lacks relevancy. True Venture businesses should be able to convince someone to take the risk of leaving the security of established salaries and benefit packages for the long-term rewards of joining your business, but understandably that isn’t always possible.

A possible solution

  • A contract/ share agreement, needs to be in place prior to seeking VC investment. Teaching founders why that is important and how to negotiate an attractive package that illustrates the long-term value opportunity of joining the business at this point is paramount.
  • The Government could better incentivise good quality people to join early-stage businesses. One suggestion could be a system through which individuals sacrifice some of their salary to pursue these opportunities while knowing that a proportion of their living costs are being covered. It’s a high-level idea, but potentially alleviates some of the conflict that a lot of good quality executives experience between the opportunity and their existing lifestyle.

True Venture businesses are a significant lifeblood to the UK economy. Recognition of this by the Government is evidenced by existing tax incentivised schemes that encourage investment into setting-up and growing such businesses. Yet, despite most incubators and accelerators being funded in part by state money, there is much more that the Government could do to incentivise professional investment into these businesses earlier.

Ultimately, many incubators and accelerators are too slow, disconnected from quality people and from successful transactions; all issues that are likely a result of insufficient experience amongst the teams running them, rather than their use of money or the infrastructure. Despite the support they provide, if all a business needs is capital and they cannot deliver the transaction – then the strategy hasn’t succeeded. We believe the key is to improve how connected these programmes are to VCs and successful transactions. Some of the suggested solutions detailed above should hopefully help achieve this.

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