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News 21.6.13

Economia: Success strategies for TMT start-ups

News 21.06.2013

The technology, media and telecommunication (TMT) area is now enjoying a renaissance not seen since the dotcom boom of the late 1990s. Despite many TMT businesses aspiring to become the Googles and Facebooks of tomorrow, today’s optimism in the sector is more rational and considered. Companies succeeding in the TMT sector are founded on a great idea that satisfies an unmet need in the marketplace. Our new research into fast growth start-up businesses makes interesting reading for both the fledgling founder and aspiring investor. Amongst other insights, it reveals that accountants play a significant part in the success of high-growth technology start-ups. The research shows that – amongst other things – getting a FD or CFO involved early can make all the difference, especially for attracting the external investment that is so crucial to success. They were strongly associated with encouraging founders to sell more of their equity and lastly ensuring that companies ‘put their foot down hard on the growth accelerator’. The end result of this acceleration means that the business achieves greater revenue growth without increasing its cash requirement. This should be a critical consideration amongst entrepreneurs since the higher their sales revenue, the higher their company’s value will be. However, meeting entrepreneurs desperate to hold onto their equity – as we see on Dragon’s Den time and again – can stifle growth and can make founders ultimately worse off. Selling equity to the right investor can kick-start growth spurts. Our research found that the most successful businesses had founders who had sold at least 50% of their equity to outside investors within their first six years.  Apart from the revelation that selling equity is beneficial for business, our research concludes that there are 7 strategies that could increase the success of start-up TMT’s which include:

1. Founders should involve investors from the outset

78% of successful TMT start ups had an initial investor, as opposed to only 60% of unsuccessful companies. 2. Ensure founders hold onto equity during the early stages Our research indicates that founders should hold onto at least 40% of equity. This minimum amount ensures founders retain significant “skin in the game” to keep them motivated.

3. Founders should introduce new directors for their additional skills and scope

80% of successful companies replaced at least one of the original founders in the first six years of operation. Successful start ups went on to expand their boards to six or seven directors within six years.

4. Entrepreneurs’ wealth comes from selling equity, not hoarding it

The founders of the best performing companies extensively diluted their ownership to achieve external investment and growth. The research shows that the founders at successful start ups sold 50% or more of their equity to investors within six years – even though this will have required a change in the mind-set amongst those wishing to retain a controlling interest. The founders of unsuccessful businesses tended to hold onto more of their equity.

5. The lone entrepreneur is outperformed!

Whilst teams of 2 or 3 founders were most common amongst successful companies (accounting for more than 50% of cases), we found that lone entrepreneurs dominated the unsuccessful firms (accounting for nearly 50% of cases).

6. Private equity, not bank loans, is funding the creation of Britain’s technology businesses (and this was the case before the crisis too)

For instance, whilst 78% of successful TMT start-ups had an investor on board from their inception, only 7% had bank loans in their early stages of development.

7. Finance directors help TMT start-ups “push their foot hard on the growth accelerator”. TMT companies with finance directors tended to:

• Grow sales faster while utilising less cash (and greater sales mean a more favourable exit value) • Grow sales faster while utilising less cash (and greater sales mean a more favourable exit value) • Grow sales faster while utilising less cash (and greater sales mean a more favourable exit value) • Make their investment money work harder (i.e. the company operates at lower profit margins without compromising solvency); • Report stronger balance sheets Nyall Jacobs is a partner at accountancy firm Carter Backer Winter Read the article in Economia here