Partner Article

More exits necessary to strengthen North East startup community

With the launch of The New Goldrush in just over a month, I have been asked a few times now my thoughts on what can be done to strengthen startup communities, like the one we have in Newcastle.

Northstar Ventures is one of the leading VC firms in the region, responsible for more than 300 investments through their Proof of Concept fund since they were founded in 2004.

Northstar and other firms are key players in this community, with other investments coming from a group of high net worth angel investors, corporates like Trinity Mirror PLC and investors outside the region. Without investors this community of entrepreneurs would be far smaller than it is now.

We also have university support, incubators, like ignite100, and numerous community led events. All things we should feel positive about.

What’s Missing?

But something is missing. We aren’t lacking a supportive culture, nor enough people willing to take risks, nor sufficient means to fund these ventures.

We live in an age of crowd-funding and government schemes such as Startup Loans, which adds to the ways aspiring entrepreneurs can support their ventures.

What Newcastle and other UK startup communities, including London, are missing, is a critical mass of exits.

This isn’t something we can solve overnight. But it is the reason why funding rounds and valuations are lower in the UK compared to America and Canada.

Mind The Gap

The numbers support the anecdotal evidence. The US VC sector is worth $30bn a year, in Silicon Valley around 300 companies, each with $5-20m invested, are supported annually.

In the UK that number is around 60. Most European startups receive funding in the region of 2-3 times revenue. In the US it is closer to 8-10 times revenue.

That gap continues on the stock market, for firms valued at around $100m, there is a trading ratio of 15 times earnings, whereas in the US the ratio is 22 times earnings.

Creating A Sustainable Ecosystem

I would argue that one of the main reasons for this vast funding gap is a lack of successful exits. When a business is sold, or goes public, money flows back into VC firms, creates high net worth individuals who usually re-invest some of that money into new startups, thereby perpetuating a cycle of innovation.

The good thing is that this is not outside of our control. Both founders and investors play a critical role in creating this sustainable ecosystem.

What is needed, from both sides, is a willingness to ask more of the tough questions. It is easy to get swept up with the enthusiasm of a new venture, but enthusiasm doesn’t create an exit. You need to ask yourself some of the tough questions from day one.

Tough Questions

Do you know who you want to sell your startup to? Do you know why they’d buy it? How much revenue or profit will you need before you have a valuation worth selling for?

Or what other tangible assets like staff, a client list, user-base, patents or proprietary intellectual property can you accumulate in order have built a company with real value?

Everything you are doing as a founder is geared towards that. Not everyone succeeds. That is inherent in a market economy.

But those who really want to succeed should be thinking about the exit from day one. Only then will our ‘critical mass’ become something self sustaining, stronger and more deep rooted.

This was posted in Bdaily's Members' News section by Starticulate .