Dragons Sit Behind Success in UK

New research from accountants CBW into fast growth start-up businesses reveals that it is investment from dragons (also known as “business angels”) and private equity firms – not bank loans – that are behind the fast-growing technology start-ups that are vital for the UK’s economic future.

CBW’s Tech Factor research investigated 100 successful TMT starts ups and compared them to 50 unsuccessful ones. The firm analysed a range of data and information covering these businesses over a six year period. The goal was to identify the key factors of success. {See notes for editors for full research and terminology details}.
The key findings include:

•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.

•Finance directors help TMT start-ups “push their foot hard on the growth accelerator”.

TMT companies with finance directors tended to:

oGrow sales faster while utilising less cash (and greater sales mean a more favourable exit value)
Make their investment money work harder (ie the company operates at lower profit margins without compromising solvency);
Report stronger balance sheets.
Attract more external investment.
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 founders of unsuccessful businesses tended to hold onto more of their equity.
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).

Report author Nyall Jacobs, a partner with accountants CBW, said “I see many start ups in the TMT sector whose founders have brilliant ideas and scalable business models, but many of these, seemingly inexplicitly, fail whilst others go on to be successful. I wanted to understand what the magic ingredient that separated the successes from the failures. Surprisingly, perhaps, the magic ingredient was often the presence of an accountant on the board!”

Nyall Jacobs added: “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. Additionally, they were strongly associated with encouraging founders to sell more of their equity.

“FDs clearly allow businesses to ‘put their foot down hard on the growth accelerator’ and the end result of this is the business achieving greater revenue through highly efficient cash utilisation. This should be a critical consideration amongst entrepreneurs since the higher their sales revenue, the higher their company’s value will be.

“Selling equity to the right investor can kick-start growth spurts. However, I often meet entrepreneurs desperate to hold onto their equity – as we see on Dragon’s Den time and again. Sadly, this stifles growth and generally the founders are ultimately worse off: our research found that most successful businesses had founders who sold at least 50% of their equity to outside investors within their first six years.

“Our research also reveals that loans are not an important source of funding for successful technology start ups. Only 7% of TMT start ups had bank loans during their earliest days (although bank loans became modestly more important over time as the companies grew).

“In terms of government policy, more bank lending is not the answer in this sector as the start ups have few assets to borrow against. What we do need are policies to encourage more business Angels to invest, and more security for investors to attract crowd funding. Although there are some great tax incentives (especially the EIS and SEIS schemes) to encourage investment, these need to be given greater publicity to encourage more wealthy businesspeople to become Business Angels.

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David Dungay

Editor - Comms Business Magazine
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