The early years in a business’s life are often its most critical. During this time, it has to develop a product, establish a market and retain customers – all while generating repeated revenue to power future growth. Yet it is also the time in which some of the best returns can be found for investors. What if there was a way to access this potential whilst also addressing a key risk in early stage venture capital investing?
Many young businesses don’t make it past the start-up phase. They trip and fall before they can realise their potential. According to the Financial Times, only half of companies formed in London in 2013 succeeded after three years.
There are many reasons why start-ups fail, including intense competition, issues with workforce and cashflow related difficulties, but there is one factor that supersedes the rest in causing the most problems for young businesses.
Industry research published by CB Insights indicates that the number one reason for start-up failure, cited in 42% of cases, is the lack of market need. There are many instances where talented, hardworking teams fall short because their business model is unable to address a large enough problem.
Start-ups are keen to solve this issue. A global following has sprung up to do just this – the “Lean Startup” movement. Taken from the book of the same name by Eric Ries, the movement is most famous for advocating for a Minimum Viable Product (MVP) to test market demand before too much time and money is lost. Then, once market fit is established, rapid innovation improves a product until it becomes a potential market leader.
However, despite the progress, many businesses continue to stumble at this critical hurdle. Even with leadership, creativity and an innovative workforce, it is still hard for young companies to judge a market before they enter it.
Venture capital investors also suffer as a result of this trend as well. Traditionally, the industry has approached this problem by researching a broad cohort of companies with the aim of identifying the most attractive investment proposition. Investment is then made based on this research with the hope, rather than the expectation, that the market will validate the investment.
However, this method does not ensure that a company is working on a product the market needs.
To help address this core problem, VCT managers are taking a closer look at enhancing their investment strategies. Across the industry, we have started to see a movement towards a new, distinct approach to venture capital investing based upon the need to address the problem of establishing market fit. At Triple Point we call this a ‘Challenge-led’ approach.
The essential tenet of a ‘Challenge-led’ approach is to work alongside established corporates to identify the problems they face and then identify the early stage business with the innovative new product or service that can provide the solution to these core challenges, thus providing market validation.
So, while early-stage venture capital has conventionally invested in companies with an idea of demand, the Triple Point Venture Fund VCT focuses on market demand as a core foundation for investment.
Triple Point works with early-stage businesses that have products able to overcome these identified business challenges. This typically ensures that a market fit has already been established, before investment, which results in the same potential early stage financial returns, whilst reducing the risk of the business not achieving a market fit. By investing at this stage, the ‘Challenge-led’ approach addresses the most critical obstacle of early stage investment, whilst continuing to maximise potential returns for investors.
Over the Autumn Triple Point announced a top-up of its venture fund, a share class in the successful Triple Point VCT 2011 plc. As Triple Point’s 20th VCT fundraise to date, this share class targets income and capital growth by drawing on a distinctive ‘Challenge Led’ investment approach. If you have any questions regarding our Venture Fund VCT please contact us on 020 7201 8990.
Risk warning: The Triple Point Venture Fund carries all the risks of investment in smaller companies and places investor’s capital at risk. There is no guarantee that target returns will be achieved, and investors may get back less than they invested. Tax rules and reliefs depend on individual circumstances and are subject to change.
This financial promotion has been issued by Triple Point Administration LLP which is authorised and regulated by the Financial Conduct Authority no. 618187.
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