So much of the discussion around Scotland’s tech scene is dominated by a single common aspiration; creating the next unicorn. But while ambition is crucial for any entrepreneur, is the billion-dollar moon-shot really where we should be setting our sights?
After all, rapid growth comes at a cost and the risks and the compromises can be a heavy price to pay. This can be especially true where VCs and external investment are concerned, as many a founder will attest.
Colin Hewitt is the CEO and Co-Founder of Float – a cash flow forecasting service that secured £500,000 in private investment last year and specialises in helping businesses to manage their finances and achieve growth. Hewitt thinks we should stop looking to build the next tech giant and take a step back to refocus our priorities.
Instead of becoming fixated on unicorn status, huge funding rounds and global recognition, he says we should concentrate on building great companies and great products, and then let customer demand take care of the growth:
“People are so focused on looking for the next Facebook or Google, and as much as I’d like to see that, I don’t think we need to be looking for that in Scotland.
We need to concentrate on creating products that deliver value – it’s not just about profit, it’s about the customers, the people you work with and the people you touch in the local economy.
If you fall into that all-or-nothing culture then once you’re at that stage you’re basically all-in on that moon-shot and the chances are it’s going to fail.”
Leave Your Ego at Home
Edging its way into the Scottish start-up scene, Hewitt suggests, is a Silicon Valley-style, VC orientated culture of rapid growth and inflated risk. These cultural traits, he argues, can have damaging effects on start-ups.
While VC funding and the allure of six-figure cheques cannot be denied, for a company in its formative years this can quickly spiral out of control, developing a culture purely based around inflating the valuation.
Rather than continuing an insatiable drive for rapid growth and emulating Silicon Valley, Hewitt said Scotland’s aim should be finding the next FreeAgent; the next entrepreneur that will go out and create a great company and scale it up, it doesn’t need to be a billion dollar behemoth to be a great business.
Hewitt does concede that it is hard to avoid the ‘sexy’ side of the industry associated with VC backing, and that is where examples are needed to prove that there is in an alternative route to success.
“I think it’s the sexy part of it, the most successful companies in tech will generally be VC backed. There are good exceptions, such as MailChimp and others, that are successful who aren’t VC funded – 37 Signals are another example of a successful firm who aren’t, they are focused on the product and have an international global market to go after.”
But Hewitt thinks that the big VC backed tech companies are the ones that get the most limelight and this is in danger of clouding the judgement for younger entrepreneurs.
“If younger entrepreneurs are constantly hearing about the VC route, they just think that’s the only way.” And he cautions that this is where ego can creep in:
“There’s a bit of ego in it, it’s nice to announce a million-dollar funding round as it feels like you have that validation. But I’ve had this conversation with people before and they’re like ‘yeah we’re probably gonna raise around two million’ and it’s like, well you’ve got no revenue – it’s not based on anything it’s just ego.”
All on the Line
The stakes are high for startups; caught between aiming for rapid growth or maintaining control and focusing on product. Hewitt explains that recent examples showcase the dangerous compromises that many entrepreneurs make:
“For me, FanDuel is a great example where VC funding forced them to grow at a certain rate – once you’ve taken that path, there’s no going back.”
The original founders of FanDuel received nothing from the acquisition earlier this year and have since launched a legal bid against Paddy Power Betfair.
This dangerous game is one that many entrepreneurs are obliged to play after taking VC investment. Rather than a gradual journey, focussed on running a small business on your own terms, the emphasis has been shifting toward a high risk, high reward environment – and Hewitt cautions that this often leads to decision making that isn’t in the founders’ interests.
That’s not to say that Hewitt wouldn’t like to continue to grow his company, and he says that matching the success of Skyscanner or FanDuel would be an aspiration for anyone in his position. But he emphasises that it’s important to go about it in the way that is right for your own business.
Float has already branched out into other markets and is developing a customer base across Europe, the US and Australia. In 2014, it won best emerging add-on at Xerocon, and the recognition from this helped raise the company’s profile and establish a foothold in the Australian market.
At this stage, Hewitt said that they had considered taking VC investment to take Float to the next level, but in the end they decided against it:
“We almost took on some VC funding, but we decided against it and in hindsight, I’m glad we didn’t. It felt like it gave us the control that we needed to set the culture that we wanted to set. Once you’ve taken the money, you’ve signed up for that path and that big realisation for me is that when you’re taking money, you have to fully conform to the idea that we want to be a unicorn, billion-dollar business.”
Hewitt explains that this completely changes the benchmarks when it comes to viable exits:
“When you don’t have that level of investment there are lots of very healthy exits you can take” – “FreeAgent is a great example of exiting without VC funding, so the founders can still walk away with a potentially life-changing amount, without having to see that as a failure – which is probably what a lot of VCs would have seen that as.”
Following the route to avoid VC investment at this stage he says, offered Float much greater flexibility. And while he accepts that the opportunity to take on VC funding further down the line isn’t out of the question he said it would only be considered as an option if the time is right.
By developing a product and maintaining the vision, start-ups can still generate revenue while avoiding the risks that accompany funding. And if you can seek out founder-friendly angels in those difficult formative moments, then it can create the perfect environment to grow and develop. Hewitt is a strong advocate of angel investment, and says it brings the same capital benefits but with much less of a fast growth mandate:
“An angel’s £100,000 feels exactly the same as a VCs, yet they’re very different in terms of what you’re signing up for. A VC may insist that you need to spend this fast, then raise another round.
“But all of a sudden, you’ve found you’ve very little equity left in the business and once you’re at that stage you’re basically all in on that. Chances are, it’s going to fail.”
It’s easy to fall into the trap of focusing solely on growth, ignore building and cultivating products that work, Hewitt said, and Float very nearly fell into this trap.
“Float could have easily fallen into a syndicate that was more focused on the returns and making money”, he suggested, but at the time they resisted the temptation.
“Fundamentally we’re not just about generating a big return for our investors”, he said. “What gets us up in the morning is being a brilliant company, a great success story but also building a great product.”
What Money Can’t Buy
Choosing the right funding methods is critical, Hewitt said, but so too are the people around you. Rob Dobson was Float’s early angel investor, and served as the company Chairman. Additionally, Gareth Williams of Skyscanner played a crucial role in providing early investment for the firm.
Hewitt was clear that these investors brought a lot more to the table than a chequebook; both had extensive experience in the start-up market, growing successful technology businesses and offered invaluable guidance, support and wisdom.
Funding is only part of the puzzle for any young startup. Ensuring that you have competent, passionate people surrounding you can help propel the business and the vision.
Scotland in the Spotlight
Scotland’s technology sector is flourishing, and while we may still struggle to attract the same level of funding – and international recognition – as other parts of the world, Hewitt thinks there is a lot to be proud of.
Big hitters aside, recent events have proven the strength of depth within Edinburgh in particular, he said. Landmark funding announcements from Care Sourcer and Snap40 speak volumes of the quality found within the capital city. Ultimately, Hewitt believes we do have the right foundations in place to grow and develop a highly successful tech ecosystem. But we should do it on our own terms and not fall into the trap of treating every start-up as a moonshot.