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Intelligent investment analysis of early-stage companies

Periodic Reporting for period 1 - INTEL-1 (Intelligent investment analysis of early-stage companies)

Reporting period: 2016-03-01 to 2016-08-31

The European startup ecosystem is booming. It has attracted more than $14.4bn of venture funding in the last four quarters, the highest in 5 years. A major factor fuelling this growth is a higher-resolution venture finance industry, which has opened up the traditional Venture Capital (VC) space to new types of equity investors: angels, accelerators and micro-VCs. At the same time, the emergence of equity-based crowdfunding (i.e. securities offered to investors, often non-professional ones, through an online intermediary) as an increasingly prevalent capital-raising channel is further disrupting early-stage investing. This popularisation of market access provides vital capital underpinnings to businesses across the maturity spectrum and has been a centrepiece of economic growth for EU policy makers.

Supporting innovative ways of diversifying the funding sources for European businesses is crucial to improving growth and job creation. The European Commission believes that venture finance, including crowdfunding, has the potential to bring significant benefits to the EU economy in terms of jobs and growth, by providing an alternative funding source for start-ups, SMEs and unlisted companies. The European Commission estimates that €4.2 billion was successfully raised through crowdfunding platforms in 2015 in the EU, compared with €1.6 billion in 2014.

As with any type of investment, the promotion of the benefits of venture finance needs to be pursued in parallel with ensuring appropriate safeguards. The risks inherent in venture financing are common to those more generally related to investing in unlisted shares or bonds and can also manifest themselves in the context of the crowdfunding business model and are exacerbated by the fact that many aspects of the investment ecosystem remain opaque. This is particularly true for equity funding of early-stage companies – defined for the purpose of this project as companies that have raised less than €10 million of capital.

Institutional venture finance investors have both the experience and the resources (capital, staff and professional tools) to navigate this opaque landscape. On the other hand, individual investors (“angel investors”) face three crucial challenges: 1) they lack experience; according to Nesta, 62% of UK angel investors have no investing background; 2) they lack access to relevant and reliable data; 3) they lack the time, resources and expertise to properly research companies. Consequently, they tend to invest based effectively on marketing materials, forming their view as consumers of the product/service rather than as investors in the business.

Investment/angel networks and crowdfunding platforms, which present opportunities to investors and charge startups a percentage of the funding they secure, face similar challenges. Their success – and reputation – is strongly correlated to the quality of the deal flow. Yet angel networks are usually resource constrained, which prevents them from properly screening and qualifying opportunities. As a result, many of them struggle to 1) sustain investor interest and 2) secure funding for startups. Meanwhile, crowdfunding platforms are under increasing pressure to ensure investors have access to objective information about the companies fundraising.

Finally, startups themselves face an uphill battle when trying to secure funding. Amidst a surge in the number of startups being created, it is very hard to separate the wheat from the chaff. The problem is particularly acute for European startups not close to the large investor pools of the UK, France and Germany. As an example, we have come across business incubators and accelerators from Central Europe struggling to credentialize themselves and their companies to Western European investors, despite an abundance of talent in the region. Lack of transparency limits the volume of cross-border project funding and constrains the reach of crowdfunding to regional or local levels.

It is our belief that these factors result in significant misallocation of capital, hindering the ability of the European SME ecosystem to expand optimally. Crowd Analytics is a first-of-its-kind large-scale data analytics and visualisation platform that helps investors assess the risk profile and investment-readiness of early-stage companies. The system collects structured and unstructured data from a number of public and private sources, correlates them using proprietary algorithmic analysis, deduces relevant insights and presents them to the user in an intuitive and structured manner.

In this context, the overall objectives of the project were, firstly, to assess the demand for such a product from a range of potential target user categories and research user acquisition strategies. Based on user feedback, we aimed to refine the product positioning & roadmap, determine the optimal monetisation strategy and develop detailed financial plan. Finally, we aimed to Identify potential channel partners, develop an IP management strategy and determine risks and mitigants for successful commercialisation.

The conclusions of the action support our thesis that there is demand for such a product, and we identified a range of features that need to be implemented in order for the product to stand out versus competing offerings. The most significant challenge is building a product whose data and analytics are trusted by industry participants. This requires amassing a comprehensive and reliable dataset that can be harnessed contextually and transparently. Our overarching success factor will be to build a system that can be entrusted to harvest data reliably and at scale.
During the course of the action we assessed the market opportunity by soliciting feedback from a large number of potential users, researched user acquisition strategies, determined the preferred monetisation strategy, created a product roadmap, identified partnership opportunities for accelerating market penetration, developed a detailed financial plan, researched our strategy for intellectual property protection and considered key risks. Finally, leveraging the output of the aforementioned activities, we drafted a comprehensive business plan for Crowd Analytics.

In order to assess the product’s value-add and its potential to be monetised, we solicited feedback from hundreds of potential users across Europe using online surveys, observation of behaviour on the platform, as well as one-on-one discussions. We also followed up with users who had previously expressed interest in our product and identified additional users through networking, referrals and social media.

We evaluated the effectiveness of numerous user acquisition channels and determined that partnerships and direct marketing were highly effective in building initial traction. Among online marketing channels, Google Adwords, LinkedIn and Facebook yielded the most attractive cost-to-value channel for reaching a wide audience. Twitter was found to be less effective. Finally, inbound marketing using PR methods such as articles and other thought pieces were effective in building brand awareness and enhancing engagement.

The feedback we received from users was invaluable in helping us shape our market position particularly versus competing or complementary products and platforms. It also led us to connect with partners who could help us improve our relative positioning.

In terms of pricing, we reviewed the approach of key peers and concluded on a 3 tiered pricing strategy that we feel most appropriately supports our product's revenue model. In that context, we contacted several potential channel partners and explored mutually beneficial means of cooperation, with our objective being the product's accelerated commercialisation.

In order to quantify the market opportunity, we leveraged third-party analysis of the market and studied related trends. Based on this analysis, we created estimates for market penetration over time, which in turn underpinned our growth plan. We then researched and quantified the costs for achieving the envisaged growth plan and identified the most relevant Key Performance Indicators for tracking our progress.

IPR was another important focus area for us. In conjunction with legal counsel, we researched the merits of seeking a patent for various aspects of our IPR. However we concluded that this would not be an effective use of our capital. Considering the nature of our activities, our legal counsel confirmed that the most appropriate course for protecting our IPR is via trade secret.

Finally, we documented potential risks pertaining to the execution of the roadmap and ways to mitigate them and drafted an elaborated business plan for the opportunity.

The aforementioned activities led us to confirm the existence of a very promising business opportunity in this area.
When evaluating early-stage companies, experienced investors focus primarily on the following areas: product, market size, team, competitive landscape, company financials and valuation. While several aspects of such analysis are subjective and ultimately a judgment call by the investor, there are certain crucial elements for which relevant data can be collated, including traction, competitive landscape, team history, financials and valuation. Crowd Analytics is a web-based system that collects such information. We gather and parse structured, unstructured and semi-structured data from a number of public and private sources, including data provided by the company itself, and correlate it using proprietary algorithmic analysis. The platform then automatically generates reports assessing companies’ investment-readiness. Our system progresses beyond the state of the art by gathering structured and unstructured data from a variety of sources, parsing the captured data and extracting meaningful information, contextualising the extracted information and deducing signals that are relevant to our target users.

In terms of socio-economic impact, we believe Crowd Analytics has the potential to positively impact the European economy by supporting growth and job creation. Small and medium-sized enterprises are the backbone of Europe's economy, representing 99% of all businesses in the EU. In the past 5 years, SME's have created c. 85% of new jobs and provided two-thirds of the total private sector employment in the EU. For that reason, the European Commission considers SMEs and entrepreneurship as key to ensuring economic growth, innovation, job creation, and social integration in the EU. Our product supports economic growth and job creation by addressing one of the most important issues facing SMEs, which is access to funding. Crowd Analytics enables the allocation of venture finance to SMEs that, despite their strong potential, are disadvantaged by their lack of proximity to Europe’s major economic hubs and by investors’ asymmetric access to relevant information.
Business Opportunity