Startups beware: Too much investment too soon can hold back innovation

 
Martin Kelly
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The Silicon Roundabout In Old Street
But if you’re on a funding round it’s worth bearing in mind how staying lean for longer could allow you the freedom to experiment. (Source: Getty)

For startups, cash flow is always front of mind.

This focus is necessary given the balancing act many perform on a daily basis. So my suggestion will sound surprising.

Borne from experience, I think too much money in the early stages of a startup’s life can be an impediment to valuable innovation. I would suggest businesses can benefit in that intense beginning phase from a period of austerity that sharpens appetite to make sure the idea, and the business formed around it, is sufficiently viable to survive and flourish.

This can be seen by comparing the progress of US and European SME’s in the industry in which I operate – ad tech. The sector has received a great deal of attention in recent years, as it provides the technology which powers the ads that continually flick across our screens.

Digital advertising is the fastest-growing type of advertising, so no surprises that the ad tech market is also booming. There have been a variety of big-ticket acquisitions by large companies over recent years and plenty of investment by financiers eager to find profitable homes for their cash.

But it’s interesting to look at how different patterns of investment (in quantity and timing) tend to then pan out for those businesses.

Compared to their European peers, ad tech start-ups in the US are financed at an earlier stage in their business life cycle, and with larger amounts than those in the UK. This is down to the global economy – despite pockets of growth, investors are still jittery about where to leave their funds.

Businesses can benefit in that intense beginning phase from a period of austerity that sharpens appetite to make sure the idea, and the business formed around it, is sufficiently viable to survive and flourish.

In the US, financiers are often keen to invest their money at an early stage, to maximise their anticipated future returns.

On the face of it, this sounds great for the entrepreneurs: fully funded sales teams, and the breathing space of not having to worry about the wage bill.

But in reality this is encouraging too much copy-catting on the part of these well-funded fledgling companies. Knowing that their backers are hungry for predictable and early returns tempts them to stick with known technologies, rather than pinning their fortunes on something truly ground-breaking.

In ad tech, this has translated into lots of barely-differentiated ideas getting all the way to market – lots of identikit technology that is only varied by the way it is sold to customers.

This side of the Atlantic, investors are also keen to put their money into new ad tech companies, but they take a more cautious approach. The money generally appears later, when the management team has proven its idea and its ability to create a sustainable business.

This might put extra pressure on the team but I believe it means we work harder to come up with something that is genuinely innovative. UK ad tech organisations, for example, are digging deeper into the emerging disciplines of data analytics and customisation, going far beyond the more standardised American platforms.

The French experience in the ad tech market holds my argument. The investment community had taken a similar cautious strategy as the UK until around 2010. At this point the government started channeling generous grants towards young ad tech businesses, resulting in a bundle of start-ups. But now, many have either been swallowed by larger groups or gone out of business, their technologies or business models unable to sustain growth.

Of course this isn’t a simple issue. American businesses are often able to expand quicker than their European counterparts precisely because their funding allows this. Likewise, they are able to afford more significant marketing campaigns which can really lift a growing business.

But if you’re on a funding round it’s worth bearing in mind how staying lean for longer could allow you the freedom to experiment.

That extra period of independence will buy you a truly ground-breaking idea.

Martin Kelly is chief executive and co-founder of Infectious Media.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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