Thursday 19 November 2020 11:14 am

Data first: How tech startups build trust and tap investment

When Phil Marshman set about launching his health startup Sentai this year he faced a challenge. For the serial entrepreneur, it was not the pandemic or the intricacies of artificial intelligence or even getting to market that posed a challenge, it was customer data. 

“For any product team you need to be data first… We have to make sure we’re protecting our users,” he says. 

Sentai uses augmented voice technology to help the elderly in their homes through an app and speaker system to guide them through the day and to alert friends and family in emergencies. 

But even though it is a niche market, it poses fundamental questions of what can and cannot be done with data and to what extent it stifles – or can promote – technical innovation. 

He encapsulates what startups are having to prioritise and it has come into sharp focus this year with the proliferation of healthtech firms coming to market amid the pandemic. 

Beyond the regulation startups are now facing increasing pressure from investors, and indeed consumers, to be transparent about how they handle data. 

It is shifting how startups behave in the very early stages, with data and privacy issues coming top of the priority list not just to troubleshoot possible security issues but to build trust and consolidate their brand promise. 

Investors prioritise data health 

“The nirvana of a company we invest in is not just to serve the customer but to lead them.” Dawn Capital’s Henry Mason speaks for most investors.

In this case he is talking specifically about how startups should be innovating around the issue of data and privacy. 

Dawn Capital invests in Series A and B in security so data is front and centre in decision-making. But it is indicative of a wider shift in approach from investors who are treating data as a hygiene factor alongside financials at pitch stage. 

Oliver Holle, managing partner of pan-European VC Speedinvest which invests at seed stage, treats data as part of the due diligence process now and expects far more from startups at the earlier stages. 

“If you talk to a founding team and they don’t have a proactive strategy… that’s a red flag for us. Founders need to go way beyond the current rulings and GDPR regulations to think ahead,” he says. “The exercise of forward planning is indirectly a big part of our due diligence and gives you an idea of how people prioritise and weigh in on certain topics.” 

Nervousness on the part of investors when it comes to privacy and data is in some part due to regulation but the endless negative headlines for big tech this year is a likelier reason. 

Patrick Roux, senior associate at tech law firm Kemp Little, says that this anxiety has come out in the form of “unreasonable” warranties at the due diligence stage. Some investors “ask all companies to give a flat warranty to say they’re totally compliant with GDPR and sometimes include guidelines that don’t actually have statutory force.” 

It shows the scale of the battle startups are facing when they’re looking for investment. 

Startups adopt a data-first approach 

Considering data and privacy issues on top of product launches and tax and IP advice seems a daunting prospect for startups with little time and money. 

But unlike big tech, which has to grapple with legacy data and less agile infrastructure, startups have the opportunity to prioritise data from the offset. 

Given how vast the startup ecosystem is in the UK it is common to find data experts on the founding teams, particularly in the healthtech and deeptech spaces where data is a core asset. 

While helpful at the early stages, particularly in saving money on pricey lawyers and specialists, it also becomes an asset at the investment stage. 

Holle tells City A.M. he is more comfortable investing in companies with data scientists on board from the start. “If you’re going to be good at optimising your business model you have to have this data perspective and you need to have a clear view of the risk.”

But what about startups that don’t have a data wonk on board? They’re having to weigh up the cost of strategists and specialist lawyers in the early stages where budget is often limited, and potential technical and security debt they could be saddled with later on. 

Caroline Plumb, founder and chief executive of cashflow management fintech Fluidly, told City A.M. she was not willing to take the risk. 

She prioritised the handling of data early on and hired a risk and consumer specialist whose role also included training for the commercial team. 

“Are you realistically expecting your sales development representative on the phone to remember every piece of legislation that comes up in training?” she asks. 

It shows that startups are not considering data and privacy a burden but an integral element of the product and is ingrained into the company’s culture. 

And this is key. Data is becoming so central to startups in the early stage that it has become part of the innovation process. With increased scrutiny from investors, data is not just about building algorithms building trust in investors and customers. 

“We see it as a UX and communications problem as much as a legal requirement,” Plumb says.

The communication point is crucial, early stage companies don’t have the luxury of vast exposure and need to build trust quickly and effectively. 

Digital health company Careology, which helps cancer patients feel in control of their care, has centred data in its offering. Chief executive and founder Paul Landau tells City A.M. that transparency with end users is key. 

“We’ve worked really hard to make sure that the consumer stays firmly in control of their data, all the time. And it’s very easy for them to select who their data is shared with.” Careology introduced a slider feature allowing the user to turn data-sharing capabilities quickly. 

There is a clear shift in mindset here across the start-up world. Instead of data and privacy becoming a burden it has become essential to building trust. 

Those startups that can demonstrate that they really care about data can stand out and build a customer base –which means the funding will follow.