For a long time, the traditional venture investing model has gone unchallenged. While portfolio returns can be significant, there remain large risks associated with early stage companies; a company’s journey from start-up to scale-up is, after all, one of its most uncertain and challenging times. Emerging recently however, is a movement towards a new, distinct approach to venture investing based upon the need to address certain risks associated with nascent companies – establishing market fit. This new ‘challenge-led’ approach can accelerate the growth of these early-stage enterprises and potentially boost returns for investors.
Venture investing has typically focused on researching a broad cohort of companies, and sought to identify those businesses likely to be successful. Whilst this has been the natural assumption underpinning venture capital to date, the analysis often ignores the crucial factors that determine the success and longevity of the vast majority of start-ups.
Research suggests more than forty percent of failures of early stage companies arise from problems in the initial phase; testing market demand. Put simply there is either no market need for a product, the product is not a hit, or the company has the wrong business model. Market participants have found these problems difficult to address, potentially exposing investors to a greater level of risk from the outset and leading, at best, to lower returns.
But a new approach is pioneering a way to mitigate these risks. The approach sees large corporates and early stage businesses work together. It starts with the market challenge, by asking large corporates what they need to fix within their own business to make themselves more competitive and serve their customers better and then focuses on early stage companies that can, or already do, offer solutions. In doing so a market fit is established far earlier, thereby eliminating one of the crucial issues that leads many fledgling enterprises to fail so early, while also looking to reduce investors’ risk exposure and increase their potential returns.
We are already employing this new strategy, having launched a new, Venture Fund share class for our existing Triple Point VCT 2011 plc. The new approach draws on the expertise and reach of our own Venture Network, encompassing a wide range of corporate innovators and entrepreneurs. They match the Network’s over 5,000 innovative young companies with big corporates to help them solve some of their key operational and trading issues.
By investing in growth businesses that already have established a strong market fit the challenge led approach mitigates the main risks inherent with venture investing, helps underpin investor returns – and may, potentially, transform the face of venture capital.
Risk Warning: As with any investment, there is no guarantee that target returns will be achieved and investors’ capital is at risk. Past performance is not a guide to future performance and may not be repeated. Tax rules and reliefs are subject to change.
Triple Point Investment Management LLP is authorised and regulated by the Financial Conduct Authority, firm reference number 456597. Triple Point Administration LLP is authorised and regulated by the Financial Conduct Authority, firm reference number 618187