Oliver Woolley, CEO of Envestors reveals how the digital transformation of the funding landscape could be a good thing
The world of early-stage investing has always valued the human touch – matching businesses and investors is all about relationships, after all. So, it’s no surprise that the adoption of digital in this space has been slower than within other industries. Pitch events –where investors have no advance information on the presenting companies and are handed out printed info packs and need to pick up the phone to learn anything more – are still very much the norm.
But the sector is now waking up to the idea that digital does not mean impersonal. In fact, it can help people to build deeper relationships - faster - by providing new ways to communicate, share information and ultimately make the process of finding the right opportunity and deciding to invest easier for investors.
There are two key ways in which digital will transform the world of early-stage investing. The first is that it will make it considerably easier for investors to discover deals, complete due diligence and manage their portfolios
In early-stage investments, offline activity is still primary. This is set to change with the introduction of white-label investment management platforms. These platforms allow groups to showcase deals to their investors in an Financial Conduct Authority-regulated environment. Investors can review deal information and documents in a secure area, engage with the management team and other investors and make an investment.
The suggestion here is not that digital will replace offline activities; presentation events and face-to-face meetings will always play a crucial role in any investment decision. Digital will complement these activities in a way that makes the entire end-to-end experience much better for investors.
The second way digital changes will transform early-stage investment is by connecting the disparate world of early-stage investing.
The landscape we have today is the same landscape we had 50 years ago. We’ve got investment networks, clubs, incubators and accelerators, all of whom actively help investors find opportunities and scaleups to secure funding – but they’re all closed and separate. That’s where technology can help bring people closer together through different platforms.
But why is this happening now? Well, it’s because we live in an age of instant gratification. This spans across all areas of our lives – from instantaneous validation on Twitter and one-hour Amazon delivery to 24-hour news at our fingertips. So why should the investment experience be any different? If I can find out about anything in the world from wherever I happen to be, why should I – as an investor - wait for a pitch session to find out about investment opportunities?
And then there’s the ROBO effect. If you’re unfamiliar with this term, it‘s been coined in the retail industry and stands for “research online, buy offline.” It reflects a broad behavioural change. People no longer head to a shopping centre to browse for an item, they go online and find what they want and then go down to the store to get it. In many cases, they opt not to go to the store, satisfied with the information they’ve found online and make an immediate purchase.
This behaviour isn’t particular to consumers. A study by Forrester Research, found that 68% of business to business buyers researched online independently and a further 62% say they go as far as developing a selection criteria and vendor list based on digital content.
So, why is it different with investing? When people prefer to get information instantaneously and independently, why do we ask them to wait for a pitch event? Using digital, information on potential investment opportunities and any relevant details can be ready for investors to read at their leisure. Further to that, information can be interactive. Potential investors can ask management teams questions by using online channels and get answers in real time.
Digitisation has fuelled the unprecedented growth of startups in the UK. This has produced a vast – and occasionally overwhelming – array of opportunities, resulting in a trend showing networks are becoming more niche and sector specific. While regional investment networks have long been part of the landscape, they are joined by networks specialising in for example greentech, medtech or women-owned businesses. This is not a bad thing but it has caused further fragmentation.
Experienced investors know that if they’re to get the best chance of a return on their investments, a diverse portfolio is a must. However, such specificity throws diversity out the window, leaving investors only one option – joining multiple networks and doing a lot of leg work to build and manage their portfolios.
Digital to the rescue. With an aggregated platform, regional and niche networks can connect to one another and share deals at the click of a button. This allows networks to protect their greatest asset – their investors – while offering them a broader array of investment opportunities without doing all of the vetting and admin.
By mid-2018, the impact of a looming Brexit was already starting to be felt across the industry. With predictions of economic troubles in the UK in the short term, many investors tightened their purse strings, becoming increasingly selective over which investments to make. Yet, at the same time, reports show that foreign investment is at an all-time high: in 2017, a whopping £6bn was invested over the course of the year, with 396 of these deals involving at least one investor from abroad.
This is another opportunity that could be capitalised by digital. With a digital platform, deals can flow across borders – giving investors the ability to further diversify their portfolios, while giving businesses a better opportunity to find investment.
There are too many benefits to be had by adopting digital for the sector to delay any longer. A lot of key players, like The SetSquared Partnership and Britbots, are already well on their way and I expect they’ll find themselves in good company.