Richard Metcalfe, ARKK’s CEO and Founder, considers the importance of funding for start-up and scale-up businesses alongside the crucial factors that need to be considered once a company receives investment.
Whether it's round A, B or C, getting investment is a great achievement for any company. Tech firms, in particular, are known to receive funding to help support product development and growth and allow the organisation to expand at record-breaking rates.
In 2019, over £10 billion was invested in UK tech businesses and 2020 exceeded this figure. UK FinTech is the predominant subsector for tech investment coming second only to the US. ARKK, recently securing additional investment from Mobeus totalling over £7 million, is continuing to edge towards a market-leading position as an AI FinTech software provider.
Continued investment in the industry is fantastic and shows a level of commitment and resilience to the uncertainty and challenges of 2020 during the height of the global pandemic. However, an interesting question arises when you think "Once a company gets investment, what’s next?"
What to do before you’ve spent a penny
Coupled with the investment is a significant level of responsibility that the leader of an organisation must manage. Funds must be spent in a strategic and calculated way to ensure that they are used wisely, add business value and achieve specified objectives.
One of the most important questions to ask is, what do we want to achieve in this current milestone? Depending on what stage you’re at in your investment cycle your aims will be different. Your primary goal might be to drive revenue and EBITDA or perhaps you’re trying to put the company in the most financially attractive position for acquisition. Whatever the objective there is one important thing to remember, in many situations the additional investment in your company will be obtained by giving up a share of your business. This is a complex and difficult decision to make and one that must be financially beneficial.
The formula for successful investment
One of the biggest challenges that founders face is balancing investment with share dilution. It’s not enough to simply seek to create value when deploying new investment, as the value created must be sufficiently large relative to the investment for it to be accretive from a share value perspective.
A founder must be able to look at the investment and calculate a formula where 1 + 1 = 4, meaning the whole is greater than the sum of its parts. Bearing in mind, this also needs to be done within the time constraints of the funding round and it is no easy feat.
Investment in the right people, technology and processes can lead to gains that far outweighs the initial funding. This sweet spot is what every company seeking investment wants to achieve.
Why do companies get investment and where's it spent?
There are numerous reasons why a company may choose to seek investment, some of which we've previously mentioned. Once a firm has obtained additional capital there's now pressure to ensure that the company is making good use of the money and driving enterprise value.
A large influx of capital, which can range from hundreds of thousands to millions of pounds, can be challenging to manage. Initial priorities can sometimes be put aside for seemingly more fruitful endeavours.
There are a few things to constantly have in mind once the funds arrive:
- There has to be a return on investment (ROI) for various stakeholders. How will this additional capital realise a return over a set time period, for example, 1, 3 or 5 years?
- What specifically is this investment for? Is it for product development, R&D, additional staff resourcing? Having a clear picture in mind of where the funds will be spent will help make sure it's assigned to the correct places
- Do you currently have the right people in place to achieve these objectives? If not, part of that investment has to be in hiring the right staff
- The need to constantly manage funds and cash to avoid overstretching
Let's look at ARKK as an example. We knew the specific timescale that we needed to provide a return in; the investment was for the development and launch of a future-proofed SaaS platform to meet the looming MTD deadline and we understood that there were skills and knowledge gaps, so we hired people to fill these in.
We understand that changing the way that tax and finance teams operate will take time, but we are on a journey to use AI-functionality and automation to help create the finance function of tomorrow.
It's all part of the journey
Obtaining funding and investment is typical for many tech companies and it’s part of their journey to provide an outstanding service and product to users, while also meeting future market needs.
Using HMRC’s Making Tax Digital mandate as an example, companies generally fall into two distinct groups. Group one wants a simple tool to make sure they’re compliant with phase 1 and 2 of the mandate. Any regulatory changes that happen after will be taken on a case-by-case basis.
Then you have group two. Forward-thinking proactive companies, that not only want to comply with HMRC's latest mandate but also see how they can improve and empower their finance function. This is where there's currently a huge gap in the market that ARKK is perfectly suited for.
Our journey will take our expertise, experience and knowledge of regulatory and statutory compliance and combine our technological capabilities to build a platform that can speed up and improve processes, visualise data in reports and give the finance function insights which were either extremely difficult or impossible to previously do.
With the additional pressures and time constraints that finance departments are combating, ARKK's goal is to create a solution that will ease the burden on finance teams and allow them to focus on adding value to their businesses.