New research reveals that one of the biggest issues faced by European start-ups is their inability to stop competitors taking their market share.
The research, which was carried out by startup rating agency Early Metrics based on the analysis of 1,774 European early stage businesses over the past two years, reveals that just seven companies received top scores in this category. This is the biggest red flag for potential investors to look out for. Just over one in ten businesses scored 0 in this category.
The rating process carried out by Early Metrics is tailored to assess the growth potential of innovative SMEs. It examines three key pillars of every business rated (team, product, market) and analyses 27 different rating criteria. Just looking at financials can be a one dimensional and often an inaccurate assessment as to whether or not an early stage startup will succeed. Often these numbers don’t even exist.
On average, European tech start-ups score 68/100 in the rating process. 16% of those rated scored less than 60 which is a point where most investors will walk away. However, our research reveals that more than a quarter of start-ups excel across the board scoring 73 or more when put under the microscope. This means one in four have a strong chance of survival and growth.
Availability of the leadership team
During the rating process we found that 30% of founders in European tech startups do not invest enough time in their new business. The first five years of activity are crucial to develop the idea, source the right talent and work out the business model. Hence, investors might be put off by entrepreneurs that are only committing part-time to their venture.
Ability to convince
The majority of business founders have a natural ability to defend their idea and this is one of the most important characteristics for successful leadership. It means founders are able to convince award juries, investors, advisors and obviously clients to support the business. 73% of early stage startups received top marks for this. In fact, just 14 of the businesses scored one out of five.
It’s not what you know…
Investors want to see that start-up leaders are connected. Just 16% received top marks, 38% of the businesses rated fell down at this hurdle which is a significant alarm bell for investors. This isn’t just about the number of Twitter followers you have; these are contacts you can leverage for commercial growth even in the early stages of business.
Agility is key
With smaller teams and no legacy systems, start-ups usually have the advantage of being more agile than incumbents. However, putting together the right team, developing an innovative product or pivoting to respond to market demand is easier said than done. Operational speed is crucial when it comes to investment. Less than one in five (17%) received high scores in this part of the rating process but 22% were simply too slow to progress. This is often down to low levels of resource in a new business or lack of time committed by the founding team. Either way, this can make or break an investment as it’s the lifeblood of any start-up culture.
Antoine Baschiera, CEO and Co-Founder of Early Metrics comments: “There are always teething problems for every new business, the important thing is to learn quickly and keep moving forwards. Moving quickly is key and it’s one of the things every investor wants to see in a potential investment opportunity.
Businesses are complex beasts, in order for them to fly or die we recognise that success is more about people than numbers. That is why we developed a rating process that looks at the strength of the leadership team in just as much detail as it does the business numbers.”