By Mark Palethorpe, CFO, Cox Powertrain
Establishing your business as an attractive investment opportunity is a challenge for any company. For a business that is working on a step-change innovation, where the new product or service isn’t just improving the existing offer but setting out to revolutionise the industry, you need to present yourself to potential investors as one of a kind opportunity. Cox Powertrain is a UK-based engineering business developing a first-to-market new diesel engine. To raise the money needed to bring this innovation to market we needed to create a business that stands out from the crowd and stands up to scrutiny – communicating effectively every step of the way.
Investment doesn’t start and end with finances. In your early stages, you’ll need to attract the talented professionals who are going to bring your innovation to life. You’re asking qualified people to invest their careers and reputations with you. The most innovative businesses can capture the interest of curious professionals who want to work on something game-changing. But there’s got to be more than a promise of a unique challenge. Your company needs to have a range of talents on the team including financial, technical, operational, commercial and entrepreneurial skills. To be credible, you need a well-balanced team that you keep up-to-speed on your progress so they feel supported in their roles within the business as it grows.
The best teams support each other, balancing strengths and recognizing how each contributes to the company’s success. Creating a strong culture of teamwork will also impress financial investors who recognize how a team with ‘linked arms’ can hold together successfully when one area needs more focus.
Sourcing financial investment and funding is not for the faint of heart. We have raised over £40 million to date and continue to raise funds to develop our engine. It’s true that much of the money we’ve secured so far has been from people who “just get it”. But despite them sharing our ambitions and enthusiasm, we’ve had to put in the work to ensure the financial projections and market awareness are compelling and credible. An investor’s decision to finance a new product can be influenced if you have well-proven answers to these four questions:
1) Does the market want it?
2) Can you prove that your offering meets market demand?
3) Will your product work?
4) Can you protect your product?
Due diligence will be conducted but there’s also an emotional aspect to their decision. They need to believe in your company and your product. Your team needs to make them feel confident. Can you demonstrate that your team has the experience and track record to draw upon? Have the team’s successes in previous roles led them to your business? Does the way you work together and the culture you’ve developed appeal to the investor?
Whatever the level of risk, investors need to see that the company has the corporate governance in place and operates in a way that can scale successfully. Cox Powertrain is privately-owned, yet we’ve taken the decision to govern ourselves like a PLC with all the checks and balances required. This helps our company run smoothly and provides welcome transparency to current and prospective investors.
Be crystal clear about your route to market. We have invested significant time and resources to research the market in order to back up our views that the workboat market was hungry for a 300hp diesel outboard engine. We worked hard to establish a network of contracted distributors and support centres, providing a ready route to a large international customer base. The distributors and resellers’ faith in our innovation acts as an endorsement in what we are doing and provides reassurance to an investor that we’re working with the market in mind.
A well-connected intermediary can get you in front of the right people. You’ll need a broker with an extended network of investors who understand the risk/reward opportunity your company offers. A financial advisor who filters prospects for their clients can be a difficult place for an innovator to traverse. Our Chairman and broker both have an enviable ‘rolodex’ and their ability to establish contact directly with investors saves us from getting stuck in the sifting process of financial advisors.
The investors’ fourth question ‘can you protect it?’ needs to be addressed early on. Write up your patents and protect them as soon as possible. Work with experts, as needed, to ensure that your innovation cannot be copied legally. Few investors will move ahead without that assurance.
It’s important not to get caught up in the technology for the sake of it, ignoring how you’re going to commercialise your ideas. Getting a product to market – and properly supported – is every bit as daunting and time-consuming as developing the innovation itself. Any funding source is less likely to engage unless you can convince them that you understand this.
Keep everyone informed as you move ahead. You will need to communicate effectively with your staff and partners, to your existing shareholders, to the market and industry and to the City. You’re going to need to keep feeding the ‘buzz’ so that when you get in front of a prospective investor, you’re ready and they may even have heard about you.
Product innovation needs patient investment. Innovators need investors who are comfortable with a longer-term return and not looking to make a quick profit. The Patient Capital Review, announced by the Prime Minister in November 2016, the results of which should be announced in 2017’s Autumn Budget, set out to identify the most effective ways to improve the availability of patient capital for growing businesses. Like other innovative businesses, we’re watching this review closely and with bated breath as we see this as a really positive step for innovative organsiations like Cox.
There are Government incentives for technology companies like ours, such as R&D tax credits, as well as tax incentives for those who invest in innovation. The EIS scheme has been pivotal to us raising capital as we have progressed along our journey from concept and early design stages towards market launch. Make sure you are familiar with the funding and tax credits available.
Working on an innovation, with the ambition to establish long-term business success, can appeal to investors. But you have work to do to prove you have the strong team in place, that technology works and that the market is hungry for it.
About the author
Mark Palethorpe is CFO of Cox Powertrain and part of the management team driving the development of a 300hp diesel outboard engine. The engine, which is designed and will be manufactured in the UK, will be launched in 2019. The Cox CXO300 engine will give buyers a significant total cost of ownership saving of up to £500k per boat, over the lifetime of the engines. There are also significant logistic, safety and environmental benefits.
Prior to becoming CFO at Cox Powertrain, Mark Palethorpe was FD of QinetiQ PLC’s EMEA division and CFO of the Cosworth Group