Background
We often get asked what we are looking for when assessing management teams. It is hard to provide a formulaic answer which covers all businesses at all stages of development. For example, how does an early-stage company with a smaller senior team get across their strengths in the loan application?
Within Innovate UK Loans Ltd it is generally accepted that the repayment of any loan product will typically rely on the achievement of planned project or business objectives. It is the achievement of these objectives that will generate sufficient revenue and profits. A corollary to this, will be the ability of the team to deliver this technically and commercially within an effective management framework.
We recently made a visit to Northern Ireland to attend a customer product launch. While there we arranged catch up meetings with other portfolio companies. As we travelled between the businesses I was discussing in turn the senior management teams and the different skillsets the individuals brought to the business. While all distinctly different businesses and respective markets, the pattern in their teams was clear. I called it the trifecta (a reference to a perfect group of 3) where each showed strength across leadership, commercial and financial areas.
These attributes of a good management team are not just likely indicators of the ability to take on, manage and repay a loan. They are also good indicators of the firm’s ability to benefit from our support for innovation, raise capital and deliver growth at scale.
The trifecta
We acknowledge that start-ups will not necessarily have a fully built out team covering the C-suite, a competent board or advisory team or wider base of employees giving the company bandwidth.
So as a minimum I look at 3 functions or aspects in particular:
- leadership
- commercial
- financial
If you are a startup, there may even be some doubling up of these functions, but all 3 should ideally not be focused on a single person.
Taking each in turn:
1. Leadership
Is there a chief executive officer who has an ability to bring products to the market? Is there someone responsible for the overarching strategy for the company, vision for the innovation and, or, the technical expertise in space the company is focusing on?
So we look for evidence of a track record in bringing innovations to the market or being thought leaders. Other indicators can be having successfully ran or having had businesses acquired. It’s been suggested that the best businesses are those which are built from the heart or are solving a problem they have identified, or both. In the credit team we often discuss the length of a company’s financial runway.
Given the difficulty of leadership it can be said there is a need for an emotional runway too which can be hard to measure. It is viewed as a positive if the owners or leaders of the business can demonstrate commitment to the business with equity capital at risk, colloquially ‘skin in the game’.
2. Commercial
Is there a chief commercial officer or sales director, that has a track record in bringing new products to market, in the sector the company or the innovation is focused on? If so:
- has the person got in depth knowledge of the market?
- do they know the market sizes?
- do they understand their competitors and their weaknesses?
- do they know the route to market?
- can they exploit this or utilize their previous experience in the field?
Sometimes an innovation may be genuinely market changing and will want to see the person in the role explain the value proposition comprehensively. Additionally, they will also have to demonstrate or convince us why the macros of the market will be moving in the direction of the company’s vision or innovation.
3. Financial
Is there a qualified financial director or a chief financial officer (CFO) ideally who has been in position for a period of time?
This is the area where we see most gaps in our applications and is a key area. It’s quite a niche area and requires specific knowledge. It is however an area where staggered approaches can be taken, or the skillset outsourced.
Having a full-time dedicated CFO or financial director (FD) would be ideal. However, this isn’t necessarily the right answer if the business is at a very early stage or pre revenue.
Our approach is to get comfortable that the business seeking a loan is able to avail of suitable financial resource at its stage of growth or maturity. We are asking ourselves:
- will this business demonstrate good financial governance?
- be able to meet our standard reporting requirements?
- handle the complexity associated with forecast growth?
- translate the vision into numbers and have the experience, if forecast, to complete the funding strategy sometimes through multiple rounds and product?
An example of a staggered approach may be to grow this resource as the company requires. Initially this may be in-house experienced finance individuals combined with a full-service option from their accountancy firm. Growing to a bookkeeper supplemented by a part time FD before finally appointing a full time FD or CFO.
Credit: kgaimages, iStock, Getty Images Plus via Getty Images
Summary
There are always exceptions to the rule. There is a clear pattern emerging after seeing over a thousand applications since the inception of Innovation Loans providing a form of convergent evidence.
When we look at any company, there is an expectation to see the necessary skillsets, knowledge and, or track record but we are not expecting perfection.
Diversity in the senior team is important. Diversity is not just about the complementary skillsets described earlier, but also about bringing different perspectives and experiences. This should lead to better decision-making, enhanced customer focus and likelihood of success.
We often see gaps, and, in these cases, we would like to see awareness from the company and they have a plan and time frame for all areas of resourcing. This was covered in Investment Director Nigel Walker’s blog Innovation Loans, what makes a great management presentation?
Further information
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Top image: Credit: PeopleImages, iStock, Getty Images Plus via Getty Images
Andrew Wade is a senior credit specialist who has been with Innovate UK Loans for 5 years since its inception. Prior to this he had experience in working in both retail and commercial banking. Outside his day job he has interests in technology and innovation and finance in general, while trying to keep up with his 5-year-old son.