Getting to "yes" in a world of "no"…

And so it was that eighteen startups bearing £100K TSB promissory match-funding notes came to London to stand before a roomful of people (a good few of whom were genuinely angels) and have their eight-minute pitches evaluated for investability. On the same bill was the comic relief, the twenty nearly-but-not-quite-funded startups – myself included – whose two-minute pitches were abutted together to form a kind of weirdly psychedelic blur, intended to be some kind of mashed-up Powerpoint speed-dating session.

I love catching up with old faces, putting faces to email addresses, meeting new people and watching new pitches, and I thoroughly enjoy the inevitable rush of pitching (getting a big message across in two minutes is a great writing and performance challenge), so I had a thoroughly great time: and as far as the Technology Strategy Board goes, “I love it when a plan comes together“, regardless of whether David Bott and his crew did or didn’t shave a few corners to push through to the 128-day end line.

But putting all the adrenaline aside, though, the real issue is what to make of the whole event: and as I sat on the train coming back, I have to say that I felt a little bit of sadness. Even though a £100K TSB promissory note could well have been a wonderfully positive thing for my particular company, I do wonder whether it will genuinely help even half of the 18 grantees. For a start, the grim reality is that £100K doesn’t buy you much in Old Street: there’s a kind of implicit £20K “Tech City tax” (in terms of living, commuting, overheads etc) imposed on you just for the, ummm, privilege of working there, rather than (say) Croydon.

For another, because the TSB is only technically allowed to help companies back free-standing loss-making projects (to the point that if you make short-term money from the grant money, they probably won’t cover the payment), all you’re really allowed to do with the grant-plus-match-funding is learn stuff. Yes, in its own curious way the TSB forces grantees to run projects as learning-based “lean startups”, where the important outputs are all intangible, and the most important thing is failing fast, and then pivoting / iterating as a result.

Ultimately, this makes each TSB Tech City funding tranche contingent on finding one or more angels who would be happy to lose invest £100K in something entirely intangible as long as the TSB also loses invests £100K. And I have to say that I have met very few active UK angels who have pockets deep enough to make such truly conceptual calls: as a rule, they don’t yet get Eric Ries’ whole “lean startup” movement. For all the talk of digital media, most social media pitches are just short-term hacks: truly intangible angel investment has fallen drastically out of fashion over here (if it ever was in fashion, for some would loudly argue not).

However, arguably the biggest structural problem of all is that UK angel investors are, by and large, attuned to investing in tangible profit-making companies rather than free-standing intangible loss-making projects: and I suspect most of the angels who eagerly attended yesterday will have felt rather caught in the middle. This was perhaps best exemplified by the Somethin’ Else people, who essentially said: Option A is to invest in our high concept £200K 3d audio game project, while Option B is to invest in our £6.5m turnover (I don’t remember the precise figure) international audio production company from which Option A came. It’s no big secret that most angels are looking for something between the two, that somehow manages to extract the best of both worlds: I can see how presenting such a sharply polarized smorgasboard may end up getting neither (for all the individual merits of both Options A & B).

I don’t know: I suspect the TSB may (wrongly) believe that giving money to startups can only be a good thing for them, when everything comes at a cost. It all reminds me of a short story that popped fully-formed into my mind a few days ago:-

Once upon a time, a boy inherited a box of ancient Arabian junk. While polishing an eerily familiar lamp, out popped a genie. “Thank you immensely for releasing me from the magical prison in which I have languished these long millennia“, pronounced the genie, with more than a hint of Brian Blessed. “I therefore grant you two contingent wishes.

The boy was puzzled. “What on earth are ‘contingent wishes’?“, he asked.

My goodness – don’t schools teach you anything these days?” boomed the genie genially.

No, not really“, sighed the boy.

Well“, the genie heaved, “they give you what you want, but at a matching cost. For example, receiving great wealth would plunge all your friends and family into abject poverty and debt.

The boy sat and thought for a while. “My first contingent wish“, he said eventually, “is to be just a little luckier in everything I do for my whole life.”

Ah, a good choice!“, said the genie. “I grant you your wish, but with the contingent cost that if you tell anybody that you are the recipient of magical aid, you will instead be just a little less lucky in everything you do.

Then my second contingent wish is easy“, said the boy. “I wish to forget that I ever met you.

“No!”, exclaimed the genie, “that means…

But it was too late. With a loud squelch and a flash of green light, the genie was yanked sharply back into his lamp prison for another millennium. The boy stood there blinking blankly, with just a tarnished old lamp in his hand. What had he just been thinking about? He couldn’t remember. All the same, he did feel like it was going to be a good day…

Basically, there’s no such thing as a free lunch, or indeed a free grant. Just because you cannot immediately see the cost doesn’t mean that there isn’t one.


Comments on: "TSB funding workshop / pitch day…" (8)

  1. Nick, I’m not sure I understand or agree with your 4th paragraph. We are trying to encourage and support companies and groups of companies to do something more than they would do in the normal course of their business – or else why would they need taxpayers money for support. The project plan outlines how they would fully develop the commercial capability and the exploitation plan we ask for says how they would make money. We are definitely not just about learning, but about taking understanding through to products and services. Why do you think what you do? Do we need another coffee? 🙂 David

    • David, in section 3.3 “Eligible Costs – Industry Partners” on page 26, the entry notes say: “Any revenue generated by the project must be used to offset project costs against which [the] grant can be claimed.” I read this to mean: if you make money from the project while the project is still being funded (i.e. while the project plan is still active), then the balance of money provided by the TSB at the next settlement date would be reduced by the (presumably net) amount of money that you made. Have I got this wrong? Either way, another coffee would be great. 🙂

  2. Nick, if we are supporting the more risky end of the project spectrum, then we assume that it will take some time and effort to get to product or service that earns revenue. We support projects everywhere from 3 months to 5 years – the length is determined by the company or consortium in their proposal. Given that this is taxpayers money, if the project is really successful a lot sooner than the plan allows for, then perhaps they didn’t need the support in the first place. That doesn’t imply we’re only supporting learning – it means we have a contract that allows us not to pay money that isn’t needed. And the truth is that I don’t think we ever clawed back money in this way, so presumably projects don’t go faster than planned! Of course, if you want to see an conspiracy…. David

    • David reading project guidance notes hardly counts as conspiratorial, surely? 😉

      I don’t think you’re actually contradicting me yet, because all I’m pointing out is that the “project phase” is effectively a pure learning period, during which an angel investor matching the TSB’s grant would not be able to see revenues coming in from the project up to the value of the grant because the TSB would not pay them (effectively cancelling them out). Perhaps I interpreted the slides I saw yesterday wrongly, but a number of grantee companies seemed to be looking for limited early customer wins, which would seem to be what the TSB is expecting to see only in the exploitation phase, not during the project phase.

      I suspect that the key difference with the Tech City Launchpad competition is that, unlike companies who have already launched and perhaps have already validated some key aspects of their business in the marketplace, very early-stage startups have a different, edgier relationship with would-be angels and backers. I’m not sure the angels I know would be happy grant-matching projects that aren’t allowed to make money along the way, i.e. where the project funding document lays out an absolute ceiling on what money will go in during the project phase.

      None of which is being negative or seeing only the bad things, but rather just trying to take a balanced view of what’s really on offer.

  3. Nick Appleyard said:

    Hi Nick,
    You raise a good point, and are observant indeed. The clause that you’ve been discussing was written to accommodate a blurry distinction between development and commercialisation, due to the common practice in the digital world of putting a live beta prototype into the customer-facing marketplace, whilst it’s still in development.
    European State Aids rules require that public money, such as Technology Strategy Board grants, can’t be used to support finished products in the commercial marketplace. Once a commercial product is developed, we must terminate a grant because it’s no longer an R+D project: we are legally obliged to step back and let the private investors take over.
    But what about an unfinished product? By tapering off the eligible costs against which grant can be claimed in this way, we can effect a smooth transition of a project from development into commercialisation, and allow live user trials of development prototypes to be carried out inside the project, with no cliff-edge in the funding profile.

    It’s all intended to smooth the journey.
    Our hearts are pure.
    Best wishes, Nick

    • Nick: I agree and concur… but have so far failed to see any sign of tapering written into the guidance notes. If I’ve read all the PDF tea-leaves right, the blurry distinction gets resolved into a binary yes-no: if you make money from the project, that gets lopped off your grant settlement. In fact, I’d guess that the TSB would be within its rights to claim back money it had already given if money earnt during the project phase exceeded the remainder of the grant (I’m not saying it would necessarily do that, but it suspect it could do if it wanted).

      Essentially, the problem with super-early seed I’m flagging here is that their growth variance is so much wi(l)der than the kind of startups the TSB has been putting grants into to date that all kinds of outlier behaviour become not just possible, but even likely. Your hearts are pure for sure 🙂 , but the TSB is stepping out into new territory here, and what has worked before may not now be a reliable guide for moving forward. Hope this is a help!

  4. Nick Apppleyard said:

    Hi Again.
    Just one point of clarification. Since the grant is typically 50% of the net project costs, then any offset will only be 50% of the revenue received, not all of it.
    Put another way, this clause means you can claim 50% of your NET eligible costs as grant, rather than 50% of your gross costs. Thusly, once you start to run an operating profit from the project activities, you can no longer claim a grant, ‘cos by definition you’re then running commercially.

    • Nick: of course, yes. So what I should have said is that 50% of project-based revenues during the project phase should (theoretically) get taken off the grant settlement.

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