After leading investments in cyber security company, Boxphish, recruitment software provider Tribepad, and leisure & hospitality tech business, Tevalis, Rob Johnson, Investor at BGF shares what his team looks for when deciding whether to invest.
We all know how challenging the funding landscape can be for start-ups and scale-ups, and the technology sector is no exception. While private equity and venture capital firms remain actively interested in backing high-potential tech businesses, founders still need to answer a simple question: what exactly are investors looking for?
For businesses looking to raise investment to support the next stage of growth, standing out means demonstrating more than product innovation. Investors want to see market opportunity, defensibility, commercial discipline and the leadership capability needed to scale successfully.
A large addressable market
One of the first questions an investor will consider when assessing a technology business is the size of its market. Not just the size of the theoretical global market, but the size of the market the company can realistically address given its geographic, product and customer focus. To scale, and to scale at pace, it’s helpful (although not essential) to have a large and growing addressable market where there is room for multiple “winners” and sustained expansion. Assuming there is, the question then becomes one of competitive positioning and execution.
Estimating your total addressable market (“TAM”) can be challenging, but realism matters. Investors will look straight through overstated TAMs and will expect a business to evidence how they have built up their market sizing analysis using both external and internal data points to validate the underlying assumptions.
Solving a real customer pain point
Strong technology businesses can clearly articulate the problems they solve, their ideal customer profile (ICP), and why their solution wins. The proposition does not necessarily need to be revolutionary, but it does need to be better than alternative solutions; either through offering a better user experience, the ability to drive efficiencies or reduce costs, improve compliance or accelerate workflows.
Many earlier-stage businesses struggle because they lack product-market fit or are not clear on their ICP. Investors are particularly drawn to businesses that solve a real pain point for a clearly defined customer group, ideally supported by a service, compliance, or regulatory wrapper.
Deep defensive moats
As well as being able to demonstrate the ability to win new customers, technology businesses must be able to demonstrate resilience and retention. That might come through IP or proprietary technology, although these traditional moats are increasingly being eroded by AI.
Ideally, there would be non-technical moats such as data ownership, expansive partner ecosystems, regulatory drivers, integrations with multiple other workflows or highly embedded customer relationships operating in hard to access markets such as defence, education or healthcare.
Without meaningful barriers to entry, the likelihood is that competitive intensity will increase over time, and it can quickly become a race to the bottom in terms of pricing. Even large businesses can struggle to sustain value over the long-term without strong defensive moats. Deliveroo’s London listing is a relevant example: analyst concerns around competition and low switching costs contributed to a weaker-than-expected market reception, with its shares still trading below its IPO price.
A motivated team with the right expertise and mindset
Leadership remains one of the most important indicators of a technology company’s long-term growth potential, regardless of sector.
Investors will assess both the commercial and product capability of the team they are backing, as well as their openness to influence and ability to work with an institutional partner. Has the team been there and done it before? Do they recognise the changes that will need to be made to support the next sage of growth?
And are they willing to evolve the organisation to meet the demands of the company they want to build? What has worked to scale a business from zero to £2m annualised recurring revenue (“ARR”), is unlikely to support scaling a company from £2m to £10m ARR.
Company culture and organisational structure are also important. In a market shaped by skills shortages, remote working, and salary inflation, attracting and retaining talent is increasingly difficult. And it only gets harder with scale, if the right foundations are not in place.
Creating a culture where strong people want to stay and grow their career and putting in place the structures to allow decision making to be delegated down the organisation, is key to scaling effectively. This is where choosing the right investment partner can really help founders overcome some of the common scaling challenges.
Commercial edge, scalable execution and quality of earnings
Innovation alone is rarely enough. To scale effectively, technology businesses need commercial acumen and financial discipline alongside product vision.
At an early stage, evidence of beta customers or committed pilots with a mix of one-off or project-based revenues and recurring licence income may be sufficient. For growth-stage companies, investors will look more closely at the level of recurring or contracted revenues, customer concentration, churn and retention which are good indicators of how embedded the product is within its customers’ operations.
Credibility when it comes to forecasting is equally important. Overly aggressive “hockey stick” plans can undermine confidence, whereas realistic forecasts grounded in data and KPIs, supported by sales, product and operational capability, build trust. Similarly, demonstrating a path to sustainable profitability is more important than ever given the increasing focus investors and strategic buyers are placing on profitability and cash flows, as well as ARR growth. Gone are the post-pandemic heady days of “growth at all costs.