Case Study – Moment of Inspiration – Upgrowth Equity Exchange – A lesson in starting small and focused

As part of my reading for my Personal MBA, I am documenting the key lessons I learnt from my various projects over the few couple of years. Reflecting on the past makes it more valuable, a better investment in the future.

Most people forget how much work goes into being an overnight success. With failure seen as something bad, I see failure as a step towards success. They are not opposites of one another. I can succeed easily if I set my success targets low enough. I fail, because I try and I set my aspirations high enough.

The birth of Upgrowth – A moment of inspiration

Mike and I were sharing a sneaky mid-day beer one week day. The conversation steered towards investments, then specifically, crowdfunding. As we discussed it, we both concluded that we were put off by the lack of liquidity, this prevented us from seeing it as a serious investment channel. We then asked why, why wasn’t there liquidity?

With that, Upgrowth was born, a secondary market providing liquidity to startups.

The concept – The Start-up and crowdfunding market is broken.

The lack of liquidity in the market requires startups to have rapid and high growth expectations to be attractive to investors, this creates a need for increased risk taking to meet these expectations resulting in a high failure rate, which results in high growth expectations in those that survive, a self-reinforcing negative cycle.

Upgrowth was looking to solve this by providing compliant liquidity to early investors, owners and employees. Enabling liquidity for founders, employees & early investors (including the Crowd) through a platform that allows buyers and sellers to connect, while facilitating share transfers. Simpler and easier management, tracking and monitoring of deal flow.

Why wasn’t someone else already providing this solution?

  • Timing – SEIS and EIS require you to hold shares for 3 years, crowdfunding took off in the UK 2012/2013. (This was 2016)
  • Capital Markets – The regulatory compliance of a Capital Market is far more onerous than the current Crowdfunding (FCA) regulation. It is difficult for someone from a Capital market background to consider alternatives. The key distinction being are the shares readily tradable. Typically most give the company right of first refusal, in cases where this is not the case, we could include a simple restriction, such as not allowed to sell for 3 months. (The FCA does not distinguish between primary and secondary trade).
  • Regulation – The innovative and bootstrap thinking (MVP, MDP) of the startup world is not congruent with the regulatory market. Regulations are different in different jurisdictions.

The result

We did not generate sufficient interest and belief to secure funding. Whether that was our belief or the investors I am not sure, one needs to lead to another.

We actually found the market was bigger than we imagined, with a key one being employee share ownership schemes and another being early employees, who want to move on to the next challenge. A lot of them are managed on a spreadsheet with a limited trading window.

We also found that a big frustration was that capital tables were terribly maintained, which made sense. Founders have typically never maintained a cap table before and have limited cash, so incentivise with shares. Over time these become messy, with records not properly kept. Then when a venture capitalist comes in, it can take weeks unwinding and verifying share issued, their class, timing and dilution.

The key lessons

  • Did too much on Version 1.0, should have looked at Version 0.1 – an automated (free?) cloud based cap table would have been better. This would have provided us the wedge to allow entry.
  • Spent too much on (great branding).
  • Name is important – to get website and it just gives a feeling of something real, something tangible.
  • Spent too much money going to the Web Summit too early (£3-4k), very much in concept stage, but got caught the excitement and momentum. I learnt a lot from the experience and made some valuable connections, just none that helped Upgrowth directly.
  • We needed traction first before seeking investment from Venture capitalists – They are surprisingly risk averse.
  • Investors in the UK didn’t feel the pain of the problem we were trying to solve, it may have been better to approach start-up founders who had cashed out and been burnt.
  • Just because a problem needs solving, doesn’t mean I am the right person.
  • Just because a problem hasn’t been solved, doesn’t mean it can’t be.
  • Just because it’s a problem, doesn’t mean other people want to pay to get it solved.
  • Focus on the solution and bootstrap the rest.
  • It’s important to move quickly, not because of competitors, rather because it is costing money to be stationary.
  • Be sure you are all in a position to 110% commit before putting down a penny (or serious money).

All in all, spent ~£8k and countless hours on this education.

A successful failure. That has been binned

If you are interested, this was one version of our deck – Upgrowth Equity Exchange – September 2016

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