For micro-businesses, the funding process usually follows a well-travelled – often long – path involving chats, coffees and meetings. But as the pandemic shut down all social interactions, the first six months were a scramble towards Zoom meetings, which opened some opportunities but pressured even experienced founders in their search for funding.
James McMillan, CEO of MyNexus and a speaker at ICAEW Virtually Live, says the fact everyone was at home levelled the playing field in terms of competition, although the usual challenges did not disappear.
“At the beginning of the pandemic, most equity investment dried up because a lot of the investors realised they needed to look at their existing portfolio and assess what the capital requirement within that portfolio was,” he says. “So, most new activity just disappeared and it became very difficult for micro-businesses to find the right investors, because at micro-business level, it's mostly about networking.”
McMillan talks from experience, MyNexus was founded in beta last September. The business managed to raise £195,000 pre-seed in 2019. “We found that hard, and we were looking to raise £1m for seed follow-on at the start of the pandemic but decided to put the brake on it and focus on product development, so that once the recovery started to come we could get back to fundraising at the right time.”
MyNexus creates a virtual place for micro-business and investors to meet, and McMillan smiles at the suggestion that the business model sounds like a ‘Tindr for start up funding’.
“Maybe a bit less disposable perhaps,” he suggests. “But yes, the dating analogy is one we use a lot. Maybe more match.com, for long-term relationships.”
But there is an added twist to MyNexus, and that is to address the inherent bias: investors invest in people that look like them or are familiar to them.
MyNexus has built an entrepreneurial assessment tool – essentially a game whereby the player sets up and runs a coffee shop and gets presented with challenges, both good and bad. “From that game, we can tell you what your entrepreneurial skills and capabilities are, actually scientifically measuring your likelihood of business success,” McMillan explains. “This means we can provide that data to give investors a bit of context to the profile of the entrepreneur and remove the bias from the conversation.”
“While investors say it’s about people, they can get bogged down in a process where they think the pitch deck will give them the answers they need,” he continues. “But what investors want is to understand whether that person is capable of delivering the business plan. So, instead of analysing the business plan as a proxy to understand the people, MyNexus flips it around, analysing the people first, so investors have context to better evaluate the business plan.
“You've got context around where the weaknesses might be: for instance, the entrepreneur might not have the skills or capabilities or experience to actually answer the exam question and therefore you as an investor will know what you can bring to the table rather than trying to ‘catch them out’, which doesn’t actually tell you if the business will be a success or not,” McMillan explains.
But it will take more than that for minority groups, women and LGBT entrepreneurs to crack through the investor bias, and here McMillan’s advice is simple and to the point. “Recognise that you will get asked more difficult or just different questions. Put the politician hat on, and instead of answering directly, answer the question you should have been asked.”
It is hard for entrepreneurs from diverse backgrounds, he concedes, because the system is somewhat flawed with an overreliance on the pitch. “It’s subjective. One person will find your pitch amazing and another will tell you it’s not good.”
The model has become one where the entrepreneur needs to present something perfect to get the funding, but McMillan argues that the real challenge for micro-businesses is to acknowledge and identify where they are falling short, so that investors have a view of the unknowns.
As society reopens and restrictions are lifted, is there a risk that the virtual world will recede, and we will go back to ‘a coffee, a warm chat, a meeting’? Obviously McMillan doesn’t think so, MyNexus will have a place in tomorrow’s world.
For him there will be a digital funnel leading to the in-person meeting post COVID, but the bias won’t go away when the tool is as good as its creator, so he has little hope for mass-adoption of artificial intelligence screening in the investment process.
“AI won’t be the silver bullet people think it is if it’s used to automate the existing process, however we are now seeing rating systems emerging alongside virtual platforms, and I predict we will see more and more of this crowdsourced information where people will rate who is a good investor, and that will be very useful for the underfunded communities we’ve talked about.”
Insights Special: Access to finance
ICAEW Insights examines the finance options and support available to businesses, as well as the challenges they face in obtaining it.