Why Postcode Data Could Be the Secret to Private Equity Success

sign for piccadilly

By Charlie Makin, Managing Director & Founder, Pintarget

In 2020, the top 1,000 UK start-ups raised over £7.5bn. Fundraising often seems like a goal in itself, companies crowing over their success of closing a Series A round, when the reality is that it’s only the petrol in the tank. They now need to prove they know where they are going.

The figures for failures of start-ups are stark. Something like 90% fail, which would be unacceptable in any other area of business.

The view from the Private Equity and Venture Capital industry is that it’s OK, it’s a test strategy and they make their money back on the one in ten that work, however, given that they are largely using other peoples’ money, as an investor I’d be less than happy if my portfolio was made up of the 90% failures. It’s also a tremendous waste of effort, intellect and ingenuity and I think with better marketing insight the odds of failure could be massively reduced.

For every Oatly and Cazoo, why do so many fail? I have both pitched for and been pitched to by people looking for investment. We were told that the presentation decks have to be short — no more than ten slides, because the audience has a short attention span — and that they should focus on the idea, the business model and the team. They should be light on detail, get the investors on the hook and worry about the viability of the business later.

There used to be an adage at brainstorming away days – I attended many with clients in boutique hotels just outside the M25. The moderator would always start the day by saying “I want to reassure you, there is no such thing as a bad idea.” I guess trying to placate people who may be nervous, but it is hardly setting a high bar for quality control.

That’s why we spent ages exploring whether a large holiday company should employ clowns to entertain the children of holidaymakers whilst checking in at 4 a.m. at Luton. I’m sorry, there is such a thing as a bad idea, in fact, most are.

Detailed consumer insight and research should quickly flush out bad ideas. I suspect the likes of Cazoo did extensive research before they went to market with a clear vision of every element of how they were going to change the supply chain and who the proposition would appeal to. I suspect many businesses don’t go through a similar due diligence process and that’s why they fail.

CB Research cites the following reasons why start-ups fail.

  • Firstly, bad cash flow accounts for 38% of failures. This means the costs were higher than the revenue, so the market modelling and prediction of demand were flawed.
  • Secondly, there is no market need (35%,) again indicating poor consumer insight
  • And thirdly, at 19%, is a flawed business model which again suggests poor consumer insight. I am amazed that the market need and business model (principally understanding and calibrating consumer demand) are not better flushed out at an early pre-investment stage.

A lot of consumer research and insight I see in investment decks is thin and this is the foundation that the complex business plans are built on. If you can’t generate demand, your business model is fundamentally screwed however clever your funding model is.

This year we received a brief from a consumer-facing financial services start-up. Proudly they showed us a series of personas of their customers, they all had pen portraits and witty names. They were aiming at young, urban, cosmopolitans who mainly worked in digital media, who were underserved by conventional financial institutions.

We asked the source; it came from a brainstorm. Basically, they were targeting themselves and had used this insight to raise substantial funding. It was rubbish, but they believed in it. There was no quantitative market analysis, it was almost cultish. If we wanted to work with them, we had to agree with the personas. I’m not saying they won’t be successful, but if I was investing, I would insist on better data.

So, what is the solution to this? Obviously, start-ups are risky, but my view is we can reduce the risk by better data-driven insight.

If I was a serious investor, I would be insisting on robust research on consumers, and if I was making a large investment, I would probably do my own. It’s not necessarily complicated, there is a lot of bureau data like YouGov Profiles that can give pretty robust insight quickly. Pen portraits with silly names are not a targeting strategy.

In addition, I’d destruction-test the long-term acquisition strategy. Many start-ups start slowly using cheap or free channels like social media or SEO to win early customers. I understand why they do it, but it’s not a strategy. The customers won through social will not be the base for a long-term acquisition model, and in many respects, they are a distraction.

One of the benefits of the last few years in media land is that high-quality, small-scale testing is viable. It’s possible to quickly identify an audience in specific locations and addressably target TV, direct-to-home media and a multi-channel digital display to specific consumers.

This can cost less than £50,000, including production and data, and will quickly indicate what a proper consumer-based acquisition strategy should deliver. It needs to be done properly, should be multi-channel and precisely targeted as the basis for proper research.

The key to delivering this is the humble postcode. We get blindsided by digital, but usually identifying specific groups of people to target is a really powerful way to start testing performance. This is a common currency that we can use to target TV, door drops and get deep insight into consumer response, order value and frequency by where people live. IT can unlock a detailed and robust acquisition strategy based on consumer behaviour rather than guesswork.

Start-ups are risky, they require bravery and self-belief, but to be successful they need objective insight. This is readily available and, if executed properly, should substantially improve the odds of businesses succeeding. Now back to my day job as a clown at Luton Airport….