Antoine Baschiera is the CEO of Early Metrics, a rating agency for start-ups and innovative SMEs looking at non-financial metrics. As ‘start-up culture’ goes, now is an interesting time; more start-ups, more venture capitalists, and more corporates, enter the market every year.

It is an indication of the level of investment in Europe’s start-up scene that there is demand for a company like Early Metrics. Early Metrics is a non-traditional rating agency: rather, it is specifically aimed at start-ups. Because start-ups cannot afford to pay for ratings, and do not have any data anyway, Early Metrics follows a different business model. Instead, corporates, venture capitalists (VCs), and other investors, pay for access to the analysis of a company’s prospects.

Therefore, few are better placed than Antoine to analyse today’s start-up market. I wanted to ask him how Early Metrics works, what insights he’s gleaned, and how he thinks Britain’s start-up culture is set to change.

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How does a ratings agency for start-ups work? What do you assess in lieu of long-term data?

The key point, when we developed our scientific rating methodology, was to understand that the analysis of a start-up is not about credit risk like with listed or established companies. Rather, it’s about whether the venture has the potential, the ‘foundations’, to grow positively in the 2-3 years following the rating. What our clients wanted from us was to understand the growth potential of rated start-ups, not their non existent credit scoring.

Once we knew that, it was important to focus on a relevant set of specific criteria that would reflect a start-up success or failure.

Our rating model is focused on three pillars: management, product and technology, and ecosystem. Within these three pillars, we assess 50 criteria, which are a mix of both qualitative and quantitative indicators. The final rating, or valuation, is based on these aggregated criteria.

To give you some examples, on the management side: we analyse profile complementarity between the founders, or the relationship between their past work and their current project.

On the product pillar, we look at innovation of course, as well as traction, but also very importantly, capacity to execute.  

For the market, we look at competition, legal barriers, the size of the market, and so on.

Do you think that the team is more important than the product? If you had a really experienced team with a poor product, would you expect them to get further than vice versa? 

Yes. If you look at the way we weight criteria, the managemant pillar counts for more because a team is actually a young venture's primary and main asset. An American VC once said:

‘I’d rather be in great company with an ugly product, than with a poor team and good product, because I know that the great team is always going to reshape, and change their idea based on the feedback that they receive from the market.’

So clearly, yes, the management is the key point and that’s also why part of the rating process always includes a meeting between our analysts and the founders.

What are some red flags that make you immediately think that a company is going to fail?

There is never one single feature, which will make a start-up fail. But regarding the team, we pay close attention to profile complementarity as statistics show it strongly impacts a venture’s success. Likewise, if you are a solo founder, it might be difficult for you to have all the required skills to start a business, and might also generate future challenges in structuring the team. Motivation is also another indicator: if the founders are not going to stick around when troubles arise because they are not committed to the project wholeheartedly, or are not properly incentivised, then the remainder of the team is likely to dislocate.

On the market side, complex regulatory legislation can be a deal breaker. On the product side, we know that some ideas are capital intensive, and without a large funding round, they won’t even be able to develop a working minimum viable product.

At the minute, the way that I see it working is that new tech capabilities are made available by people with a lot of money for research, and then they are made into products and taken to market by start-ups – do you think that this process will change? Will we continue to see more start-ups?

I think it depends on the industry. There are some industries that have already been digitised and transformed by start-ups. Newcomers might have some trouble finding something different and new. In other industries, for instance accounting, visualisation space, or travel and mobility, room for disruption and digitisation is still high. Any start-up with an interesting proposition could win a large part of the market.

In a previous interview you said that London’s start-up ecosystem is very mature. What do you mean by that?

London is a mature ecosystem: there is a very dense number of start-ups, and there is also a very dense ecosystem of investors, from business angels to more established VCs, and private equity.

These two stakeholders contribute to creating the first layer of a mature start-up ecosystem: entrepreneurs have relatively easy access to funding, and can test and learn – fail fast, or succeed well. They build on knowledge, which is then shared back. Meanwhile, the large number of investors means that they can take over one another depending on the investment rounds, thus supporting a venture in various growth stages. The second layer, as important as the first one, consists of all the other players supporting the start-ups: whether the incubators, intermediaries, individuals or public entities. Last but not least, the corporates play a strong role: amongst other inputs, they are a valuable route to market for the start-ups.

It strikes me that it’s such a cluttered marketplace that if I was making something that was B2C, such as a smartphone game, it would be very difficult for me to get my product out there now. Do you think that’s true?

Yes, it is true that in some markets, it is getting harder to scale a B2C product or service, because for every innovation, there are ten direct competitors that are doing more or less the same thing. It can also be true of B2B. In general, it is becoming increasingly difficult to stand out from the crowd. We contribute to it at our level, as we increase a rated start-up’s credibility. At the end of the day, having a product that is of use to consumers, and being able to bring it to market are essential.

I read a lot of blogs by VCs and there seems to be a lot of information-sharing and sounding out what they think, and what they think is good to invest in. Do you think it’s an area that’s prone to groupthink? Or investment bubbles, for example?

I wouldn’t say that there is a ‘bubble’ in the sense that everyone is investing like crazy in a specific area, which is likely to burst. There could be an over-focus of investors in some sub-sectors because they know the market size can be huge. It’s the case for fintech for instance, where huge funds were raised a couple of years ago, creating diversification into the market. This can only be positive from an innovation perspective.

How do you think Brexit will affect VC funding in London?

What is key to remember is that start-ups operate in a micro-environment. They are not directly affected by this kind of macro-geopolitical event. They may be affected in an indirect way if investors decide to pull out their investments, but this is unlikely to happen in the short term based on the level of maturity of the London start-up ecosystem. The London ecosystem has not become what it currently is solely because of its posture towards the European Union. EU funding has certainly contributed to its growth, but the ecosystem has also developed thanks to the UK-US bridge as well as the relationship London has with other markets including Asia, and because of the local market.

I don’t think that the EU stopping its investments towards the UK will make the start-up ecosystem collapse altogether. We might just have more competition with other start-up ecosystems: the German one, the French one, or maybe even Southern Europe and Asia, which are growing very fast. Ultimately, London may lose its pole position.

Some newspapers lament that even though there is a good start-up record in Britain, there’s a failure to upscale into large businesses.

I don’t fully agree with this assessment. A successful start-up is not one that necessarily needs to scale and turn into a large company like Cisco or Twitter. In reality, very few succeed that way. We need to balance our view of success and accept that there are a variety of outcomes for a successful start-up, and not all of them are around the lines of staying independent and becoming huge. Some successful start-ups may end up being bought and grow within another structure, or scale to become small and medium-sized enterprises and remain at this size.

The UK ecosystem actually allows companies to scale by the virtue of the density of its investors. In France, it can be hard to raise 15 or 60 million euros once you reach a certain level, wereas we see larger rounds closed in the UK in the last couple of yeras, supporting business scaling.

Read more about Early Metrics' analysis of start-ups in our State of Recovery Report.