Helping startups become long-term City businesses

Starting a company and building a company are not quite the same thing.

The first requires an idea, a degree of courage and usually considerable persistence. The second requires something more difficult: the ability to turn entrepreneurial energy into an organisation capable of surviving beyond its founders, its first customer and its first funding round.

For those of us interested in the future of the City of London, this distinction is important.

We do not simply need more companies to be incorporated in Britain. We need more promising companies to grow here, employ people here, raise capital here, sell to customers here and ultimately regard London as their permanent home.

That journey is rarely straightforward.

In the earliest months of a business, informality is often an advantage. Decisions can be taken around a table. Product changes happen quickly. The founder may know every customer personally. Job descriptions are fluid and everyone does whatever is required.

That approach can produce remarkable progress.

But the qualities that help a company reach its first £500,000 of revenue are not necessarily the same qualities required to reach £5 million or £50 million.

As the business grows, customers become larger. Contracts become more valuable. More people join. Regulators may become relevant. Information security becomes more important. Investors expect better reporting. Customers start asking what happens if the founder is unavailable for three months.

In other words, the company begins its transition from a start-up into an institution.

This is where many otherwise good businesses struggle.

Governance can sound rather unexciting when compared with product development and fundraising. Yet putting sensible governance in place early is one of the best ways of protecting entrepreneurial freedom later.

A functioning board, reliable management information, properly documented intellectual property, sensible shareholder arrangements and clear financial controls do not stop a founder moving quickly. Done properly, they make growth easier.

The same is true of regulation and risk.

The FCA's experience with high-growth firms has highlighted the importance of investing early in governance, risk management and controls as businesses scale. For companies hoping to serve regulated institutions, this becomes even more important because their customers are themselves responsible for understanding and managing risks introduced by third parties.

Founders sometimes find this frustrating.

A bank may love a piece of technology but still take months to approve the supplier. Questions arrive from information security, procurement, compliance, legal, finance and operational resilience teams.

It can feel like bureaucracy.

Yet viewed from the other side of the table, those questions are entirely rational. Financial institutions are entrusted with people's money and information. A technological failure at a supplier can become a regulatory, financial and reputational problem for the customer.

A start-up that understands this has an advantage.

Instead of regarding institutional requirements as obstacles, it can design the business around meeting them.

That might mean achieving an appropriate security accreditation earlier than strictly necessary. It might mean employing someone with genuine compliance expertise. It may mean building redundancy into systems, maintaining proper insurance, documenting data flows and being willing to explain exactly where customer information is stored.

These things cost money, which is one reason the right kind of early-stage capital is so important.

An investor should be able to help a founder distinguish between expenditure that merely increases the size of the company and investment that increases its credibility.

At Rosary Capital, this distinction is central to how we think about early-stage investing.

We want the businesses we support to become capable of winning institutional customers. We want them to understand how decisions are made within large organisations and to build the evidence, governance and resilience required to give those organisations confidence.

We also want businesses to think about London as more than a place to raise money.

The City's great advantage is its network.

Lawyers, bankers, insurers, accountants, investors, regulators and customers operate alongside one another. Relationships built in that environment can remain valuable for decades.

The challenge is ensuring that entrepreneurs can access that network early enough for it to make a difference.

There will always be founders whose ambition is to build quickly and sell quickly. There is nothing inherently wrong with that.

But I would like to see more founders begin with another possibility in mind.

What if the business they are starting today could still be trading in the City thirty years from now?

That changes how you think about customers, people, governance and capital.

It also changes the purpose of early-stage investment.

The most interesting question is no longer simply: how quickly can this company grow?

It becomes: what would it take for this company to last?