One of the many ways that people can lose points while preparing a TSB grant application is by simply ignoring a sub-question that they don’t have data for or they don’t know the answer to yet.
One place where this often happens is in question 2, the Market Opportunity section. One of the points made very explicitly and clearly in the Guidance document, in a standalone paragraph, is:
You should describe and clearly quantify the return on investment that the project could achieve and provide relevant source data references.
Despite this apparently obvious instruction, most of the applications we’ve seen don’t have any mention of ROI anywhere.
Sense and Sensibility
There’s a good sense reason for that. ROI largely doesn’t make sense when it comes to most highly speculative and ambitious projects, particularly in a startup context. Even in a medium company, where things should be planned out in more detail, ROI is subject to so many variables that it’s often not worth calculating beyond the most cursory, early glance at whether this is indeed a project that is likely to make money for the business.
And yet, in the words of General Patton, while plans are worthless, planning is essential.
This is what TSB is trying to get with this question: evidence of planning, evidence that someone in the business has done some basic due diligence work to make sure that in fact, this project is worth pursuing from a financial perspective.
Sense might tell us that an ROI figure for the typical TSB-eligible project is pointless. Sensibility tells us that we should give one anyway to satisfy TSB assessors and give them reasons to give us more points.
Pride and, er, overly cautious shyness
So what should the ROI be? Well, it should be something realistic, sensible. Of course, if everything goes perfectly well and you take over the world and become the next Google, the ROI on your humble £200k project is going to be immense, insane, intimidating. But that’s a big if.
If you present a plan to an investor that claims that you’ll provide them with 1 million percent ROI, they probably won’t trust you. They’ll assume that you’re naive and inexperienced and don’t know what you’re talking about, and they’ll probably give you a pass. Well, TSB is no different.
The overall ROI should, therefore, be ambitious but realistic, and backed by some kind of justification (more on that in an instant). A good figure is in the multiple-hundreds or low thousands of percents range. a 5-year ROI of 800% or thereabouts sounds pretty good. 1600% is high, but can be ok if it’s justified. 200% is unexciting. 5000% is hard to believe.
Even a 5000% ROI could be justified, if you have the right supporting material. But it would need to be absolutely rock solid and extremely clear, and that’s very hard to achieve, so presenting a more modest but still optimistic ROI is a better approach.
So how do you justify an ROI calculation? Well, the simplest way is to prepare a simple spreadsheet, which is basically a yearly or quarterly financial model, and calculate the ROI there. Some concepts you should be aware of while doing that include:
- Discounted cash flows: Cash is worth less in one year than today. Your ROI calculations should discount cash amounts by a certain percentage each year to account for that. Usually that percentage is 10%, so for example, a £100k expense this year will be worth -£90k next year, -£81k the following year, -£72.9k the following year, and so on. This is not strictly required, but it’s better to use discounted cash flows, as it’s more realistic.
- Ongoing expenses: Even though TSB will give you a big boost and enable you to develop your project fast and better for the first year or two, you will presumably continue investing in the technology later on. The R&D investment should continue (perhaps reduced, or perhaps increased from the initial project cost) in later years.
- Calculate ROI properly: ROI is based on cumulative expenses and revenues, so don’t just calculate the ROI for that year’s expenses. The formula for ROI is: (CR - CC)/CC - where CR is the Cumulative Revenue and CC is the Cumulative Cost. It can be stated both as a cash figure (CR - CC) and as a percentage (divide by CC).
- State your assumptions: The spreadsheet model which drives your revenue projections for each year are based on assumptions, e.g. how many users are going to sign up, what the conversion rate will be, etc. If those assumptions look realistic, they will give more credibility to your statement of ROI.
- Down and then up quickly: TSB is looking to fund projects with relatively quick returns on investment, not 10-year moon shots. Your model should probably show a negative ROI for year 1, a slightly less negative ROI (or slightly positive) for year 2, and then positive ROI going forward. Negative ROI until year 4 would be worrying.
- Monthly breakdowns where appropriate: Month-by-month projections for the 4th and 5th year are unnecessary. For the first couple of years of revenues, though, they should be there. Show what’s going to happen in those crucial years.
Warning: project vs. company
One mistake that is made by most applications that people send us (usually after they’re rejected) is that people don’t make a clear enough distinction between the business and the project.
TSB Smart Grants fund projects to develop awesome new technology - not businesses. The ROI question, in that respect, is a great tool for TSB to figure out if you’re blurring the lines between project and business. Make sure that the ROI refers to the project, not the business as a whole. The only cases where blurring the lines is acceptable is when the entire business is the project.
If you can’t come up with an ROI calculation for your project, this may be a hint that it’s not the right kind of project for TSB funding.