Scale X: helping banks better collaborate with startups
By Katerina Mansour - 31 March 2022
The relationship between banks and startups has been steadily evolving over the past years. Not that long ago, banks offered little to no services that were well-adapted to young ventures. While it can still be challenging for a startup to seek loans from banks today, the landscape is quickly becoming more startup-friendly. Time has shown that by getting involved early, investors and banks can be a part of massively successful ventures. This, in turn, can bring great financial returns to the banks that provided services to help a startup take off. As such, banks are increasingly seeking to collaborate with startups. This has led to the develop of more and more offers tailored to these young ventures.
However, as collaborations between startups and banks increase, so does the need for banks to better assess these companies. Indeed, banks now offer startups a variety of services: various loan options, insurance, international services, external expertise on legal or financial topics, etc. Because of this, there’s now a need for banks to better identify which services are most adapted to which startups. On top of that, banks also need to seamlessly manage and track their portfolio of startup clients.
Why we launched Scale X, a comprehensive solution for bankers
Early Metrics has 7 years of experience assessing the growth potential of startups worldwide. We’ve built a robust methodology that has been used to score over 4,000 startups for a wide variety of clients, from corporates to VC funds. This methodology has been built in collaboration with academic and research entities such as the CNAM, Audencia Business School and Imperial College London. Its efficacy has been proven through our partnerships with players like Innovate UK for its Recovery Loan Scheme, for instance.
Because of the evolution in startup-bank relationships, Early Metrics identified a gap needing to be filled. This was the need to further accompany banks seeking to serve more startups. This accompaniment involves helping banks better tailor and provide their services to their portfolio of startup clients by leveraging key insights into their potential. Furthermore, having the tools to track the startups’ progress over time and share concise assessment reports on them internally can save valuable time for bankers.
How Scale X supports banks in their relationship with startups
We’ve used our 7 years of experience in this ecosystem to design a comprehensive questionnaire for entrepreneurs. This questionnaire includes a large variety of questions to help fully understand a startup’s current situation. The questions span four pillars: the team, the product, the business and the finances. Upon completing the questionnaire, entrepreneurs have the ability to verify all the information provided to ensure its accuracy. Scale X then collects this data to quickly complete an automated analysis which is presented through an interactive dashboard.
Today, the banker’s dashboard showcases the following information:
- a presentation of the startup (its offer, its team, KPIs, its target, its roadmap, etc.),
- its score (overall and by pillar) and an ESG assessment,
- predictive signals (its ability to successfully raise funds, its potential for debt funding, its potential for international expansion, etc.),
- benchmarking against similar startups in our database,
- and lastly, an analysis of its financial situation and projections.
To simplify information sharing, an executive summary that recaps all key information is also available.
Lastly, within ScaleX, bankers are also able to access an overview of all the startups they’ve assessed through the platform. This way, they can quickly identify key data about their portfolio:
- number of startups,
- average turnover,
- graph of maturity levels,
- average funding raised,
- sectors covered,
- average number of employees…
How the scoring system works on Scale X
Our questionnaire seeks to gather meaningful company data across the four pillars mentioned above (team, product, business, finances) and ESG criteria. Based on our years of experience rating startups, we’ve selected a set of criteria we know play a significant role in a company’s growth. Indeed, we based our selection of criteria used in Scale X on extensive backtesting of our rating methodology. Each criterion has a different coefficient in the scoring methodology dependent on the level of impact it has on a startup’s growth potential.
Of course, we also added new questions specifically tailored to banks. These questions were added and weighted based on our research and empirical data. Let’s have a look at some examples to better illustrate how Scale X makes its assessments:
The team pillar:
It’s no secret that a startup’s team plays a significant role in its growth and success. Based on our backtesting and experience, here are some of the criteria scored by Scale X:
- The founders’ financial incentive: to assess the risk of a departure due to financial reasons
- The founders’ availability for the project: based on the knowledge that low involvement often correlates with challenges in developing a project
- Support from external investors or advisors: research shows having professional investors with strong commercial synergies and market expertise among the company’s shareholders is impactful
- The team’s size: because the larger the team, the easier it should be to grow the company
The product pillar:
We can glean a lot of key insights from assessing the technical development of a startup’s product. The IP strategy, the roadmap, the presence of a skilled tech team and the ambition to develop new products can all offer an idea of a startup’s growth potential. For this pillar, Scale X assesses criteria such as:
- Technical maturity: our data shows that more technologically advanced startups have better odds at rapid growth thanks to scalable processes and products
- Barriers to entry: to assess whether a startup’s technology and IP give it an edge over newcomers
- Ability to execute a technical roadmap: we assess technical advances over the past 24 months compared to the project’s complexity to evaluate execution speed
The business pillar:
For this pillar, we look at a set of criteria related to the startup’s international ambitions, product-market fit and presence in the media. The following criteria help us determine the project’s place on the market, its reception thus far, and the extent of its potential doing business abroad:
- Press coverage and social media presence: our backtesting has shown that having a following on social media and being featured in the press is a crucial growth lever, even for B2B startups
- Recent revenue: we look at the average monthly revenue over the past three months to help determine the project-market fit, in addition to sales performances
- Long term international ambitions: we look at the GDP of the startup’s target countries and assign them a score to them, in order to evaluate the potential of the startup’s international ambitions
The finances pillar:
Here, Scale X looks at the startup’s key financials through criteria such as:
- Complexity of the funding strategy: how the startup plans on funding its activity; we look at factors like whether the entrepreneurs plan on pushing profitability back to prioritise growth or whether they plan on relying mainly on debt
- Past fundraising: we look at how much has been raised, what the last post-money valuation was, the number of funding rounds, etc.
- Revenue stability: assessing the portion of recurring revenue allows us to determine the robustness and predictability of the startup’s business model
Each of these four pillars has its own coefficient, determined thanks to our backtesting results. A final calculation then provides us with an overall score out of 100 for each startup analysed through the platform. The higher the score, the higher the growth potential. These scores, accompanied by key insights and explanations, help banks strengthen the selection and prospection process to collaborate with startups of interest.
Our ESG scoring methodology
ESG criteria have become a key way for investors to evaluate a company before investing. Indeed, pressure has been mounting for financiers to favour startups with a positive impact on society and the environment. As such, ScaleX also includes an ESG assessment module. This module looks at:
- The adoption of environmental policies: tracking greenhouse gas emissions, using renewable energy, implementing processes to ensure suppliers are also mindful of the environment, etc.
- The management of employees: percentage of precarious workers (part-time, freelance, interns), gender parity in management positions, ongoing employee training programmes, the presence of a dedicated talent manager, etc.
- The startup’s governance: CSR guidelines, ethical charter, etc.
Thanks to this data, banks have the necessary information to collaborate with startups that meet their standards in terms of ESG efforts.
How predictive signals work on Scale X
Our predictive signals assess the startup’s potential for:
- a successful fundraising
- fundraising services (e.g. the need for support in executing the funding strategy)
- debt funding
- private banking services
- international expansion services (e.g. the need for banking services abroad)
- profit-sharing and incentive schemes
This assessment, based on the entrepreneur questionnaire, provides banks with a useful indicator of which startups they should target with which services.
Ready to better collaborate with startups?
Are you looking to collaborate with startups in your client portfolio? Do want more certainty over which banking product to offer to which startup? Do you need tools to better manage and track these opportunities? To learn more about Scale X and how it could be leveraged by your bank, get in touch with our team: firstname.lastname@example.org.