12 tips for accessing venture capital
At the very early stages of a company, most founders reach out to a combination of friends, family and angel investors who are active in their ecosystems.
The majority of those in need of cash either access their savings or tap their friends and family.
Competition is stiff for wealthy patrons, known as Angel Investors, offering ‘seed’ capital, with valuable insights as well as open cheque books, looking to invest on average between £10,000 to £100,000, often in companies with no revenues, who can be accessed online and via crowdfunding sites.
The Government’s Enterprise Initiative Scheme, EIS and Seed Enterprise Scheme (SEIS) makes funding worthwhile for early investors in a ‘risky’ enterprise, by providing them with valuable tax breaks.
Alongside friends and family, early stage investors can also be a good source of funding at this stage. They will require slightly more mature ideas, but there is no shame in approaching them with the caveat that your idea might be too early in its genesis for them.
Just as it is for Angels, the VC industry is built on strong and extensive networks, and any good investor in either sector will be happy to help expand your thinking and effect introductions.
While these Angels will be choosing to invest in you, never forget that you are also positively accepting them to your top table. Hence, an important tip here is to always conduct some reverse diligence on your investors. Ask them where else they have invested, then go and ask those founders if the investors were indeed as helpful as they promised.
Timing your approach to a VC
While there is no exact rule on timing, founders move from angel to VC when they are further down the line and looking for institutional investment and a long term relationship that prepares them for an exit in structured ways. Sums will also vary, but a starting point will be in the millions, not the thousands.
It is also important to understand that the relationship between a founder and the VC is more important than just the investment. Sustainable and successful businesses are built on trust, alignment and teamwork.
A VC might want to sit on your Board and act as your co founder; and you should welcome this with open arms. The best VC will sit on your board and act as co founders. Co-ownership of your idea is far more highly valued in the time it takes to hold your hand than the money on offer..
What’s the difference between VC and private equity?
VC is about building new products or services and growing a business from “zero to one”. Hence, VC gets involved from the early days of an idea, though less often from its infancy.
The best in class VCs are those that are really able to roll up their sleeves and work alongside the founders, helping them build product market fit, develop their sales channels, and help with future funding rounds.
Private equity is about optimizing established business by means of financial engineering, in many cases by putting additional debt (or “leverage”) onto the company.
So one way to think about this is that VCs are focused on “value creation” whereas PEs are focused on “value optimisation”.
VCs tend to value a business based on its future potential for strong growth, while PE firms typically anlayse historical growth patterns and project them forward. Hence PEs depend on a discounted cash flow (DCF) analysis to value an existing investment, or company, and that put that into the context of an expected exit value that would ensure their typical return. PEs typical take less risk (the business is more proven) and expect to make a lower return (typically 2x - 5x their investment) whereas VCs take a bigger risk on an unproven business and expect to make a much larger return (5x - 10x).
How do I attract attention to my idea?
Traditionally, VCs have favoured so-called fintech innovation hubs. These centres of ‘excellence’, in which founders coalesce, present their ideas and network, can range from accelerators, incubators, and even sometimes serviced offices in certain geographical areas. Some examples of this includes Level 39 in Canary Wharf and Silicon Roundabout in the City, High end business schools, such as Imperial and LBS, have MBAs that are often interlinked with investors as well, and many top businesses have started in such schools such as QED’s investment Braintree which was incubated in the University of Chicago and later sold to PayPal.
This geographical concentration made it easy for VCs to spot fintech founders, but it often meant that equally good if not better opportunities went unseen, because they were generated by those working at the coalface within business sectors.
This is particularly true of the financial services sector where deep expertise in a specific sector often innovates customer driven tech solutions whose innovators want to go develop them for themselves.
Covid has disrupted the VC founder proximity, while widening opportunity for all; those in need of funding need to become more visible while working from home, but at the same time they no longer need a physical imprint in a tech hot spot to be noticed.
Further inclusivity in the future will likely be driven from the government’s acting on the Kalifa Review into Fintech, investing in regional hubs and connectivity away from London.
The importance of visibility
In every case, networking, PRing, and widening a social circle is key. VCs are increasingly keen to initiate discussions early on, regardless of whether the ‘founder’ - or professional, is looking for advice, immediate or long term financing.
To find them, raise your head above the parapet. An interested investor will always look at a Linkedin, at any articles you might have written, at your professional network. Socialising and discussing your idea, or your thinking, extensively helps attract useful criticism and valuable feedback.
Many nascent founders worry excessively about somebody stealing their idea. The truth is that the secret is rarely in the idea, but almost always in the execution.
When Frederick Smith submitted his business plan for FedEx as a term paper in business school, he was failed. Feedback is important, but so is trust in your own instincts.
How important is it to have a big idea?
Ironically, the big idea is often the most overrated starting block of all. Steve Jobs in his famous “Lost Interview” which he recorded after having been fired from Apple but before starting Pixar, that the idea is only a very small part of success.
Execution and a strong product and customer focus are what really makes a difference. This interview by Steve Jobs is one that every founder should watch and take to heart.
Evaluate your idea by asking yourself if it is a new and innovative solution to a problem faced by prospective customers? Can you see the possibility of a sustainable and profitable revenue model to emerge with solid unit economics? Your potential market size should be big enough to accommodate a viable business, are there many entrenched competitors in your anticipated market, and do you have a way to differentiate yourself? Your key question is whether the idea has the potential to solve a big problem in a defined market in a unique way.
Build your team
Nobody succeeds alone. Once you have road tested your thinking, selecting your team is of paramount importance. No one person typically has the ten key skills to take a startup from zero to hero, so you will need complementary co-founders. It is crucial, but it is also immensely difficult.
Team building requires good relationship building skills, commitment, trust, intellectual honesty, self-awareness and all the criteria that make a relationship succeed. Where you excel and where you don’t. “Know thyself” and find that complementary person that will help build the dream over time.
You may already have alliances, but a well-connected backer will also have networks for you to engage. Then you have to be fair and transparent with your co-founder to agree how to apportion founding shares in the company, another area where a capable backer will help.
How does a VC evaluate your business
Each VC places a different emphasis on certain aspects of the company. The key requirements are normally consistent and cover Team and TAM (“Total Addressable Market”). However, the best VCs are those that look beyond just the team and TAM and have the deep industry expertise and understanding to evaluate if that particular idea will work in a particular market context. Not surprisingly, those are also the VCs that usually will be able to help the founding team the most.
Those with a more forensic mind set will reach deep into the unit economics and financial model, to scientifically plot the road map, its pitfalls and opportunities. Again, the best VC will be the one that spends the longest critiquing and refining your idea and also the ones that help the founders the most after the investment is done. Hence, every founder should do “reverse diligence” on their investors to see how much they have helped companies in which they have invested in the past.
What financials does the VC want to see?
Again, each VC will have a different perspective. In every case, however, positive unit economics (LTV/CAC) evidence of and progression against key metrics.
A VC will typically want to believe the business can become a unicorn, enabling a 10x plus return on the investment.
In our experience, fintech founders often offer more ‘tech’ than ‘fin’, while those with solid careers in financial circles already understand their customers and markets.
The VC that is right for you will be the one that complements specific skills, understands the specific sector best - be it regtech, embedded finance, impaired lending - and devotes the greatest amount of time to developing the opportunity.
Timescales - how long does it take between meeting the VC and securing the capital?
This will depend on the status of the business. A founder might want to debate with a VC years before initiating a plan, or call for finding to enable an acquisition within weeks. So a VC can react within days of an approach. The earlier the relationship commences, the better the foundations.
What you can expect from working with a VC - input, management, financials, ambitions
The business relationship will depend on the VC with whom you work. Some have more companies in their portfolio than partners available to devote the time they should. Others are more selective and prefer to invest in smaller numbers of businesses, to which they devote greater amounts of time.
Each VC has a different style. These founder friendly VCs are often former founders in their own right, who can delve more deeply into a strategy and offer expertise not just in modelling and fundraising, but in recruiting and marketing
What if I want to internationalise my idea?
With your big idea and co-founding team in place, you will need a supportive ecosystem and business friendly regime. This seems like a given in our sophisticated business world, but it is nonetheless worth second guessing as your idea might be more suitable or scale faster in an emerging economy, a specific regulatory regime, or need access to a particular talent pool, which you might find more easily in Eastern Europe, Ireland or India. Weigh up the benefits on offer not just in international hubs, but also in regional ones.
How do I present my idea?
Whether you regard yourself as a founder, or as an established professional, for friends, family, early investors and VCs alike, how you present your idea and business plan is key.
You will have to do so in several different formats, and master them all.
The first is the famous “elevator pitch” which involves being able to articulate the idea in a few sentences. Time yourself over one, two or three minute overviews. The second format is the “shark tank” format. Prepare to pitch your idea at an event, which might be televised, recorded or streamed, where you will have anything from two to five minutes to make your case.
The key here is to practice a lot, and make sure you record yourself and play it back until you get it absolutely right. Be concise and punchy. Your intro about your founding team should be a sentence or two max - an interested investor will check on LinkedIn in any case.
Polish up your profile and spend the time with the investors focused on the idea, your team, business plan, TAM (Total Addressable Market), and why you are so excited about it.
You should also prepare two presentations - a five to ten page “teaser” and a longer, fifteen to thirty page deck that details all the key points around the problem statement, the product, the revenue model, the market size, competition, your customer acquisition strategy, expected unit economics, your team bio, financial projections, future roadmap and use of proceeds, and most importantly - what exactly makes you different. The more detail and thought, the more chance you will have of finding a thoughtful investor to help launch your idea.
A word about luck
You can’t teach it at MBA, but you can’t do without it either. You can however cultivate your own luck. Key ingredients include visualising a successful outcome in granular detail every day; being open minded - especially towards diversity - surrounding yourself with positive people; believing that the universe will come to your help when needed, and practising lots of gratitude for every little thing life gives you along what will very likely be a long, tumultuous, but also exciting and transformative journey.
Founders come in many forms. Straight from universities and business schools, with plenty of management theory and zero management reality, or with twenty years of deep domain expertise, gained not just in tech, but at the coalface in broking, mortgages, investments, banking, pensions or insurance.
Many of those hard at work with big brands are frustrated with keeping up with events, when they would rather be anticipating them, while working for themselves. Others are already established, with clear ideas of how to develop an existing proposition.
Whether they are wrapping up an MBA, enabling ESG compliance or embedding paytech in an existing product, what all these aspiring, existing and established founders have in common is that they are already change agents, modernising the shape of our sector in sync with the demands of its shifting demographics.
Speaking personally, my team has been supporting these entrepreneurs for close to fifteen years and seen many nascent ideas turn into unicorns and industry leaders. In your conversations with backers, you should find those who have started up their own fintechs, and journeyed with them as operators.
Their mentoring will be invaluable on your trajectory and turn your vision into a successful business.
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