Jumping into the Top of the Deal Funnel
And how to work your way around the guillotine
Last week we kicked off with a blog post on the cyclicality of the 1600 investment opportunities that we received in 2015 and, amongst other things, we challenged the myth that August is a ‘dormant month’ for VCs and entrepreneurs.
Your feedback was a mixture of “your analysis is not statistically correct!” (which we agree with of course, as it is just a data set from one year) to “we want to know how you breakdown the funnel!”.
Therefore, in the next couple of posts, we will talk about how those 1600 opportunities translate into the 548 interactions and subsequently the 13 investments that closed last year; and what are the steps that could take you to the bottom of the funnel. We plan to address this in two parts: a) how do we filter the deal flow at the top of the funnel and b) what happens at each stagelower down the funnel after we are interested.
There are not many VCs who would publish such numbers but we are different: we like to test the boundaries of what can (not) be shared. Experimentation makes us better (and perhaps helps others too). We are constantly fine-tuning the process and battling to keep everything on track despite the unpredictably ‘spiky’ nature of our workload.
Is there any method to the madness?
This is where you appear as a line on our WIP (work-in-progress) and one of our team knows a little about you. The opportunity will be discussed in our weekly meeting and will fall into one of the following two categories: NO, MAYBE.
This is the very first connection between you (the startup) and one of the Beacon team (i.e. the Analyst Team, the Managing Partners or, more often, our Venture Partners; meet the team). This could be through a cold email, a warm introduction or a conversation at demo days, pitch events or accelerator programmes. A good starting point is usually a high level summary or the infamous ‘deck’, which should give us an overview of the business and your fundraising requirements.
What do we look for? Principally whether the opportunity fits our investment strategy. Keep in mind that at Beacon we are not generalists; we do have certain predilections, for instance:
- B2B businesses with typically SaaS/recurring revenue models
- Solutions tackling enterprise problems (e.g. operations/productivity, supply chain, sales and marketing, HR)
- An addressable market of £500m+
- Founding teams rather than “star” sole founders
- Tech must have been developed in-house (CTO must have equity)
- Some commercial validation; we predominantly invest post-revenue ( >£5k MRR)
- We participate in round sizes between £500k and £1.5m and have a strong preference to lead transactions, typically contributing over half of the round.
A note on valuations: Do not feel compelled to include the valuation in the deck if you don’t want to, but you should add it to your cover email (how much do you intend to raise, at what valuation, and if you have any commitments or leads). Many warn against mentioning valuations as early as that, but we find that it helps. You (the entrepreneur) have nothing to hide. If the valuation is not set, just say this is your ‘asking price’.
If a startup falls into our sweet spot, it is typically a MAYBE and we engage through either a call or a face-to-face meeting with the founding team. We start spending time with you, which is encouraging, but bear in mind that the culling rate is even higher than the previous stage. Our objective is to decide whether the MAYBE is a NO or NOT NOW; your objective is to stay a MAYBE.
At this point we aim to begin a relationship: both parties try to show their best self. The challenge for us is to try and ask the difficult questions without appearing to be unfriendly or negative. A product demo is also important at this stage.
Warning: if VCs do not ask you challenging questions at this stage, it is because they either did not understand your business or are not interested. The savviest entrepreneurs welcome, even invite, tough questions. We suggest that you stay away from the “easy VCs”, as it will probably load your cap table with indifferent investors (while your competitors will end up getting the ones who really care!)
What do we look for? We like entrepreneurs with a big vision but that alone does not pass muster with our team. The surest way to get past this part of the funnel is with facts-based answers, data-backed statements and a compelling product demo.
If the MAYBE stays a MAYBE after this interaction, we start investing even more time in you.… Next week we plan to break down the latter stages in the deal funnel and what to keep in mind– i.e. during deep dive, how we issue term sheets, and how to manage the closing process.
In the meantime, here are 4 pieces of advice for when you start to engage at the top of the funnel:
- Get to know us. Before approaching us, Read about Beacon Capital and check if your business fits our strategy.
- If we do not discover you first (we are very active in sourcing opportunities) then reach us through a warm introduction. Warm intros “skip the queue”. Do you know any of our Venture Partners? Have you got in touch with LCIF?
- A “no” does not always mean “never”. Our favoured entrepreneurs are the ones who listen, filter the feedback and try again. We too — as investors- can receive no for an answer, but we rarely give up. At the end of the day the ones who succeed are the persevering ones.
- Forgive us if we are late in getting back to you! Give us a second chance. We always try to give you one as well.
Thank you to those who got in touch last week and shared some thoughts. We’d love to hear from more of you. Feel free to send us any further ideas on what you would like us to discuss and we will try our best to do so.