Early Stage VC in Northern Ireland
In the past year I have seen over 1000 startup founders who are all looking for advice on how to best take their idea forward. These ideas span a variety of sectors including healthcare, fintech, crypto, consumer and enterprise. Some of the founders have deep technical domain knowledge while others feel they have a unique insight into an area which can be exploited for commercial gain. One thing is certain — for any of these to turn into a successful high growth company they will require an injection of capital.
The founders know this. Almost every conversation I have, no matter the stage of the idea, is how can I raise investment? In almost all cases they are not ready. There are misconceptions about what is required, how long it will take, who they need to speak to, what collateral they need and how much they need to raise. They have often been exposed to the twitter reality distortion field and are simply ready to send across a deck with bank details and wait for investors to get in touch.
It does not work like that.
The purpose of this piece is to circulate a few notes for aspiring founders, particularly in Northern Ireland, about the realities of raising capital — why raise capital, what is the current state of the market, how do venture firms work and who are the local investors. This is based on experience working directly with founders and investors who have raised over £100m in early stage capital.
Why Raise Money?
The first money into your company is all about validation. It is effectively a research and development project on your company thesis. You may need help to build out the product, test marketing channels or fund early distribution. Barriers to entry, particularly in software businesses, are very low so speed will often be a competitive advantage. That is the primary reason for raising money — speed.
How much money to raise is another question and the honest answer is “as much as you can”. Given that the first year is about validation, you will need to hire more people to help you with this phase. If you are going to recruit staff you are entering a highly competitive market for talent so you better be as well, if not better, capitalised than your competition. Startup companies that do well are ones that treat recruitment as a core activity and place a premium on hiring the best people. They do not settle. If you are going to raise money then do so making sure you are raising enough to hire people on the current market terms for the skill set you require.
It’s Raining Dollars
So what is the state of the market? Firstly, the good news. There has never been a better time to be a credible founder. The move by public market investors into the private market has flooded late stage companies with available capital. Tiger Global alone invested $15b in 2021 which is a hugely disruptive force to Venture Capital right down the stack. I will stay away from whether or not this is a good and sustainable thing but for early stage founders it is fantastic news — more capital at a later stage flows downstream to earlier deals. This has the secondary effect of increasing competition for deals as investors want access to the best opportunities to help increase their chances of a high rate of return to their limited partners. It is driving company valuations up with the median pre-seed valuation now between $5-$8m. One thing to note is that although there is a huge amount of capital in the market, it is going to fewer deals. The N.Irish market doesn’t exactly correlate to this but the sample set is small and looking at the European figures in aggregate this would appear to be the case.
So more money at better valuations. As a founder what’s not to like.
The good news continues. Covid19 has taken away some of the geographical barriers to raising capital. Historically location played a huge role in accessing early stage finance with research showing venture firms putting a majority of their money into companies who are within an hour’s drive of the firm’s HQ. Not any more. There is no hard data available yet but I can say with certainty that multiple billions have been invested in the past year with no face to face meetings between investors and entrepreneurs. Anecdotally, I spoke with a founder who confirmed this experience. They raised a Series A in 2021 and their location was irrelevant whereas during their seed raise in 2020 there was a lot of market resistance to their location not being in the US. Even getting investors to take them seriously was difficult.
So more money is in the market on better terms and geography matters much less. How can you take advantage?
Know Your Customer
In a fundraising process, the customer is the investor. It is imperative that you understand how a venture firm operates. The early stage landscape has changed enormously in the bull market of the past 10 years with micro-funds, super angels, syndicates and party rounds all emerging. Fundamentally they are all trying to do the same thing — make a return on capital invested. While Angel investors will put their own money into companies, venture firms almost exclusively invest with other peoples money. They raise this from institutional investors (called Limited Partners or LPs) and they promise these investors a better than market return on that invested capital. They do this by making a series of high risk bets in early stage companies who have a potential to return **AT LEAST 10 TIMES** the money back (and often they are targeting many multiples higher). When they are making an investment they are thinking of their overall portfolio construction, not just a single transaction. It is the overall fund performance that gives the VC its rate of return to the limited partners.
Alongside understanding the structure and incentives of the Venture firm, you need to know how big the fund is and how much they have already invested. Timing of the deal is important as funds will be at different parts of their life cycle (for example someone may have raised a £50m fund 4 years ago so may only have a few deals left in that fund and be more selective). Venture firms can also have investment theses and be vertically specialised or they can be generalist, more horizontal and opportunistic. Remember that they are, at their most basic level, capital allocators so will almost always bend a thesis to a good deal.
Local Investors
While the learnings above are applicable across the entire early stage landscape, a lot of my focus is on founders based outside the urban tech centres and how they can access this global capital. Northern Ireland is a good example. The current wisdom, highlighted by Carlos Espinal in his excellent book does still have a large element of truth, but it is less pronounced.
“The fact remains that if you are based in an emerging economy, you’ll have to work harder to connect with global sources of capital.”
Carlos Espinal, Seedcamp
Historically, N.Ireland has a very poor record of attracting external venture capital. Is was an immature ecosystem with little experience or knowledge on how to structure and run an investment process. I am happy to say that is no longer the case. 2021 is going to be recorded as the most successful year ever for venture investment in N.Ireland. There are still a few deals to close and a couple which will remain undisclosed but I am projecting the figure will top £100m (over half of this coming from Ignite portfolio companies :) ). An astonishing figure given it was approximately a third of that 4 years ago. While some of this increase is due to the macro environment, most of it is because founders are raising investment rounds on global terms from international investors while being well supported by local capital, particularly in the very early stages.
If you are fundraising in N.Ireland, you need to understand the local investors well. There are two main local firms to be aware of — Techstart and Clarendon. Both were setup as part of the Invest NI “fund of funds” which aims to prime the early stage market as it was thought there is not enough risk capital locally available to help entrepreneurs. Referencing “know your customer” above, this means the Limited Partners (LPs) in the case of Clarendon and Techstart are Invest NI and The British Business Bank. While it is good to understand the structure it doesn’t detract from the ultimate aim of both funds which is to get a return on the capital they will invest. Their incentives should be aligned with yours.
Techstart are a “first money in” investor. They primarily operate at the pre-seed level and place an emphasis on the founder and their ability to execute. They will take a chance on a founder before other investors and while they love to co-invest, are equally happy to be the only money in the round. They are a generalist firm who are about half way through their £30m fund and will write cheques from £50k — £750k depending on the opportunity. They will follow on in consecutive rounds. Techstart also run the Proof of Concept fund which gives out £10k and £35k grants for entrepreneurs to “prove their concept”. These are equity free grants and I encourage anyone who has a remotely scalable idea to apply for their next grant call. By applying to the proof of concept grant it also puts you on the radar of the equity team who, if you are making good progress, will help you as you move towards an equity round.
Clarendon operate something called “Co-Fund” which is a pool of capital which will match against private money invested. For example if you have an angel investor, or a group of investors, who are willing to invest £250k into your business, Clarendon can “match” this £250k investment giving you a total of £500k. Clarendon also manage HBAN Ulster which is a network of Angel Investors in N.Ireland. As part of this their role is to source companies and present opportunities to a group of angel investors. If the investors are interested this will often lead to both the angels putting capital in and this getting matched by Clarendon.
These local investment firms are a net positive for the local startup ecosystem and many companies would not get off the ground without their support.
I firmly believe we have moved from being an immature ecosystem to an emerging ecosystem and, if the current trend continues, there is an opportunity for a fully private pre-seed fund based out of N.Ireland. This will have fewer investment constraints and prove even more beneficial to founders. I also believe that this fund will be able to outperform the venture market in the next 5 years given the early stage talent I am currently seeing. That is for another discussion.
What does all this mean?
Fundamentally, that the first quarter of this year is a great time to be looking for venture capital investment. The money is waiting to be deployed, the valuations in Northern Ireland are now comparable to global standards and the opportunity to hire remotely and grow quickly has never been better. As a founder the onus is on you to do the investor research, make a coherent fundraising strategy and then execute! Easy, right?
