Straight From an Investor: What Makes an Exciting Opportunity?
Robin Knox is no stranger to investment: in a short time he flipped the cards, transitioning from seeking investment for his company IntelligentPOS to becoming an investor in nearly a dozen businesses and taking a Chair in Seedhaus — an incubator that welcomes 10 exciting early stage startups to their accelerator programme every year.
We joined Robin Knox at Seedhaus to find out what excites him as an entrepreneur and investor.
When and how did you get into investing?
Following the exit of IntelligentPOS to iZettle in 2016 I found myself in the fortunate position of being surrounded by startup founders, my position having just flipped to become able to invest. I had several friends who I had met at various networking events who I thought had excellent businesses that I was keen to invest in.
How many investments have you made?
11, mostly in Scotland via my network, one in Canada. Most are B2B but I have a couple of B2C.
What do you look for in a business when investing?
A scalable business model, a dynamic founder who has a track record of making things happen, a product rather than service business and that product should be reasonably essential to everyday living or operations for a business.
What’s your end goal for an investment? What return do you hope to see?
Every investor should be pragmatic about the failure rate of startups but I hope to achieve an overall return on my investment portfolio that outweighs the return of other instruments that are available and also compensates for the high level of risk involved. Angels typically look for an exit some time between years 4 and 7.
What makes your ears pick up when someone is telling you about their proposal?
Having done something about their idea, showing real traction over a good sample size, defendable position in terms of competitors (this doesn’t mean it has to be IP). One other thing that is very important is the founder(s) being able to articulate the idea succinctly.
What will make you turn a business down?
If the founder appears to be blinded by self belief without any factual evidence to stand behind / delusional. If the founder has been going around in circles for too long without serious progress. If I don’t believe the founder is emotionally intelligent enough. If the founder becomes defensive or hard to speak to when questioning the idea, this usually means it will be hard to work together.
Are the businesses always “investment ready”? If not, what makes you go for it?
Depends what you mean by investment ready. I don’t look for business plans, I look to underpinning asssumptions, the founder and the emotive reasons why this product or distrubution model might work. A lot of the strategy is worked out along the way. The key elements are the product, proposition and founder to survive that process.
What is your strategy for finding / getting in-front of businesses?
No real strategy here, I meet too many people and cannot invest in all of them. I don’t actively seek investment opportunities. I stay involved in the eco-system and learn that way through events like EIE. Of course Seed Haus is a fantastic place to meet start up businesses but that isn’t the primary reason why we created the space.
How often are you approached by companies?
Daily, via linked in and email.
What does your standard term sheet look like / include?
Standard investor protections, pre-emption rights to follow on, approvals for senior hires and expenditures over set thresholds. Nothing overly aggressive, but enough to make me feel comfortable to allow the founder to operate without my interference. The docs are rarely referred to once signed off, they are just a way for me to feel safe that the founder won’t transfer the IP or my shares without consent, or go on a long holiday to Barbados with my cash!
How long does it usually take to agree the terms with the businesses?
This can vary depending on how many times the term sheets are revised, the number of other investors and the workload of lawyers at the time. I have done extremely fast and simple investments which took 2–3 weeks and I have been involved in ones that dragged on for over 6 months. My advice would be to allow for an average of 5–6 weeks after you have interest from a syndicate.
What is the process after you’ve agreed to the terms?
Sign the docs, screenshot your bank balance, throw a party, execute like hell! If it’s a serious investment round you have just closed then you should be thinking about press and be expecting your first real board meeting in about a month’s time. I always recommend to founders that they start to spin up activities pre-closing so that they can hit the ground running and have something to show at the first meeting.
What’s your average investment? In exchange for what equity?
Again, it varies depending on the business. My largest single equity investment so far has been £60,000. The norm is probably £20,000-£30,000. Valuations for an early stage startup can range from £300k to £1m depending on traction.
How do you ensure that businesses meet projections? If not, how do you take it? Are you a “hands on” investor?
This is really the primary responsibility of the founder and her team. Projections are difficult to get right and before investment I will have bought into the underlying assumptions. As long as the team is being sensible then I have a relaxed attitude. Frustration comes if the team makes excuses without good reason. I do consider myself to be hands-on, obviously I only have so much time to give and there is only so much of my time a startup may wish to take. This is normally worked out as we go along. I want to be on hand for the difficult times.
Do you tend to follow your money through rounds?
I actually do not follow on at the moment, preferring to diversify my initial portfolio. I like early stage businesses. However many angels do follow on in future rounds. If I were to follow on, I would need to be very confident that sales were going in the right direction. This means as a founder it pays to keep your investors updated and ‘warm’ from this perspective.
What’s the most important piece of advice that you could give a small business trying to raise equity investment?
Leave plenty of time so that you don’t run out of cash in the process. Also ensure that the business is not plateauing while you turn your attention to fundraising.