Is your tech startup investable and how do you raise finance?
Venture capital investor Adrian Lloyd at Episode 1 Ventures is on hand to give you some helpful advice.
In case you hadn’t heard, venture capital fundraising is on the rise. In fact, it jumped 62% last year — partly due to record-breaking financing rounds by the likes of Uber but also thanks to a rapidly growing appetite among investors for growth tech. In London, technology firms secured more than $1.4bn in venture capital financing during 2014, double the amount raised in 2013. So how to secure your slice of this apparent avalanche of money?
The truth is that, while there is undoubtedly an enormous volume of cash flooding into tech companies, this is no repeat of the dot com era. Only a small minority of the startups popping up everywhere from here to Hong Kong are able to raise venture capital. Crowdfunders may be unloading their money into curious ventures at high valuations but the experienced money — the kind that will also help you grow your business — is harder to find.
So where do you start?
The first step is to establish what stage your company is at. Do you need investment to turn your idea into a business or is your company up and running and generating revenue? This will determine the kind of investors you should be talking to, whether at seed stage in which case angels (or friends and family) will help you get off the ground, build a team and develop a product and launch, or if you’ve launched in which case you will be closer to institutional funding.
As a firm we operate between seed and series A — supporting companies that can demonstrate some kind of customer traction, investing £0.25m to £1m in rounds of up to £2m in software businesses that have reached product/market fit in a massive, and usually global, market. The vast majority of companies that are backed by VCs don’t become the huge success stories that hit the headlines. As investors, the odds are stacked against us so we have to focus on companies that have the potential to deliver very substantial rewards.
What do we look for?
First and foremost, we are looking for a world-class CEO and team. The individuals in the business are the single most important factor when determining the chance of success. We will want to meet a complementary leadership team that covers both the product and commercial sides of the business. Even better an entrepreneur that covers both but this is extremely rare. We will want to review relevant past experience of the leadership and find that they are consistently successful. We also like them to be data-driven and show an ability to hire great people and delegate to them effectively. We will expect them to operate their business in a lean fashion, be able to listen and speak clearly and be able to quickly demonstrate that they have exceptional knowledge of the customer and the problem that they’re solving. Yes, we expect a lot from our entrepreneurs, but wouldn’t you if you were making 1 of 25 bets that this fund will make?
At minimum, we need to see referenceable users and a clear path to revenues plus a clear customer acquisition plan. At best, you will be generating early revenues of £5k-£50k/month and are executing on a clear and affordable customer acquisition strategy.
How big is your market?
All venture firms think alike — we want each exit to be a “fund returner”. Our fund is £40m, and we are likely to own 10–15% of an exiting company (we aim to start with 20% and get diluted over subsequent rounds, usually against our will), so a fund returner needs to exit for £266m — £400m.. How do you exit for £400m? If your market is worth over £1B and you have typically high software margins, this suggests a large enough global market to grow into a great sized business for Episode 1, but we use that only as a rule of thumb. Market size is a key consideration so it is important that you’re able to quantify this as well as explain how you made your calculation.
We love SaaS!
We have a particular fondness for software-as-a-service (SaaS) businesses and other subscription models. These businesses are able to scale more easily and deliver very predictable revenues.
We also like businesses that are marketing-savvy so if you can demonstrate an affinity with the needs of the media and know exactly which customer segments to target and the impact this can deliver your business then this would be an additional motivation. As an example, we were extremely impressed by online estate agent eMoov’s ability to drive media coverage and this was an important consideration when we valued the company and backed the business.
No copy-cats please
Yes the Samwer brothers have made a considerable fortune from replicating other businesses and rolling them out in smaller markets but that’s not our game. We also don’t like products with no business model and no prospect of sales traction in the very near future (we know that means we would not have invested in Facebook and Twitter or Pinterest, but hey)..
Preparation is key
We always advise companies to meet us early so that we can track their progress and gauge their ability to execute over time. So meet with investors before you need to raise finance as this will make it easier for them to make a decision. The last thing you want when you’re running out of money is investors needing time to think through their decision. If you meet our criteria then don’t be shy. We may ask difficult questions and give you frank advice but we’ve been entrepreneurs too and have had to raise money so we know how helpful this can be. If you can impress us with your presentation then in a few short weeks you may have all the money you need.
One last word of advice — don’t sell yourself short and don’t assume you need investment more than your investors need you. If you have a great business then make sure you get the best possible investors on the best possible terms.
You can follow Episode 1 Ventures’ blog for musings from its team of investors
Originally published at thestartupmag.com on February 5, 2015 by Adrian Lloyd.