Obtaining finance for a new business can be a daunting, difficult, and confusing experience. Who do they need to contact? How can they impress investors? Where should they start?
On Thursday 24th February, a group of venture capitalists (VCs) who specialise in providing equity funding to high-growth, start-up businesses came together to help those at the beginning of their entrepreneurial journey to find answers to their questions.
The panel was hosted by Ian Roberts, Head of Kingston University Business School and included: Matthew Cushen, Founding Partner at Worth Capital (and Kingston University graduate); Saket Narula, Investment Director at Fortunis Capital; and Sarah Barber and Jeffrey Faustin, respectfully CEO and Chief Investment Officer of Jenson Funding Partners.
Through the panel, the investors shared insight into some of the choices business founders have for funding, how to get started, and how they support entrepreneurs on their journeys. They also provided live feedback on a few business case studies for everyone to understand what venture capital firms really look for, what impresses them and what turns them off – before some of the founders in attendance had an opportunity to present to the VCs in one-on-one sessions.
Didn’t manage to attend the panel on the day? These are five of the key takeaways from the event:
1. VCs are not looking for a particular business, they are looking for a particular mindset
When posed the question about what types of businesses VCs are looking for, the panel agreed that, even for specialist funds, there is not one “type” of business investors are looking to invest into.
According to Matthew Cushen, the better question is what type of businesses won’t they invest in? For him, the key determiner is not sector or business model, it is about the ambitions of the founders. VCs are only interested in entrepreneurs that are going for fast-growth and have a clear path towards exit.
Saket Narula agreed, they are looking for founders who demonstrate entrepreneurial thinking, who have identified a clear problem and have a novel solution. Fortunis Capital is looking for businesses that have done their homework and are actively testing a problem they have identified in the market.
Jenson Funding Partners is a sector agnostic fund, explained Jeffrey Faustin, but they are looking for entrepreneurs who clearly understand their market inside out and have clear momentum behind them. In Sarah Barber’s experience, a 60 page proposal document is not the best way to make a good first impression on a VC. Investors want to get to the fundamentals quickly. Answer these questions: who are you, what problem are you solving, what is your solution, and how much are you looking to raise? If that information is of interest, the investor will come back to you looking for the details to back it up.
2. Entrepreneurs should look for a VC that can provide value beyond funding
Matthew Cushen agrees with Sarah Barber that the classic “pitch” is a poor format for presenting innovation. According to him, just as speed dating is a bad way to find a partner, speed pitching is a bad way to find an investor. Forming a business relationship requires a proper conversation. He is looking for entrepreneurs that have new insight into the market, as this proves – regardless of their solution – they have identified a gap that could be rapidly filled by the business. But what should the entrepreneur be looking for in an investor?
Entrepreneurs have to select investors that they know they can build a relationship with, said Sarah Barber. They will be working closely with their investors as a team so they have to want to work with the investors day-to-day.
Saket Narula agreed that entrepreneurs should look for a good relationship, one where the investor is respectful, responsible and reasonable. He also said that entrepreneurs should look for investors that add value beyond capital – whether that is skills and expertise they can lend to the team, access to their network, or the ability to open doors for the company and create new business opportunities.
3. Identify your business milestones to determine how much investment you need to raise, and when
One of the most difficult questions from the audience was “how much money are you looking to invest”? For the VC panel, there was no one straightforward answer.
The amount of money that VCs are looking to invest will depend on the business and how much money they need, Jeffrey Faustin explained. It is up to the founder to lay out a plan with clear milestones at each stage of growth, and to make a case for the money they will require to get to each phase – “a clear understanding of the milestones for the business is one of the key things I am looking for when I review a pitch deck.”
There are brackets of investment, Saket Narula explained. For direct investment from angels, entrepreneurs are probably looking at hundreds of thousands of pounds. Larger VCs may push the investment amount into millions, and from that point onwards the rounds are typically made up of co-investors and syndicates, which also means more cash on the table.
4. True valuation is determined between the buyer (the VC) and the seller (the entrepreneur)
Reaching a reasonable valuation is one of the most difficult tasks for early stage founders. Saket Narula explained that one of the reasons for this is that founders tend to look at later stage methodologies, but it is impossible to apply these formulas to a startup that is pre-product or pre-revenue.
Some founders turn to advisors to get an estimate of their valuation but even then this is not an exact science. “The valuation is the price that an investor is willing to pay, and the founder is willing to sell at,” explained Jeffrey Faustin, “the advisor has no part in that equation so I would urge entrepreneurs not to be too influenced by their estimate.”
So is there any formula that investors do apply? “For an investor the calculation of valuation is Evidence x Momentum x Potential,” explained Matthew Cushen. “The multiplication is key: if any one of those factors is zero, then the value of the business is 0.”
Startups also have to be conscious of how their initial valuation will affect later rounds. Sarah Barber reminded the audience that, once their investors are on board, they will not want to see “down rounds”. Saket Narula agreed, when you have your initial investors they have an equal interest in building the valuation as the business grows.
5. Building a strong team is a priority for both the entrepreneur and the investor
Finding and hiring a team to rapidly scale a startup is an area where investors are deeply involved once they invest. “A founder wears multiple hats from day one – CEO, head of sales, head of marketing, office manager,” Jeffrey Faustin explained. “As the business grows we encourage and help them to hire people to take away each one of those hats.”
Entrepreneurs also have to appreciate the reality that they won’t find the perfect person for each role the first time around. “When you are scaling quickly you are going to make mistakes in hiring, but you need to build a team around you as quickly as possible and adapt as you go,” said Jeffrey.
The most important member of the team is the co-founder. For many investors a co-founder is a “must-have” in order to invest in the business. This is because it always means a more balanced business and access to complementary skill sets, which reduces the risk of blind spots in the early stages when the founders have to run multiple business arms. It is very rare to find a single founder who is an expert in every aspect of running a business.
Investors often try to help single founders to find the co-founder they need to get their business off the ground but, of course, creating a co-dependent relationship reliant on trust from scratch is difficult. “If anyone has a good solution to match founders with co-founders I would be interested in investing in that business,” Matthew Cushen said, “as that is a true market problem that is waiting to be solved.”