Dr Rob Hornby, Investment Director at Mercia Ventures, offers some advice for founders on how to approach the fundraising process and win the confidence of investors:
- Understand what VCs are looking for
VCs take a lot more risk than private equity investors. As many early-stage companies fail, they need to make high returns on those that do succeed to make up for any losses. Typically, they will look to achieve at least a 10x return on investment so your business must have high growth potential. It doesn’t have to be the next Facebook, but it must have a large addressable market.
Most businesses VCs back are pre-profit, and many are pre-revenue, but any proof of early traction will make them feel more comfortable. Try to provide enough evidence to show that your idea could work.
VCs differ in terms of the types of businesses they will invest in. At Mercia Ventures we are keen to back the very best founders, irrespective of sector. We have a diverse portfolio and have been increasingly interested in specific aspects of life science, software and consumer.
Unlike VCs in the US, who will aim to back a ‘unicorn’, float on the stock mark and achieve massive returns, UK investors are a lot more flexible. The average UK exit is around £30m and most of our exits will be through a sale to trade buyers.
- Set out a plan
Many businesses have clever ideas but are not clear how they will put them into practice, and without a defined plan, they may never reach an inflection point. A business with a plan stands out. Understand the different stages of the journey, how much each stage will cost, and set clear milestones. That makes it easy to measure progress – if you can tick the boxes, it will give confidence to future investors which will make it easier to raise more money.
- Explain the benefits of your product
Some businesses take a figure from a market research report and repeat it over and over even though it may not apply to their particular product. We ask founders to provide real granularity – explain how your product helps one particular company, and the value of the benefits they achieve, then extrapolate that to the wider market.
Are there any comparable platforms or products and if so, how do they differ? Highlight any examples of those that have sold as it shows us what to expect. If a comparable business sold for £50m that’s great – but if it you are trying to raise £5m and expect it to take 10 years, it’s unrealistic.
- Develop your skills and network
Founders are even more important in venture capital than they are to private equity investors who are buying an established business and can more easily replace the management. Most VCs are looking to partner, not run the business. We always take a minority stake and try to provide as much support and encouragement as we can. No matter how good the business, if we can’t make the relationship work, we can’t back it.
Most founders don’t have all the skills required and we don’t expect them to. However, they do need to be aware of their limitations and have a plan in place to address them, whether through personal growth or recruitment.
Some of the best founders we have worked with have had coaching before they started fundraising and built their own support network. We’re strong advocates of coaching and we encourage all our portfolio Boards to think about the personal development of the senior leaders. Try to build relationships with those who have already achieved success in your particular field as they can be an invaluable source of guidance and introductions. They will often have contacts with investors – and investors are likely to take an application more seriously if it has come through a referral from someone they know and trust.
- Remember fundraising is a continual process
Treat fundraising as an ongoing process and make sure you stay on investors’ radars. In a difficult economy the process could take up to a year from start to finish. If you have just raised investment for a two-year period, you need to start looking again in 12 months’ time, and the progress you make in the meantime will be important to demonstrate your achievements. Understanding the appetite of your potential VC partner for follow-on investment can be really important here, as are their thoughts on the longer-term fundraising strategy.
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