A guide to Venture Capital for small businesses
Securing venture capital funding is not easy, especially if you don’t understand the process and what investors are looking for. There is huge competition for finance and first impressions do count.
This page provides a range of useful tips and tools to help you determine whether venture capital finance is right for your business and what investors expect to see so you can fully prepare yourselves
Its not what you know, it’s who you know
There’s a general feeling in the venture capital community that the best deals come them via their networks. Now the Mercia team analyse their investment data inside out, and they know that whilst this statement is not always the case, there is a strong argument to say that opportunities which are referred to them by a third party stand a better chance of success.
Why? Well there’s a couple of different reasons we can think of.
1. Think of the third party as a grumpy gatekeeper. Unlike friends and family who can often lack objectivity when it comes to giving feedback on your business, the advisor will look at the investment opportunity without bias. If your idea attracts their interest, then it’s more likely to have potential. A good advisor can also help you create good quality investment documentation including a concise business plan.
2. Having used a third party for introductions you are more likely to have had an early opportunity to practice your pitch. Of course, the investor will want to buy into your product/concept, but they also need to feel confidence in your ability to engage other
Know your investor
If you have developed the world’s most sophisticated fintech solution but approach an investor who doesn’t back the fintech sector, then you are unlikely to be off to a good start. Take some time to review the different providers to see which provide support specifically to your sector, or the stage of investment you are seeking. Most investors will publish their list of portfolio companies and the markets that appeal to them. It helps to be familiar with their approach to ensure you are a good fit.
The following websites are really useful https://www.british-business-bank.co.uk/finance-hub/ and https://entrepreneurhandbook.co.uk/venture-capitalists/
Practice, practice, practice
Taking time to practice your pitch is crucial. You need to walk the investor through a journey which is both engaging and succinct, and this takes practice. Whilst it’s tempting to use notes on presentation software such as Prezzo or PowerPoint, this means that you may have a laptop sitting between you and the people you are trying to engage with and that won’t always work, especially if you are all sat around a table. Keep the presentation short and if you really feel like you need to, use short postcard prompts which you can glance at to remind you of the pertinent points to cover. A good presentation is best thought of as a way to facilitate the conversation.
Remember that investors will have seen many hundreds, if not thousands of presentations before and they may even know your sector better than you do. Don’t assume you are the expert, even if the product is something you have developed from the ground up. Be aware of where your personal weaknesses lay and what elements of the wider team need building. Negative feedback is intended to help entrepreneurs refine their idea.
Mercia is a specialist asset manager and manages money on behalf of its own private investors, third party clients and its own balance sheet.
This means we are able to support SMEs throughout the growth cycle, from start up to scale up and beyond.
Investment levels from £50k up to £10.0million
Preparing for Investment
Preparing your business for investment could be compared to having a good spring clean. If you are starting to think about other people investing their cash into your business, then now is a good time to get things in order. Having access to good management information and presentation material will be paramount as investors will want to know the detail behind how your business runs and the market in which you operate.We have distilled our thoughts on how to prepare your business for investment into three steps.
1. Get the house in order. The first step is to get your management accounts together and begin to share these with your senior team. If the senior team is just made up of you, then now is a good time to bring in one or two close, and trusted members of the team who can start to help. The sorts of things which you should be able to track include -
Cost of goods/services sold
Contribution to central overheads
Central overheads recharge
One of the most common stumbling points during negotiations is around valuations. The power of the money is more important than the price of the money. Where will investment take the business? How will it accelerate growth?
Don’t fall into the same trap. Make sure you take time to understand your market share by mapping the resources available to you onto your forecasts and be realistic about your opportunities for growth. Achieving very high profitability very quickly after investment when you haven’t yet broken even is unlikely and it’s this sort of forecasting which switches investors off. Your projections will be far better received if you can balance ambition with a sense of realism and perhaps most importantly prove that it is sustainable.
2. Talk to other people. You could argue that you should take specialist advice before you start work on your management accounts, but you really do need to get the fundamentals of your accounts straight. If you are serious about growing your business then you need to take specialist advice from corporate finance advisors who can offer objective guidance to you.
The sorts of things which they can help you with include determining whether you need debt or equity finance. Very often we see people too focused on one type of finance when perhaps an alternative would be better suited. If you don’t have any corporate finance contacts then you might want to speak to the local Business Growth Hubs and local advisors which can put you in touch with investors to kick start the process for you.
3. Prepare a great pitch and engage with the investor. You can’t really split these two things because you need to have both a great pitch and find some chemistry with the investor. Make sure you have built a compelling and succinct presentation and be willing to admit where the weaknesses are in your business plan. You should try to relax and engage with the investor during these early meetings, but don’t relax too much - make sure you adhere to the basics of sending things over in good time, checking for spelling errors and always arrive to meetings on time. Very often investors back businesses because they like the people behind the businesses, as well the product or service. In addition to preparing your pitch deck, you also need to think about how you might come across, particularly when the pressure is on.
Mercia has reviewed tens of thousands of business plans and many members of the team have sat on the opposite side of the table raising their own investment having run their own successful businesses. If you are seeking investment and would like some help, then please do get in touch with the team who will be happy to offer some guidance.
NPIF - Mercia Equity Finance
Early stage or late stage equity funding from £100,000 - £2.0million
One of the most common questions the Investment Teams are asked is “how long does the process take?” And it really does vary, but the answer always lies in a range depending on the position of the company.
Company 1 – Just 30 days. In the case of good management information, decent trading history/or product milestones achieved, clear market opportunity and support from good quality advisers, timelines can be short. If all these things fitted together then it could be as little as 30 days for debt finance, and a little more for equity transactions.
Company 2 – Anything from three months upwards. In the case of limited management information, early signs of trading/working towards product milestones, clear market opportunity and time spent making refinements following feedback then timelines can be a little longer. This is more likely to be something which we would watch develop, so could be anything from a few months to up to three years.
The process for debt and equity finance will vary slightly but it follows the same broad path including:
Step 1- Application received
Step 2 – Investment team allocated, internal due diligence starts
Step 3 - Presentation to Investment Panel
Step 4 – Further internal due diligence completed
Step 5 – Offer letter issued
Step 6 – Investment Committee decision
Step 7 – External due diligence begins, legal paperwork prepared
Step 9 – Pre-completion review
Step 10 – Completion and funds cleared
Start-ups with a solid business plan and great pitch deck have a far greater chance of gaining investment.
In this interview, with one of Mercia’s Fund Principals Ian Wilson, Ian talks about the sorts of things he and the team are looking for when plans come to them for review.
You can read the full article here.
Meet the CEOs
A chance to hear direct from the venture portfolio CEOs
Can you describe your career before taking over as CEO of Nova Pangea?
I am a former professional athlete with over 15 years’ international Executive Board and Advisory Board experience gained across global healthcare, energy, natural resources, industrial and manufacturing sectors. Chief Executive of a natural gas construction company and led the commercialisation of a skid-mounted meter & regulator station in Michigan, USA. I was the Chief Executive of a Pre-IPO gold exploration company in the Yukon, Canada, and Group Chief Executive of a portfolio of oil & gas assets in Alberta, Canada. I’ve acted as a senior advisor to Hon Robert Hanson and Hanson Family Holdings for ~11 years advising on M&A, investment strategy and equity finance, with a proven track record in commercialisation, growing businesses quickly, and delivering high-impact company turnarounds that positively effect and embed value.
Why do you think female CEOs are unrepresented when it comes to venture capital investment?
There is still an assumption that women fit into stereotype roles such as PA, admin, nurse, etc., more supportive roles, not “leadership” roles. It astounds me when people ask me what my husband thinks to me being a chief executive – what an assumption to make, I have a wife! Until we change this traditional mindset, it will be hard for women to breakthrough. We need to change the mindset; the messaging, and actively campaign for women leaders to express their ideas and provide the necessary support to succeed. This is not lip service, this needs to be an action by all. Let’s change this.
What value has Mercia added post investment?
Mercia – the value goes beyond investment.
My initial 90 days with NPT have been transformative. We are taking a business that has been in R&D and construction mode since 2015, to commercialisation, overnight. You can imagine the challenges the team has faced to switch gears to operational and commercial mode. Our investment director, Simon Crabtree, who has a PhD in chemistry and vast materials experience has helped us accelerate our know-how when it comes to feedstock handling and optimal particle sizing for our end-to-end process. Simon is also part of our technical committee – tasked with the oversight of technical development and accelerating our TRL (technical readiness level). This is a critical area of the business, as the technical team’s mandate is to accelerate our TRL, so we can execute on the commercial demand of the process. Mercia goes above and beyond for their portfolio companies – the added value for companies in a similar position is invaluable. They’re a true partner—investment, expertise, advisor, sounding board, thinker, reminder, and supporter. What more could you ask for!?
Nova Pangaea Technologies is a cleantech company that has developed a proprietary patented process to convert non-food plant residues into biofuels and chemicals.
What would be your “if only” piece of advice to anyone considering investment?
I have reviewed many investment opportunities over the years and my conclusion is – invest in people. You can have the best tech on the planet, but if you don’t have the right people, it won’t go anywhere. For tech businesses like Nova Pangaea you need people with a “can do” attitude. You need passion, drive, tenacity, optimists… people who are damn right bullish at times! I often equate this to being in a maze – you hit a dead end – what do you do? Accept it and go home or turn around and try another path. When considering an investment, invest in these types of people, because failure is not an option and they will keep trying until it’s done!
What’s your vision for the business in the next few years?
Within my initial 90 days, we have primed the commercial pipeline which expands every day; we need to accelerate the TRL; and begin to execute on our commercial offering of the REFNOVA process. The demand for the REFNOVA process is unbelievable; a nice problem to have! In order to service the demand, we will need to complete a Series A financing this year. Not the best timing with COVID, but even though we are going through an unprecedented pandemic, the interest level increases. Then, it boils down to execution, continuous value creation, and driving shareholder value.
Transactions in the last five years
Returned to fund investors