Straight Talk from UK Investors
Microsoft Ventures Accelerator in London recently held panel discussions on seed funding with top UK venture capitalists. For the startups in the room with burning questions, they covered assessment of startup teams, attractiveness of pre-revenue business models, valuation positioning and boldness of financial projections.
Talking to investors is a balancing act. If you are humble, do your homework and show your passion to succeed, you will be well prepared to embark on an open conversation with your would-be shareholders. Thanks to Octopus, Ascension Ventures, EC1 Capital, JamJar, Crowdbnk, DN Capital, AngelLab and Forward Partners.
Here are a few takeaways from the discussion:
It's About the Team
The most frequently mentioned criterion for investors was the team. A team's first meeting with investors is critical from a VC's perspective. Team dynamics during a meeting are highly scrutinised and often look for the following early indicators of their quality:
- Motivation: Passion for business, focus and ambition to grow –and even hunger – are pre-requisites of successful teams.
- Consistent & Concise: Make sure the investors understand your product and show you know what you’re talking about, without overwhelming them. One of the biggest mistakes often made by startups is that they don't describe their products well within a slide deck.
- Balanced & Cohesive: First impressions count, so make sure your team operates like a well-oiled machine when pitching to investors. Domineering team members, talking over each other and competing to lead conversation will not score you points.
- Co-founders: Investors prefer to see a team of co-founders, as opposed to a sole founder, and a balanced alignment of interests among team members, in the form of equity stakes or options. A successful business is never down to just one person.
- Receptive to Feedback: Investors regard a team's receptiveness to take feedback and the ability to be humble and confident at the same time as important qualities. This represents an early indicator of the relationship between a startup team and investors post-investment.
- Trust: Both startups and investors should focus on building an honest, trust-based relationship from inception. For some investors, an engaged, open conversation during a meeting outweighs a sleek, polished discourse.
Business Model: Traction vs Revenues?
Startups are sometimes concerned that a pre-revenue business has less appeal to investors. This preconception was demystified during panel talks. Traction is equally, if not more important, than revenue generation. Investors look for user base growth, as this shows ability to execute, and track business specific KPIs, such as customer retention, conversion rates, business velocity, customer engagement and time spent by customers using the product. Excellent customer traction and a compelling revenue model could convince a VC to invest long before a business has generated its first penny. In addition, market potential represents an investment decision trigger for some investors who look for evidence of scalability.
Valuation: Art or Science?
Investors consistently agreed that high valuations in seed rounds are not attractive and can even alienate. High valuations put pressure on startups to live up to them, and if startups don't, it is likely that the following round will be a down-round, which will not serve either founders or existing VC shareholders. One way to circumvent this issue is to use convertibles with a valuation cap (often used at seed and early stage in the USA); however, in the UK due to SEIS and EIS legislation, common equity structures are preferred.
Financial Projections: Measure Everything!
A valuation-related topic, highly debated among startups, pertained to financial projections. Startups sometimes reverse engineer their top-line growth to achieve a desired valuation. This 'trick' does not necessarily pay off.
Investors could be put off by unrealistic growth, and any projections beyond a 2-year horizon are regarded with skepticism. However, startups need not shy away from showing potential or adopt a conservative stance.
The rationale behind projections and credible assumptions are more important than the actual growth figure for investors. Equally, the fact that a company has a business plan represents an indicator that management went through a thorough business planning process and are serious about their business growth. Investors appreciate when a startup team has financials and assumptions readily prepared and offer them at the end of a meeting. Financial projections also help investors to structure the right investment instrument, in line with their mandate and liquidity requirements.