Each venture fund or organisation is set up with a number of broad principles that govern the types of investments the fund will do, for example, to invest in a certain sector. Regardless of these principles, there are a number of core themes that almost all venture investors seek to fulfil when selecting their investee companies. It is not necessary to meet every single one, and not all will be applicable to every business, but if your business can achieve and communicate the items detailed below, then it will be more likely to succeed in raising from venture investors.
A team that has deep experience in their respective business and sector
An experienced and motivated team is more likely to have the skills required to deliver the business plan, respond to external shocks and work collaboratively with their investors. Venture investors place greater importance on the quality of the people and team that they are investing in than almost any other metric.
How this can be demonstrated:
- A history of having built and / or sold a similar business
- A track record of strong performance within the current business
- Deep and broad sector experience
- Experience at a larger or blue-chip competitor or industry player
- A well-balanced team with diverse but relevant skills and experience
- Spending time with potential investors through meetings or Q&A sessions so that they can get to know you and your team
Relevant, industry advisors can also add credibility and endorsement to your investment thesis, provided they are genuinely involved and available to lend their experience as the business grows.
High barriers to entry
Barriers to entry make it difficult for others to enter the market and compete with you. This makes the business less to susceptible to commoditisation and price erosion, and more likely to achieve or retain its status as a market leader.
How this can be demonstrated:
- Intellectual property and IP protection
- Complex technology or processes
- Specialist knowledge
- Capital investment to date
- Brand profile and reputation
- Strong customer feedback and relationships
- Customer “stickiness”, i.e. complexity for customers to switch providers
- Established distribution networks
- Exclusive trading arrangements
Operating within an attractive, growing market
A sufficiently sizeable market ensures that the concept is not too niche. Growth in the market is arguably more important – even a new market is investible provided there is a sensible rationale for demand to grow.
How this can be demonstrated:
- Market statistics including recent and forecast growth
- Positive pricing trends
- Demographic changes that are driving demand
- Examples of other high growth companies in the market
- Recent fundraising activity in the industry
Beyond proof of concept and an attractive customer proposition
Proof of concept means that it has been demonstrated that the core business model works, specifically, that you have an attractive customer proposition that can also generate a profit, in time. It can be difficult to show profitability and long-term customer relationships in the early days, but it is possible to show progress and potential.
How this can be demonstrated:
- Customer feedback and testimonials
- Case studies
- Customer uptake and churn statistics
- Social media and press commentary
- Pipeline of customers or contracts
- Downward trend in cost of customer acquisition
- Positive gross profit and growth without significant overhead investment (“leverage of overheads”)
Differentiation from the competition
A typical venture capital firm will be presented with hundreds of investment opportunities every year – it is therefore safe to assume that they will have come across similar businesses to yours. Demonstrating differentiation is therefore very important. Investors are looking for companies that can generate above average returns and thus must be differentiated in order to do so. A long list of points of differentiation can dilute the features that are particularly important. Remember that you are highlighting how the investment opportunity is differentiated, which is often linked, but not necessarily the same as, the product or service - those points of differentiation matter more to customers than investors.
How this can be demonstrated:
- Specific features and benefits associated with your product or service
- A different approach to others that is difficult to replicate
- Intellectual property and IP protection
- A highly skilled team / specialist knowledge
- A strong network
- Superior traction
- Specific efficiencies
- Pricing power
Recurring or predictable income
This depends to some extent on the industry in which you operate; however, recurring, predictable income is considered attractive as it brings greater certainty of trading and often represents an attractive return on capital invested.
How this can be demonstrated:
- Illustration of how the fee structure works
- Monthly or annual recurring revenue
- Customer pipeline
- Contracted revenue
Short customer payback period and high lifetime value
This is the average time it takes for the cost of customer acquisition to be repaid through income from the customer. For example, if it costs £50 in marketing spend to acquire a customer, who then pays £10 a month for a subscription, then the payback period is 5 months. Business models with a short payback period (some are instantaneous), are particularly attractive.
Lifetime value is also important – if the same customer only requires the product for 5 months, then although the cost to acquire has been repaid, there is no further value generation. If the customer uses the product for 2 years, then the lifetime value of the customer is higher.
How this can be demonstrated:
- Calculate the average cost of customer acquisition for your business
- Calculate the average lifetime value of a customer (this may require some forecast assumptions)
- Calculate the payback period of a typical customer
- Demonstrate low customer churn / customer stickiness.
A clear use of funds
New funding into a business must be deployed effectively to generate a return on investment. Venture investors look for businesses with a clear use of funds and demonstrable return on capital from those uses.
How this can be demonstrated:
- A breakdown of use of funds
- An explanation for the return on each use.
The potential for value growth at subsequent fundraisings and ultimately, an attractive exit
Venture capital funds will seek to demonstrate value growth to their limited partners (their own investors) through price growth at subsequent fundraisings and ultimately realising a return through an exit event, for example, a public market listing, sale to a strategic acquirer or sale to private equity.
How this can be demonstrated:
- Highlight value drivers that would be attractive to certain acquirers, for example, data, lease premiums, customer relationships, know-how, IP
- Provide indicative views on exit routes, possibly including strategic sale, private equity sale or IPO
- Data on comparable exits in the market
- Data on industry consolidation and/or an active M&A market
EIS or VCT eligibility
If you are raising from an EIS or VCT fund, then your business will need to meet the criteria for these schemes.