What are VCs after and where can you get funding for your start-up?

7 Feb 2017

How do you navigate the tricky funding world? Image: Punyhong/Shutterstock

You have a great idea. You’ve built a small team of experts. Your product or service just needs a little backing to make it big. What do you do?

Attracting funding is an area we don’t learn about in school. It’s a smoke and mirrors environment that sees hours spent in meetings, drumming up interest and filling in bland application sheets.

Do you need a prototype to succeed? How possible is it to convey the need for your solution? Do you cold call or attend functions?

‘Be sure to attend events where those relationships can be cultivated, like Inspirefest’

It appears that there is no clear solution, as those behind venture capital (VC) funds are as frustrated as entrepreneurs when it comes to the difficulties of finding the right match.

In discussions with one prominent member of a banking investment arm, it became clear that erratic planning exists across the board.

One start-up could come into a meeting and pitch for 15 minutes, seeking €500,000. Another could pitch for two hours and seek just €50,000. If time is money, nobody is profiting from this arrangement.

Relationships are the key to fundraising

But what can be done? According to Astia Angels, a New York-based VC network targeting female-led start-ups, quite a lot, actually.

“Building relationships is key in fundraising,” said Victoria Pettibone, MD of Astia Angels. “You can’t expect to meet an investor and get a cheque the next day. You need to cultivate the relationship over time. With an early start-up, the investor is primarily investing in you.”

Pettibone’s not lying. Her company recently backed Irish-based SoapBox Labs after meeting the founder at last summer’s Inspirefest. Eight months later, after a few more meetings and updates, Astia Angels was part of a €1.2m round.

“It was raining that day, and despite receiving some 80 or so RSVPs from entrepreneurs for this workshop event, only about 20 showed up,” said Pettibone.

That meant that Dr Patricia Scanlon, founder of SoapBox Labs, walked into a workshop with a 1:2 ratio of investors to entrepreneurs: goldmine.

“Be sure to attend events where those relationships can be cultivated, like Inspirefest,” advised Pettibone, amazed at how few entrepreneurs made the effort to get out and meet her and her team last summer.

Pettibone thinks “unobvious connections” are very important. Investments come about in often unpredictable ways,  “so don’t write off people who are interested in your work simply because they can’t write the cheque themselves”.

Lastly, keeping in contact with investors, and updating those with interest in your company when any major developments or updates arise, can also help.

“I get a lot of emails from entrepreneurs that I don’t have time to respond to, but hearing that Trish had made real progress, and that she had a round in motion, was enough to re-engage myself and the other angels in taking another look. If Trish had not reached out to me, we would have missed this opportunity.”

Understanding the investor

In each of the last three quarterly results from the Irish Venture Capital Association, close to €250m has been raised through VC funding in Ireland. The numbers are too consistent to be a fluke. The thirst is there to invest, but getting the right presentation to the right people is key.

A 2014 report from McKinsey & Company found that the key aspects to start-up success all revolve around growth. Given the fact that high-growth companies offer five times the return to investors as opposed to medium-growth alternatives, it’s clear where the money will go.

‘It’s all about understanding the investor, what type of transactions they have done in the past and their risk profile’

That money fuels more success and, with the right recipe of a good business, a good team and suitable investors, exponential growth is in the offing.

But who should you target? With banks now aggressively eyeing up start-ups through various incubators, accelerators and other initiatives, the options are growing beyond the standard VC avenues.

“It’s all about understanding the investor, what type of transactions they have done in the past and their risk profile,” said Adrian Mullett, head of the technology sector at Bank of Ireland.

“A VC fund looks for 10 times the return on equity, while a bank is looking at short-run barriers to entry [or] cost control-to-service debt repayments monthly.”

These are contrasting messages that can often come from the same company.

“Experience would suggest that Irish tech sector companies tend to be either in the global fast-track enterprise, digital or semiconductor space, where equity tends to be better fit; or in the slower-moving B2B space, where addressable markets are smaller.”

The latter, according to Mullet, are less attractive to a VC but, with higher barriers to entry, they have a good potential debt repayment capacity for a bank or venture debt player.

Know your worth

Different horses for different courses appears to be the key take-home fact. Also, the importance of future planning, be that valuation or number of rounds, cannot be overstated.

“We would say one of the most common mistakes we see amongst entrepreneurs is to over-optimise valuation during their fundraise,” said Kent Ho, co-founder of Spectrum28, a relatively new VC firm operating out of California.

‘Yes, we completely understand wanting to retain as much equity as possible, but entrepreneurs also need to think about future fundraising’

Ho’s advice is solid as, at the very least, you should be aware of what you’re selling, and how you can sell again in future.

“Yes, we completely understand wanting to retain as much equity as possible, but entrepreneurs also need to think about future fundraising. They need to think about the metrics they will need to hit to justify future valuations.”

“In addition to this, we are big believers in focus. Often times, you will see founders going after multiple markets with their product. We believe in focusing on one, so that sales initiatives and resources have the most impact. Being able to sell into one market – and winning – opens the door to other markets and opportunities faster.”

Of course, knowing what your equity is worth, and how much of it you can part with, remains the somewhat immeasurable aspect of fund-seeking.

Listening to what investors are after should probably, at the very least, be part of the planning stage. When striking up relationships, keep VCs abreast of your achievements, tap up every contact you have and, ultimately, know where your business should be headed, and it might all fall into place.

Gordon Hunt was a journalist with Silicon Republic