How to approach venture capital investors
The best ways to impress a potentials investor
When you're ready to send your business plan out, who do you send it to, and how, is at least as important as the plan itself in your quest for capital.
You need to make the best use of your own time – it's all too easy to wait for weeks on end for an answer from people who are ultimately unlikely to invest. It is sad but frequently true that the right plan will reach the right person, but in the wrong way or at the wrong time, and end up not getting funded. Following some simple guidelines should get you past the main hurdles.
Who to send it to
Given the number of private equity firms out there, at first the options might seem bewildering. But don't waste time and resources by taking a scattergun-approach to sending out your proposal. Just about every venture capitalist (VC) has set criteria they apply to investments; if you don't meet all their criteria, however good your proposal, they will not invest. So do some research first, and draw up a shortlist of investors whose criteria match your business.
These criteria will include: company stage; geographical location; industry sector; and the amount they're prepared to invest. Some VCs also require that their investments can reach a certain size – so even if you meet all the other criteria, unless their investment in your company is likely to reach that level, they won't invest. Apax, for example, only invest where they expect to grow their stake to around 850m. “If you want a million, and the investor's maximum deal size is £500,000, then you are simply wasting your time because they're not going to change the rules just for you. So research is vital,” advises Stephen Goschalk, director of corporate finance at Insinger de Beaufort.
Remember this is a two-way street. You should think about what sort of investor you would like. Some will get more involved in their investments than others; some will be able to open more doors than others, which will vary with their experience in each sector. Before doing a deal with anyone, you should talk to other businesses they've invested in to find out what they're like. At this stage, though, include in your list any facts you know, and rank the list in order of overall preference. Some firms are willing to invest in all areas and all sectors; while these should certainly be on your list, you might find firms specifically focused on your sector more interested in your proposal, and it's likely to be worth approaching these first.
There are no strict rules about how many investors to approach at once, but three or four is usually about right. That is a manageable number, and allows you to learn from mistakes made in early attempts and to adjust your plan or approach, if needed, with subsequent potential investors.
Expect to be rejected by potential investors, even where you believe you meet all their criteria. Sometimes there are other, unpublished criteria, which they will tell you about; sometimes a firm may have invested all its available funds already. Equally, quite often entrepreneurs are told, “not now, but do come back”, possibly when the business is more developed, or when the VC has raised new funds.
How to send it
In the first instance, don't send anything at all – instead, phone the target investor. Even where you have done all your homework, there is no substitute for actually talking to the person who will be making the investment decision, at least in the first instance. It's a great opportunity to see whether they might be interested in your opportunity right now, and at the very least you should find out their name, to ensure it ends up in the correct person's hand.
Frequently, these calls will reveal reasons why your target is not interested in your business. Not only is this worth finding out early, saving you time, but it also provides an opportunity to ask for suggestions of other potential investors. This can work really well, providing you with the tried and tested “John Smith suggested I call you” approach, which almost always helps. Best of all, though, is when you find an investor who wants to know more, you can find out how they would like to see more information, and know that when they have got it, it will be familiar enough that it is at least likely to get read. This is no small advantage, given the large number of plans most VCs receive.
“There's a quote from an American VC which goes: ‘If a business doesn't know how to get to me directly then I don't want to invest,'” says Jason Purcell, chief executive of First Stage Capital. “To a degree this rings true: many investors, if they don't know you, won't invest.”
It is a good idea initially to send investors just the executive summary. This should be sufficient for them to establish whether they might have any real interest in your opportunity, while being short enough to be easy for them to get through quickly. And as some will decline at this stage, you will not have given too much information away, or wasted too much of your time. Additionally, it gives you confidence when someone comes back and asks for more information – you know there's at least some potential interest. But if an investor tells you on the phone they would prefer to see the whole plan straight away, then you should do it their way.
Entrepreneurs are often worried about confidentiality at this stage. Clearly, your business plan needs to contain succinct details about how and why you believe your business will succeed. Unscrupulous potential investors could surely reject your business and steal your ideas, couldn't they? Understandably there are no figures on whether this happens or not but all private equity firms who belong to the British Venture Capital Association are bound by a code of conduct which protects your information. Non-Disclosure Agreements can sometimes help, though many investors won't sign them. The best advice is to find out as much as you can about target investors before sending anything out, and only to send information to people you feel comfortable with and to register with a service like www.copyrightprotection.com.
While some VCs have websites that let you submit your proposal online, most agree you're still better off sending your plan out by post. “Your business plan should be treated like a precious gem, so don't mass-email it. Receiving a proposal like this only makes me think it's not very important,” says Mark Wignall, chief executive of the newly formed Matrix Private Equity Partners. “Instead, I'd recommend identifying your key targets by size, stage and type and then sending it out to no more than five of them by post.”
The role of advisors
It is certainly possible to raise finance without the help of specialist advisors, although many entrepreneurs who've been through the process, and many investors, believe they're a valuable component.
In fact, some VCs only invest as a result of an introduction. This feels exclusive and irrational, yet it really boils down to trust: we all know how much we believe of what people we know tell us, and thus think we can make more informed decisions. If someone we respect tells us there's a great opportunity, we're more likely to listen than if we're cold-called by someone selling us the same opportunity. Introductions can come from many sources other than advisors. But if you don't know people who know the right investors, an advisor could make the difference between raising money or not. Very often, an advisor might know of investors your research would not reveal – there are many investors who aren't obvious from just trawling the web.
An advisor will also knock your business plan into shape before sending it out, and provide coaching in just what to say when you do finally meet them. “Part of our job is to help the company prepare thoroughly for approaching an investor,” says Simon Keeling of corporate financier Corbett Keeling, which assists business through the raising finance process. “Remember, you only get one shot with each investor, so you have to be slick and impressive.”
But this comes at a cost. Assuming you are looking to raise £1m, chances are you'll end up spending in the region of £70,000 to £100,000 on advice, as the cost of the corporate finance adviser is often about 5% of the sum raised and a further 5% in share options. Firms do different deals, but some will operate on a “no win, no fee” basis, although with higher charges if you do succeed. (You should also expect to pay legal costs of a further £10,000 to £30,000 when you actually do a deal).
The advisor's fee for raising less than £1m will be a higher percent, because the deal will still involve a similar amount of work. You might find, therefore, that it is simply uneconomical to use an advisor for raising smaller sums.
Another common question is how long to leave it after sending in a plan before phoning for feedback. It is true that interested investors are more likely to phone back swiftly, though there may also be genuine reasons why not hearing for two weeks isn't an issue. You should not hassle the investors – but phoning or emailing a few days after you have sent something, “just to check that it has arrived and to see if there are any questions” shouldn't do you any harm. And during such a conversation, you can also ask when you should expect to hear any more.