How to know if your business is ready for venture capital funding
Preparing to fund your start-up? Find out if your business is VC-ready with Scottish Equity Partners' five-point checklist for entrepreneurs
Reasons for seeking venture funding can vary – from investment in systems, premises or staff to product development or internationalisation.
Whatever the objective, owners of high-growth businesses can boost the likelihood of securing venture capital by understanding some key characteristics of a ‘venture-ready’ business.
Consider your business’ stage and investment criteria
Seeking funding can take up significant management time. To avoid wasting it, first consider what stage your business is at and whether venture funding is actually the best option. Other forms of finance, such as business angel investment, bank loans or grants may be more appropriate.
Secondly, consider carefully who you approach for funding – research their investment criteria and portfolio to determine whether you are reflective of the type of business they invest in.
And finally, remember that if one venture capital firm rejects your proposal, it does not necessarily mean others will. Venture capital investment requires balancing risk with potential reward and VC firms will differ in what they regard as an attractive investment opportunity.
At Scottish Equity Partners (SEP) we fully evaluate proposals and provide constructive feedback to management teams to help them move forward.
For every investment we approve, we reject many more. No two successful proposals are identical, but those that do get funded share five common characteristics:
1. A high calibre management team
High quality people are pivotal to a company’s chances of growing and prospering – even if a business has a highly innovative product, we are unlikely to invest if we have doubts about a management team’s capabilities. Ask yourself whether you have a credible and ambitious team who possess complementary skills in terms of knowledge, experience and leadership style.
It is also important to have a shared vision and be open to new ideas and influences. You can potentially secure investment if there are skills gaps in your team as long as you are willing to address those as the business develops. A good venture capital investor will help you build your team – ensuring it is resilient enough to cope with the challenges you will face as your business scales.
2. Detailed funding requirements
Be precise about how much money you need and how it will facilitate or accelerate growth. Don’t underestimate (or overestimate) this and provide a breakdown – e.g. if you plan to invest in sales and marketing, outline your planned activity. If you want to grow the workforce, create a detailed hiring plan.
Product development plans require milestones and you should demonstrate a realistic grasp of costs, accountability, an ability to manage cashflow and good management information systems.
3. Desire to share ownership
You must genuinely see a benefit in shared ownership and in giving up some equity in exchange for funding and strategic guidance. A venture capital investor will generally take a minority stake. If you are uneasy about this or struggle to see how it will create value, the partnership is unlikely to work.
Remember that post-investment you may have a smaller stake, but it should be in a more valuable company.
4. Significant market opportunity
Your business must target a significant market opportunity and demonstrate momentum. You need to be able to quantify the size of the market and explain your competitive advantage in terms of intellectual property, business model or barriers to entry. Provide evidence of market share and, if your strategy is to dominate in a crucial territory or achieve a global footprint, list the steps you will take to get there.
Definitions of success will vary. It might mean being a top five player or finding ways to acquire customers at a lower cost, generate higher margins or globalise rapidly.
For example, SEP backed luxury fashion retailer matchesfashion.com when it was making a strategic shift from bricks and mortar retailer into the e-commerce destination for the global fashion customer. Our funding enabled investment in technology systems and logistics and has helped propel significant international online growth.
We also backed leading travel search company Skyscanner to enable it to expand from a focus on low-fare airlines in Europe to coverage of mainstream airlines globally.
5. Opportunities for value creation and realisation
A business sage wrote that you read a book from beginning to end but you run a business the opposite way – start with the end and do everything you can to reach it. From the outset, venture-backed businesses should have a plan to realise value for all shareholders. It is an essential part of the conversation in every funding deal.
In our experience, exits generally occur within three to seven years following initial investment, and merger and acquisition activity by corporates is the most common exit route.
The eventual exit may vary from what you envisage at the start as new prospects arise, nevertheless you should always keep exit on the agenda and have an informed view of potential exit opportunities, including potential acquirers and exit valuation.
Visit www.sep.co.uk to find out more about Scottish Equity Partners.