What investors look for in a tech start-up
What makes the perfect investor and what makes an attractive investment opportunity? Entrepreneurs Nick Holzherr, Tim Jackson and Stefan Siegel chew the fat…
Finding an investor is often one of the biggest hurdles to overcome when starting a tech business but knowing what makes an attractive investment opportunity, and what you should be looking for in an investor, are two pieces of the start-up puzzle that can make the process a lot easier.
Chairing a debate on raising finance at Google Campus, leading technology entrepreneurs Tim Jackson, Nick Holzherr, and Stefan Siegel discussed the qualities essential to a good investor, how to tackle valuations, and why investors “don’t really have any idea” when it comes to investing…
What kind of investors should young companies look for?
Tim Jackson: “It’s about what kind of an entrepreneur you are – if you think you can do it all by yourself then the answer is someone who can put in the largest amount of money for the smallest amount of equity. If you do need help then you probably want to triage the investors a bit by looking at the investments they’ve made, speaking to people they’ve invested in, and what they were like to deal with.”
Nick Holzherr: “Look for someone who’s experienced, has made a few investments in the past and has ran a company before to avoid a lot of hassle.”
Stefan Siegel: “The amount of time you spend with an investor is longer than an average marriage in this country! That’s how the big the decision is, so you need to find someone you can have a good relationship with.”
Tim Jackson: “The basic thing an investor should be able to do is to help you figure out how fast to burn your money. You should never wake up and say ‘uh oh I can’t make payroll this month’. Look for investors that ask the questions that haven’t yet been asked.”
“The amount of time you spend with an investor is longer than an average marriage.”
[Directed to Holzherr] What kind of investor would you be your ideal investor?
Nick Holzherr: “I love talking to venture capital firms (VCs) as you get a completely different perspective on your business. When you speak to a VC they step back and take a global view and ask you what markets you’re going to dominate, how many hundred million you’re going to sell for.
“You can learn so much from VCs by getting their feedback and views, what’s good, what’s bad and what the risks are. It’s been fascinating talking to VCs and strategic investors.”
“You can learn so much from venture capital firms by getting their feedback and views.”
How should start-up businesses value their company?
Nick Holzherr: “Get a lot of investors interested in your company and then you can get somewhere near a fair valuation. The investor I pitched to about a year ago said no when I told him we valued ourselves at £500,000, but, once I had almost closed the round, he then came back in.
“It’s really hard to value your company – you put your finger in the air, look at what other start-ups are raising at, look at future trends, what your revenues might be etc. I’ve come up with a figure based on that and generally it has stuck.”
Tim Jackson: “Most angel investors, particularly the less experienced ones, don’t really have any idea. I feel like every year that goes by I know less and less. Many investors don’t want to commit until they see somebody else that is smarter than them committing, until someone else sets the terms. There are very few investors that say ‘I don’t mind if I look stupid and if anyone says what a ridiculous company this is to invest in’.”
“Most angel investors, particularly the less experienced ones, don’t really have any idea.”
“By the time we sold QXL, my stake in the business was less than 10% and I think the biggest mistake that start-ups make is that when they’re thinking about the financial side of it they think of it like a cake and they want the fattest, biggest slice. My feeling is that you shouldn’t worry about the angle of the slice but the size of the cake. I was always very happy to give away big chunks of my company to investors who could help me build the firm and grow it faster.
“It’s usually the most inexperienced entrepreneurs who are hung up about valuation.”
Nick Holzherr: “There’s probably about 50 angel investors in London that are really well regarded and have great experience and if you can get one of those to say “yes I’ll put in, say, £25,000”, finding the rest will be really easy or a lot easier as investors follow-on.”
Tim Jackson: “You often hear people talking about hot sectors, but I think the perfect position to be in is to start a company in an area that’s not exciting and then take it public or sell it when people do think it’s exciting. I’m really interested in boring businesses. If other people you know of, or have heard of, are doing the same thing then that’s not necessarily a good sign.”