6MS Can you find me the Right Investor?

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Can you find me the Right Investor?

“Can you find me the right investor?”

“What are the chances of success?”

“What are the odds of finding an Investor for my Company?”

 

I am asked these questions all of the time as if finding investors for companies was like throwing darts at a dart board; if you hit the bull you get funding, Right?

Well not quite.  In this blog piece and the accompanying video, I will try to share with you some of the complexities in the funding process.  I want to try to demonstrate that building a systematic funnel is much better than throwing darts!

Lets start by looking at some statistics from Crunchbase.  This free online database lists over 100,000 companies and over 30,000 funding rounds.  Crunchbase also shows us that there have been literally thousands of Seed Rounds, Angel Rounds and Series A, B and C rounds.  Furthermore over 9,000 funding rounds are unattributed.

In our research over the past decade, we have identified over 1,200 investors in the UK and this dataset only has a small number of Angel and High Net Worth investors.  We are predominantly talking about funds, networks and family offices.

So where do you start?

In the video I walk through a series of factors that need to be taken into account when trying to select investors.

These include:

  • Investor Type
  • Sector
  • Stage
  • Funding Round
  • Deal Size
  • Risk
  • Geography
  • VC Portfolio
  • VC Specific Odds
  • Investment Criteria
  • Deal Criteria
  • Process
  • Documentation
  • Term Sheet
  • VC Deal Flow
  • Conflicting Interests

Unfortunately, finding the Right Investor involves kissing a lot of frogs!

I do not believe that there are any short cuts, they take too long!

I hope you find the video useful and if you want to know more or to discuss any issues I bring up, you can email me at jbdcolley[at]aol[dot]com or contact me through the blog.

You can also download the slide deck from Slideshare at http://www.slideshare.net/jbdcolley/can-you-find-me-the-right-investor-5-oct-2012

What Next?

Take a look at my FREE video Tutorial “How to Turn Your Great Idea into a Business” which is all about Starting a Business and Raising Capital.

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Is Venture Capital the most inefficient Capital Market in the World?

If it was as difficult to buy and sell on the Stock Exchange as it is to raise Venture Capital, investors would call it more than a technical glitch!

Why is it so difficult? If you look carefully,  there is no shortage of capital seeking investments.  Furthermore, there are literally thousands of companies seeking funding from Venture Capital investors.  And yet finding the right investor, pitching a deal, working the process of committees, due diligence and documentation, takes months and has no guarantee of success!

It is difficult to assess the level of failed deals.  I have heard estimates that 90% of funding deals <$500k fail and 75% of those below $2m fail too.  This suggests to me that friends and families are more than doing their bit to create employment in the North America and Europe by supporting these companies when the VC market fails them.

I want to discuss why this market is so inefficient and to see whether there is anything that either side can do to improve the situation.

Lets look at the situation from the side of the Venture Capitalists.

Once a VC raises a 10 year fund, say $100m, they look to deploy this in the first three to five years of the fund.  Therefore these funds are looking to get $20m a year out of the door and into companies.

The team to do this may have as many as 10 people in it.  Don’t get too excited by this.  Two of these will be Partners, two more experienced Deal Executors, a couple more are less experienced “bag carriers”, sorry, I mean Analysts.  The remainder will be Administration, Marketing and someone to answer the phones and write letters.  This means that most of the deals that come in unsolicited, get reviewed initially by probably the two Analysts.

This is the first reason that you have to write a good investment summary!

A typical firm will see around 500-600 business plans/summaries in a year.  This is around 40-50 a month, around 10 a week (20 days a month even if they are 15 hour days!).  The same firm is likely to do up to 5 deals a year, one every two months!

Look at it another way, the fund will want to make 20-25 investments in their $100 million fund, over 5 years, its 4-5 deals a year.

So your chances of getting funding from any single investor is around 1%.  Unfortunately, if you see 100 VCs, your chances improve somewhat but not to 100%.

I think that VCs should try to be more specific about their investment criteria on the website, but of course, ultimately this is not in their interest as they want to see as broad a deal flow as possible, in case they miss the next Facebook!

What can you do to improve these odds? Well, lets look at it from the Company’s perspective. 

There are thousands of funds out there but you need to short list the funds who might have a theoretical investment interest in your business and these are the main initial criteria:

Geography: the earlier the stage the more localised the geography so find where their nearest office is located

Stage of Development of the Company: in Venture Capital, Seed, Early, Series A, B, C, D, E, F, Growth, late Stage

Deal Types: in Private Equity; there are a whole range from Generalist to Specialist (e.g. Turnarounds, Public to Private, Buy and Build), but I am going to keep focused on the VC market here where the investors primarily focus on the Stage of Development of the company.

Financial Development: Revenues: Pre or Post revenue.  Take it from me, pre-revenue investment from VCs in Europe is very difficult to raise, in the more sophisticated, mature and larger US market it is easier.

Profitability: Profits: Cash flow positive, breakeven, profitable?  VCs are not investing to take early stage, product risk.  They are looking to invest in companies once the questions – Can the product sell?  Is there a problem for which this is a solution? – have been answered.

Size of Investment; this genuinely varies: for VCs you expect them to at least invest £500k or $500k but all have minima.  There is a logic to this.  It is very difficult for a small team to manage a large portfolio with lots of small investments and from a portfolio theory perspective, a VC wants to make a limited number of reasonably sized bets in its investee companies.

Sector: the VCs will very often have specific sector and sub-sector preferences

Management; make sure you have a strong, successful (previous successful start up track record in the same sector is a distinct advantage) team.

Management, Management, Management: See the paragraph above in case you missed it. This really is one of the most critical factors.  The VC is essentially backing the team to successfully execute the business plan and weak management teams don’t get backed.

Market Size: the bigger the potential market the better.  Often a management team makes the mistake of trying to define a micro market to show how they can quickly become number one.  This is a mistake.  It is much better to have a small share of a huge market, than a large share of a small market

Competition: there is always competition.  If you have not found it you don’t know your market and claims that there is no competition is a telling sign to a VC that the Management team is not on its game.

Returns: VCs are fundamentally looking for a 10x return so their in price, the pre-money valuation and the expectations of any future funding rounds are important to them and you can expect them to negotiate.

Hot Trends:  this is the one that you do not find on their website.  I always ask VCs what is “hot” for them at the moment.  This gives me really valuable information about their appetite for certain types of companies and enables me to bring deals to the VCs which they are more likely going to want to engage with.  As you know, fashions and fads change and so do these – about every six months.

Once you have honed your long list to a couple of hundred potential investors, you now need to find a way to approach them.  I am not a great believer in filling in online forms.  As you can see from the discussion above, the attention span of a VC team is challenged to say the least!  An approach from some one who knows them or a mutual contact who knows them is the best chance of getting past the the initial filtering process.

A really good way to find how to do this is Linkedin.  If you are not already using it, you should definitely start building your network today.

Be prepared to contact between 50 and 200 VC investors (in Europe), I would suggest that in the US the number os probably between 30 and 100.  This means several calls, emails, follow up and a lot of persistence.

The initial negative responses come in quickly.  Give the VCs initially a week to 10 days to process the summary internally and hopefully get some initial interest from a few of them.

After this initial period, put in follow up calls to make sure your approach has not already hit File 13 (thats the round metal receptacle under the desk of the analyst).

If you get an initial meeting with a VC, well done!

Now you only have three to six months of haggling in front of you.

Lets go back and look further at how inefficient this market really is.

From a numbers perspective, there are thousands of investment events every year but this still remains a small proportion of the businesses seeking funding.

I do want to be fair. 

Many of these companies are either not good enough or ready for investment and there are good reasons why they do not get funded. However, without a mentor, an experienced adviser or investor, it can be very difficult for these businesses to learn why they have not been successful.

There is the same quality issue for the Venture Capitalists who can spot an under prepared business from a mile away in a fog at midnight.  Make sure your collateral – Executive Summary, Business Plan, Financial Model, Management Presentation and Elevator pitch is as good as it can be.  I often hear VCs complain about the scarcity of good quality deals.

The summary of all this is that management teams can spend months seeking investment while still trying to build their businesses, a very distracting and time consuming process.

There are moves a foot to create online investor exchanges for VCs, similar to AngelList which (as its name suggest) is focused on the Angel market.  There are considerable regulatory hurdles to this although steps are being taken, particularly in the US, to address these.

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How to Bait the Hook to catch a VC

I am currently working on a “flyer” or a “teaser” to send out to potential investors for a client and thought I would share my method and template with you to help you if you need to do the same thing.

The purpose of this short document is to get their interest. The objective in this is to get the attention of a Partner at a VC firm and to do this you have to get past their screening process.  While this often involves an intermediary like myself with extensive personal contacts into the VC community, the greater challenge is inside the VC firm itself.  New opportunities are screened by junior associates and only once this has been done does the flyer get wider circulation.  So it had better stand up to the competition from all the other flyers.

Remember this is a baited hook – so don’t give them all the answers.  You must provide enough information to get them interested and keen to learn more.  The odds are around 100-1 against this firm investing in your business so look sharp!  Here is the Six Minute Strategist Guide to writing the Flyer!

1. Structure and Content

Bearing in mind this is a one to two page PDF document, it needs to be well structured and the content must cover the key things about your business.

  • Management
  • Business Model
  • Products and Services provided
  • Customer base
  • Route to Market
  • Financials – 3 years historic and 2 forecast (Revenue and EBITDA or EBIT)
  • Six Key Differentiators – Why Me?
  • How to reach you for a meeting

2.  Clear Statement of Intent

What are you looking for?  It should be very clear that you are seeking capital, how much you are seeking and why?  Is this growth funding, for a recapitalisation, buying out of an existing shareholder (not a popular one – money going out of the business rather than being put to work within the business).  Communicate that you have a clear objective and a detailed plan to achieve this.

3. Style

This should be a well written document, in the third person.  Grammar and spelling are important.  You should definitely avoid hyperbole – keep extravagant claims and language out of this.

4. Accuracy

You must make sure that your statements in the document are accurate and truthful.  Check the numbers (make sure they add up where appropriate).  If you are making a claim but do not have a source, it is ok to state that “the Directors believe that…” but not more than a couple of times.

5. Brevity…

…is the soul of wit.  Never more so than here.  This document should not be more than one or two pages long and in pdf format.  If it comes from an intermediary then it should be properly headed and footed to show that it is being professionally managed.

6.  Annonymity

Use a code name and not your company’s name in the document.  Firstly you do not want them to know who you are and to have to come back to you to ask you or your adviser.  Secondly, this document is out in the public domain – whatever they say – and is likely to be shared around.  If it reaches another VC who has an investment in one of your competitors, they may use it for their own nefarious marketing purposes.

What Next?

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Six Minute Strategist Guide to Defining Equity Investors Part 1 of 3

There are so many confusing terms out there to define equity investors that I thought it would be helpful to put a little Six Minute Strategy around the problem.  This blog topic turned into quite a long one so I have split it into three parts and these will be published successively, the second part on Friday 23rd September 2011 and the third part on Monday 26th September.  As a follow up, on Friday 30th September, I will turn the problem round and give you an A-Z (in the form of 26 questions) of how to identify which investors are right for your business.

I have taken six base categories to work from

  1. My own 6MS classification
  2. Early
  3. Venture Capital 
  4. Growth
  5. Special Situations
  6. Structured

The Six Minute Strategist Classification

I use a broad number of categories to screen investors so my six categories in this group are rather broad and deliberately so. I am trying here to create large groups which I can further refine.  It is also part of my email and networking strategy (more about that in another post another time).

Note: in my contacts classification the F is the sixth of six classifications and covers the financial investor community.

My categories are:

F1 – Early Stage: these investors are typically referred to as Venture Capitalists (“VC”) (as opposed to Private Equity (“PE”)).  Don’t be mistaken, for the most part they have the same attitude for risk – very little.  In the US, the VC market is far more vibrant and the most successful firms are characterised by a long track record and staffed by many who have been successful (often serial) entrepreneurs themselves.  They typically like to come in as the first “institutional” investor after seed and angel investors have eliminated some of the product related risk.  Typically, they will not invest pre-revenue.

F2 – Mid Market: these investors are firmly in the PE camp.  The mid market is defined by deal size and it is this primarily that separates them from the VC end of the market.  These investors are looking for established businesses with strong management on whom to work their financial alchemy.  The types of deals they do will be dealt with below but the enterprise value of the companies they look at can range from £10 to £100m.  This is broadly the same in the US although the deal size range is probably larger.

F3 – Large Deals: this is not primarily my market, although I would be delighted if a significant opportunity came along. These PE boys play in the big league of syndicated leveraged buyouts.  The deal sizes range from £100m upwards and can reach billions of pounds.  It is important to know who these players are so that you don’t confuse them with we mere mortals.  Offering a £10m buyout to one of these guys just tells them you don’t know the market.  The flip side of the coin here is that as many of these financial gentlemen make exceedingly large amounts of money, they are sometimes prepared to make private early stage investments of a few hundred thousand (although the terms will probably be tough) and can therefore individually some times be regarded as F5 investors (see below).

F4: Small Deals:  These investors are still primarily PE investors but investing in the £2m-£20m deal size and writing equity checks of around £2-£10 million.  In the UK they often raise their money through VCTs and like to take advantage of the EIS (Enterprise Investment Schemes) to get tax breaks for their investors.  Many of these firms will accept minority equity positions but will nearly always protect this with shareholders agreements which give them de facto majority rights over a broad range of issues.  Investee companies should also look carefully at the maturity/exit/sale rights of their equity instruments as these often have additional premia attached to them.  As a rule of thumb is is always worth working out how these investors make their returns.

F5 – HNW (High Net Worth):  These investors might also be called Angel investors.  Typically they are successful (for which read wealthy) people, often but not always successful entrepreneurs.  Many of them take a portfolio approach and if you are lucky will also bring their experience to the table to help your business develop.  This is not blind money and if things start to go wrong, expect them to step in to protect their investment.  A good rule of thumb for these investors is what ever your valuation or funding round, they like to get between a quarter and a third of the enlarged equity in return for their risk capital.  This is not cheap money.

F6: Special Situations:  This is not just a catch all grouping.  These investors are seeking opportunities to take advantage of difficult or unusual circumstances (often distressed companies or successful companies short of capital) to make their return.  The often use complex structures and share classes to protect their downside and negotiate hard for as much of the upside too.  By definition, they are seeking situations where their capital is badly needed and where their negotiating position is strong.

This then is my classification.  However, when reading the investors’ websites you will often see a wide range of different terms used.  I will now try to explain these in a little more detail.

Early

The second major category looks at the investors who invest in early stage deals.  It should be stressed here that these investors are all looking to put money into the companies and not to see any of it going out to earlier investors or founders.

 

Seed: Seed investors are those who come in right at the beginning.  They sometimes referred to as Friends and Family (literally at this stage the only people who will put money into your brilliant idea!).  Sometimes the category is referred to as Friends Families and Fools.  These investors understand that this money is REAL risk capital and very often they do not get it back.  As often, the business plan requires additional funding and they end up suffering significant dilution.  It is worth considering, if Uncle Jim really can’t afford to lose the £50k he is offering you, why jeopardise future family reunions by taking his money.

Start Up: this term is sometimes used by VCs who want to invest in early deals.  As mentioned above, they seldom (but not never) invest pre-revenue and often will make very encouraging comments and tell you to come back to them when you have achieved some significant milestones (for which read sales).

Angels:  These investors are covered largely under the HNW category above.  Essentially they differ from Friends and Family as they are neither Friends nor Family.  Their investment size is typically in hundreds of thousands where as the former are in the tens of thousands range.

Other Early Stage: this is VC-speak for post-revenue investors who might really be trying to steal into the Series A space (more of that below).  At this stage investors are moving away from product risk (is there a market for the product?) to market risk (can the product be sold into a large enough market to make the business profitable).

Venture Capital: or VC.  These investors are “institutional” in the sense that they are normally professional investment firms (or offices of High Net Worths or wealth families).  They employ professionals to vet deals and make the investments and therefore have a more cautious (and less proprietary) approach to deal risk.  If you are investing your own money you might decide you want to back the founder and make a subjective judgement on this basis.  These investors are not likely to take this approach.  You may expect their term sheets to contain a considerable amount of tricky to understand downside protection clauses (which you really do need to understand and often cross out!).

Development: this is another catch all term for investors seeking to invest in growth companies.  Often minority investors, they are likely to be post revenue investors seeking high growth (lower risk from slightly more mature businesses) investments.  Normally institutional rather than private individuals.

In Part 2 I will look more closely at Venture Capital and Growth investors.

Six Minute Strategist Start Up Course – Is this for you?

Are you struggling to get your Start-Up Started?

Do you need to learn more about Business and Financial Plans

Do you need to learn how to pitch to investors?

Take a look at my brief Video…

Now go and check out the Course at http://jbdcolley.com/startup

2011 Outlook – Six major Technology Trends to watch


This brief blog post sets out my thoughts on what we are likely to see in the Technology Sector for 2011.  This is a culmination of my digesting a wide range of sources and considering the impact of the political and economic environment that we are challenged by today.  I am broadly optimistic about 2011 but believe that more than ever quality is the key and companies need to be very focused and strategic in their decisions and dealings.

Mobile

The recent fantastic results from Apple combined with the 100 plus tablet devices on show at CES in Las Vegas are confirmation that this year is all about Mobile.  It is estimated that more than two thirds of phones in the UK are now smart phones and although the networks sometimes struggle to keep up, demand for applications continues to build.

For Corporates operating in this space I expect to see a significant number of acquisitions in six core strategic areas

  • Advertising
  • Payments
  • Messaging
  • Gaming
  • Content
  • Application Delivery

The opportunity to reach customers (B2B or B2C) through their mobile device is becoming a key marketing and sales channel and technology companies who adopt the mobile technology, particularly when integrated with complex social media strategies will be able to create market leading solutions for their customers.

The launch of the App Store as a separate entity is another key trend indicator.

US Cross Border Deals

Despite a relatively weak dollar (£1=£1.60 as I write), US companies are increasingly meeting the globalisation challenge by seeking overseas acquisitions.  In the UK I see this more as a market entry and customer acquisition led strategy and therefore do not look for mega deals.   This is particularly the case as there a relatively few $1 billion plus corporations left in the UK technology space.   The common language and relatively benign culture in the UK makes this the first stop for US buyers looking to find deals in Europe.  (See my previous blog about US acquirors coming into the UK).

The mega deal market has dynamics of its own – the consolidation players are now global and the private equity acquirors are often acting with industry players as a risk diversification strategy.

While the capital markets trade at reasonable valuations and corporates consolidate their strategies non-core assets are also a potential source of deals, not just for US buyers but a significant area for them to look nonetheless.

Sectors

As ever some are hot and some are not.  To specifically look at three major sectors.

The squeeze on the UK public finances means that a different approach to public sector deals will be required.  The selling point has now got to be around a fast ROI, cost savings and structuring deals as a service rather than a capital cost.  Outsourcing deals have been doing this for sometime but have often involved a significant up front SI and infrastructure investment project to get them going.   The absence of capital means that technology vendors will need to be more creative and imaginative in their proposals.

Healthcare is also facing a squeeze but like the public sector needs to save money in order to become more efficient and deliver more front line services.  The complexity of the NHS and private healthcare when combined with the complex ecosystem of suppliers and support services means I belive this will continue to be an interesting market for technology vendors and M&A will continue.

Financial Services have bounced back from the troubled times of 2008 and 2009 but still face considerable regulatory and risk management pressures.  The combination of complexity, regulation and a dependence on high tech means to my mind that solution sales will continue to be strong and software and service vendors will remain attractive M&A targets.

SAAS and Cloud Computing

Thin Client structures have been around a long time but the latest evolution of these to hosting “in the Cloud” and offered on a software as a service basis (also applicable to public sector vendors) is finally beginning to achieve traction.

Microsoft, Google and other major companies have been investing vast sums in server farms for several years making solutions offered in the public cloud increasingly attractive, certainly to the B2C market.  For the B2B sector, where virtualisation is a virtue but security is a necessity, outsourced Cloud and SAAS solutions or private cloud solutions in owned data centres are now  beginning to gain traction.

From an M&A perspective, service companies who can implement cloud solutions will be attractive, security and virtualisation skills will also be important.  As there is currently a shortage of data centre resources, deals in this infrastructure area are likely to command significant scarcity premia.

Private Equity

2010 showed that the mega deals and global industry consolidation are back but mainly led by cash rich corporates and not the highly leveraged deals which were prevalent in 2007.  I have seen small deals really struggle for the past two years due to the lack of acquisition and leveraged finance from the banks.  Indeed, I believe that this risk adverse approach from the banks will continue in 2011 and that mid market private equity firms will have to accept lower leverage and lower return projections to get deals done.  This means of course that there will be greater pressure on management teams to perform, to make their businesses more efficient and that bolt-on acquisitions and buy and build strategies will be important to earning acceptable deal returns.

Private Equity buyers have long stressed the importance of recurring revenues, the defensibility of IPR, the importance of quality management teams.  I think this will continue to be the case in 2011 and therefore project depended SI and Consulting firms are more likely to appeal to trade buyers than Private Equity.

Small and Mid Cap Companies

Vendors expectations of price have been out of kilter for a couple of years making deal closure in the small and mid cap sector relatively difficult.  In 2011 I think this gap will be seen to have closed and I think there will be more (predominantly trade) acquisitions in the mid market, including more public to private transactions.

This area is a fertile hunting ground as often the quality of the companies is good, earnings are solid but they lack the value premium on the scale axis and for a large trade buyer will look like good value.  Expect to see more deals, particularly cross border deals as overseas (US and other) buyers take advantage of our benign business and legal environment.

I would be interested to hear your views.  As ever, if you like this please RT

Silicon Roundabout – who’s investing in what?

Wired Magazine’s February 2011 edition has an interesting article on Silicon Roundabout.  This nexus of technology and new media startups around  Old Street, just to the North of the City of London, has been attracting increasing attention from the media and investors.  The essential proposition is that this is a mini-silicon valley start-up hub.

This got me thinking…

Using the list from Wired Magazine’s (have a look here) I thought it would be interesting to see who is investing in what types of companies.

The Universe of Companies

I started with the original Wired List of 86 companies and have added another 25 of my own.  This latter group are all based around the centre of London and do not precisely fit the Silicon Roundabout group. I will keep them distinct in my discussion.  We have a total of 112 companies.

Segmentation.

I looked at the activities being carried out by these business and segmented them into 5 Groups – one of which was Cleantech and applied to only one company (not in the original Wired group).

The remainder then fell into four categories

1. Consultancies

This group comprise 56 of the 112 companies (50%) but only 5 funding deals amounting to a total $94m. However one deal for $75m funded EPAM systems (not in the core Silicon Roundabout Group).  Excluding this, the deal count of 4 is worth only $19.2m.  This is revealing.  It tells me that investors are a great deal less interested in early stage businesses where the core assets/value lies in people rather than software/IPR.

2. Online Tools

There were 11 companies which I categorised in the Online Tools segment. All of them are from the Wired Silicon Valley Group.  Of the 11, I have identified six funding deals for a total of $9.5m.  This represents 55% of the group and supports the investment ethos refered to above.  I believe one of the major attractions of this group to investors is potential scalability and global applicability.

3. Social Networks

This category has 33 companies in it,  of which 23 come from the original Silicon Roundabout Group.  The Categorisation is quite broad and I have applied it to any business essentially trying to address a  community or a group online.  In this group I have identified 10 deals worth a total of $17.72m.  The original Wired Silicon Roundabout group represent 7 deals worth $6.38m.  Clearly one third of companies have attracted external funding.  One company had already gone out of business.

4. Software

The Software Group comprises 11 companies, of which 7 are from Silicon Roundabout.  Five deals have been identified for a total of $62.2m.  If  Corvil is removed from the group (non Silicon Roundabout), the remaining 4 deals still r represent $30.7m of investment.  Once again the intellectual property and scalability of software companies is clearly attractive to investors.

Total Funding

I have identified a total of $238m of external funding to 27 of the companies.  The core Silicon Roundabout Group represent 21 of these companies and a total funding value of $65.6m.  For this group that is an average of only $3.45m per company.

Types of Funding Rounds

In total I have identified 8 seed rounds, 9 Angel Rounds, 11 Series A Rounds,  7 Series B Rounds and 5 Series C Rounds.  Clearly some companies have had more than one round of investment, very often with existing investors following their money.

Seed Investment Rounds

Silicon Roundabout Seed Investment Rounds

Silicon Roundabout Seed Investment Rounds

The average deal size was $280,000 per deal.

Angel Investment Rounds

Silicon Roundabout Angel Investment Rounds

Silicon Roundabout Angel Investment Rounds

The average deal size was $1.63m but heavily distorted by one investment of $8.5m.  Without this deal the average deal size was $770,000.

Series A Investment Rounds

Silicon Roundabout Series A Investment Rounds

Silicon Roundabout Series A Investment Rounds

The average deal size was $6.4m.  The two largest deals were $21m and $25m.  Without these the average size of the series A rounds was $2.71m.

Series B Investment Rounds

Silicon Roundabout Series B Investment Rounds

Silicon Roundabout Series B Investment Rounds

The average deal size was $10m but again with a distorting outlier of $50m.  Without this the average deal size was $5.85m

Series C Investment Rounds

Silicon Roundabout Series C Investment Rounds

Silicon Roundabout Series C Investment Rounds

The average deal size was $13.2m

The deal sizes show a clear and expected increase in size which reflects the increasing maturity of the business.

Investors

I have identified 18 Angel investors and 48 venture capital/funds investors.  I will focus on the latter as a discussion of Angel investors is a much broader topic.

The key question is where are these companies getting their funds from?

Of the 48 Fund investors, 3 come from Russia, 7 come from Europe (excluding the UK), 20 come from the USA and the remaining 18 are UK based funds.  This is the most encouraging finding of my investigation.  The breadth and wide availability of funds in Silicon VALLEY is frequently documented.  I am delighted to have clearly identified a small group of venture (and by that I mean real risk) taking investors who are based in or have offices in London.

It is interesting to me that of these investors, only 3 have made more than one investment; one fund made 6, one fund 3 and the third 2 investments.

In my own databases of early stage investors I have a total of 167 investors including only 9 of the companies involved in the deals in this study.  While there is clearly a market for early stage deals, the types of companies and their perceived risk clearly affects the willingness of any particular investor to commit.

It is also important to consider that each investor will have his/her own requirements regarding revenues, profits, sectors and sub sectors, stage of investment and that this will lead to a fairly rapid reduction in the number of potential investors.  In addition, investors avoid having competing companies in their portfolios as this leads to conflicts of interest.  Therefore if an investor has just invested in a company similar to that for which you are seeking investment, it is more likely not less likely that that investor will decline the opportunity.

Management

The key factor in an investment decision is the confidence of the investor in the management team.  This analysis clearly has not addressed this and without interviewing the companies involved it is not possible to come to any positive conclusions.  One might reverse the issue and observe that the companies who have successfully raised money clearly have leadership which has impressed the investors.   Those who have not raised money may simply not have needed to raise money and this cannot be taken as a criticism of their management teams.

Valuations

This study does not have any measured metrics for valuations.  Typically at an early stage investors look for between 25%-40% of the company for their investment regardless of its size.  Friends and family rounds can mitigate this dilution at the early stage as the management have more control over the issue price of the shares. In addition, companies try to develop progressive valuations, increasing each round, as milestones are met and progress in the business plan delivered.

Silicon Roundabout Funding

Silicon Roundabout Funding

Conclusions

This analysis allows me to draw a number of business development conclusions.

1.  If you are seeking investment you stand a much better chance if you have a scalable and IPR based offering than if you are an agency or consultancy.

2. There are a core group of UK based investors with an active appetite for early stage investments.  I would generalise and say that I would expect all these funds to expect post-revenue opportunities and not seed investments.

3.  There is clearly some momentum behind Silicon Roundabout, but the size of the investment pool is still very limited compared to the US where there is a wider pool of real risk based investors

4.  If you are seeking institutional funding for a technology opportunity you need to investigate the market in depth and specifically target those investors whose criteria most closely apply to your own circumstances.

5. Angel investors also have their own criteria and often invest in smaller amounts.  This often means that management need to put together syndicates of investors.  Angel Investor Groups exist who take some of this work out of management hands but the individual investment decisions still remain with the investors and so their are no guarantees of funds.

6. Investment rounds are very timely and will absorb a considerable amount of management attention.

Silicon Roundabout Funding Conclusions

Silicon Roundabout Funding Conclusions

I hope this discourse is of interest and I would welcome any feedback or discussion.  Please contact me through email, phone or Twitter – details are on my contact page of my website here.  If you like this please RT.