How to target PE & VC firms
Only target VCs whose investment preferences match your proposition:
- Stage of investment
- Preferred business sectors
- Amount of investment
- Regional preferences
Elevator Pitch
Cover:
- Product / service
- Market
- Revenue model
- Team’s background / achievements
- Competition
- Competitive advantage / USP
Need:
- A “hook”
- Passion
- Request (follow-up meeting / referral)
What Venture Capitalists look for
Commercially viable
Potential for sustained growth
Management ability - exploit and control growth
Risk vs reward
Return vs. investment criteria
Porter’s 5 Forces
For tech companies:
IP
Market need
USP
‘First mover advantage’ not always necessary for success
Deal Flow
- Name and market position
- Unsolicited approaches from management teams
- Introductions from intermediaries
- Referrals from portfolio companies (current and previous)
- Leveraging investors / advisory board members
- Introductions from other PE firms (incl syndication)
- Investment forums
… and - Active sourcing of deals
- Personal contact and research
- AI to comb databases, press, regulatory filings.
VCs Dilemma (from Kenney and Florida, 2000)
Errors of omission - not investing when one should
Errors of commission - investing when one should not
Rule of thumb - for every 10 investments:
- 3 are complete losses
- 3 or 4 neither succeed nor fail; difficult to extract original investment
- 2 or 3 return > or = 3x
- 1 or 2 return > 10x
Differentiation is key for deal flow generation
- Proactive not reactive approach
- Sector focus, executive expertise, management style, empathy, adding-value
- Track record with portfolio companies
- Profile in marketplace
- Understand market, advise on strategy, industry connections
Branding of PE firms
Important for PE firms to have a strong brand. PE Branding Survey (BackBay Communications)
Limited Partners - IRR and whether top quartile or decile, communication is key between PE firm and LPs.
Entrepreneurs - trust, support for growth
Deal sourcing - brand (reputation) can be a key reason firm gets to see deal in first place
Reputation Building
PE / sector events
PE / sector publications
Press mentions
Involvement with PE industry organisations
Other sources of finance for companies
- Improved cash flow management techniques
- The company’s own resources
- Friends, family (and fools!)
- Fellow directors and employees
- Business Angels
- Equity crowdfunding / peer to peer lending
- VCTs, EIS, SEIS
- Government sources and Multilateral Agencies (eg. World Bank, EBRD, Asian Development Bank)
- Strategic partnerships
- Banks - overdrafts, short, medium and long term loans, senior debt,
- Government guarantee loan scheme
- Bonds
- Factoring receivables and invoice discounting
- Asset finance, leasing and hire purchase
- Project finance
- Mezzanine finance (sits between equity and secured debt)
- Listing on AIM or Main Market.
Maximise internal sources of finance
- Effective cash flow forecasting systems
- Customer incentives for prompt payment
- Rigorous credit control procedures:
- Customer credit checks
- Prompt sales invoicing
- Incentives for early payment
- Age analysis of debtors
- Monthly statements to customers
- Reminder letters
- Delay payments to suppliers – but within credit terms
- Maximize sales revenues
- Control overheads
Business Angels
High net worth individuals who invest their own money into unconnected, unquoted companies for potential financial gain.
16x more start ups funded by BAs than VCs in USA (Business 2.0)
Different Types of Angel Investors
Operational Expertise Angels - Relevant Industry Experience but not Relevant Entrepreneurial Experience
Financial Return Angels - No Relevant Industry Experience and no Relevant Entrepreneurial Experience
Guardian Angels - Relevant Industry Experience and Relevant Entrepreneurial Experience
Professional Entrepreneur Angel - No Relevant Industry Experience but Relevant Entrepreneurial Experience
To attract angel capital:
- Working prototype
- References from potential customers
- Angels may invest in groups
- And in specific businesses - e.g. tech start ups
- Usually they want a hands on role
Crowdfunding
Reward based: delivery of product or service, invitations to events
Donation based: money for a cause, charitable giving
Lending based: peer to peer lending, incl fixed interest rates
Investment based: equity crowdfunding
