Securing institutional investment in your startup
For many business founders, raising institutional investment can be daunting, especially in today’s economic climate – but it does not have to be.
This article by Simon Porter, Investment Director at Pembroke VCT, dispels a few myths about how it all works and gives some tips on how to give yourself the best chance of securing investment from a Venture Capital Trust (VCT) such as Pembroke.
What is a VCT?
A good place to start is looking at what a VCT is and if your business qualifies for investment.
A VCT is a specific type of fund that only invests in early stage, entrepreneurial businesses. As investors receive tax incentives for putting their money in a VCT, HMRC applies strict criteria for businesses to qualify for funding.
There are a few trades that are excluded from VCT rules including property development, banking, and farming. The business must also be small, with fewer than 250 employees and young, less than seven years old.
If you are a more established business, you may need to look at other sources of investment.
How to approach a VCT
The overwhelming majority of the businesses we invest in have come to us directly. Sometimes this happens through our network or an introduction by another investor or legal advisor; often that first contact comes from a founder who has reached out to us via email or LinkedIn. We also have a form on our website you can fill out.
We cannot speak for every VCT, but we work hard on being responsive and aim to reply to every enquiry we get.
Many of the people in our firm have been business founders themselves and know how hard it is to secure investment and run a startup at the same time, so we focus on being communicative.
If for any reason the investment is not for us, for example, if it is too early in your business’ journey or you are not in a sector we focus on, we will let you know as quickly as we can.
While a direct approach will get our attention, the best advice to founders is to do some research before reaching out. Looking for similarities between your startup and the other businesses a fund has backed will save you valuable time and allow you to pursue the most likely prospects.
If an investor has declined to back your business, try and understand why. It may be that the investment opportunity is too small, or the business needs to reach certain milestones. If this is the case then take time to understand what the investor is looking for, and whether they might be a good fit for a later round. Stay in touch, and an initial ‘no’ might become a ‘yes’ next time.
What happens if we are interested in investing
The first thing we will do is ask to talk to you. Today, that usually means a video conference. If that goes well, we will invite you in for a face-to-face meeting.
This is when it gets exciting; because it is your chance to show us the magic behind your business.
When we first met Peckwater Brands we thought their virtual kitchens idea sounded interesting, but it was only when we met the founders that we truly understood that their data-led approach meant a business that would work for everybody; customers, restaurant owners, and delivery platforms. We knew it was destined to succeed.
Sometimes at this stage we realise that the business we are talking to is not quite ready for investment. If we like your idea, we will give you advice and happily keep in touch. When your business is ready, we will look at it again.
This is what happened with Pasta Evangelists – the fresh Italian food delivery business – we saw the team a year before we invested. We recommended that they consider an omni-channel approach and once they put that in place, we were able to make our investment.
The process of securing investment
If the face-to-face goes well and we decide we want to start the process towards investing, we will put together a short proposal for our Investment Committee setting out what your business is, some of the financials, and why we would like to back it.
If the Committee likes your business too then we will ask you to present to them. You will need a pitch deck that tells us about you and why you started the business, your product, the markets in which you operate, your traction to date and your forecasts for the next couple of years. Most importantly, you will need to set out how much you need to raise and what it is for.
If your presentation is a success, we will enter the long-form due diligence process. This is the point when we really get under the skin of your operation. It can take up to three months for us to understand the financial, commercial, and legal aspects of your business and we will want to meet your team and speak to some of your customers as part of this work.
From the first meeting to the investment, it usually takes around 3-4 months, depending on the availability of information.
You have secured your investment – what happens next?
How much an external investor works with you once you have received investment can vary hugely – our financial investment in your business is only the start of a close working relationship.
We often support our investment companies on governance, ensuring there are Board meetings and monthly management accounts. Putting in place good governance at an early stage helps give future investors confidence and may help improve the size and timeliness of an exit.
We will also help with recruitment. For instance, bringing in a good, strategic CFO can make your investors’ money work harder, and a well-connected Non-Executive Director can open new doors and networks. We will help you identify the right people for these roles.
Through Pembroke you will become part of a network of startups who you can lean on for advice or contacts. We also host events where our portfolio of founders can connect, including workshops with expert speakers. This peer group is one of the real unsung benefits of VCT investment.
The challenging economic climate of the past 12 months has made investment more difficult to come by and valuations more conservative. However, there is still investment available for the right businesses and a good investor will steer you through the process, keeping you informed and supporting you at each stage.
Critically, if you find the right partner, then their investment in your business will be a lot more than just financial.