At Rise Ventures, we currently partner with over 130 UK and US-based Venture Capital firms. Whilst all VC’s have their investment thesis (which may focus on a specific vertical or company stage) it is evident that there are certain business decisions and/or metrics which can lead from a promising proposition to a firm ‘NO’.

Throughout this article, an entrepreneur will be able to identify key points to correctly position or understand the missing parts of their proposition to gain the backing of a VC.

1. Fit – Sector, investor interests

As previously mentioned, VC’s often have a particular investment thesis in which they target specific industries and company stages (among various metrics that won’t be public). It is therefore imperative that before you start your search for a VC, you target those who are a good fit for your business.

The biggest burden entrepreneurs face with raising funds is time spent, therefore having a strategy when approaching VC’s and ensuring that you approach the right VC will ultimately save you time.

The following considerations should be made before approaching a VC;

• The preferred business stage by the VC
• Average Investment Ticket Size
• Preferred Geographies to invest in
• Sector Focus

So which VC is right for you? There is a wealth of information available online on sector-specific/stage-specific VCs. Visible Connect is a great example, where one can identify and connect with institutes.

2. Execution – Board, advisors, executive team, network

Execution is a top priority for a VC or an investor before they deploy funds. Great business models come and go, but great founding teams will always go that extra mile. Industry expertise, experience such as exiting a business, and a strong foundational network will help with investment decision making. Investing in early-stage private limited companies is risky, inexperience and mistakes may come at the cost of financial losses which VC’s want to limit. By ensuring your business has good corporate structure will put you in good stead when speaking with VC’s.

Top tip

At all stages of a business, founding teams should be analysing their internal skillsets and comparing with the business objectives that lie ahead. As a VC will ultimately appoint a representative to your board, they will be ensuring that the board they will join is active, productive, and collaborative in solving problems.

3. Financial – Valuation, projections, exit potential, pipeline, traction, proof of concept.

Arguably one of the most important factors of any investment decision is the financial element. Founders must establish the current and future financial performance of the business, produce projections and estimate a reasonable valuation.

To mitigate risk, VC’s tend to lean towards later-stage businesses because the valuation of later-stage businesses is less speculative as more financial performance data is available. Therefore, with early-stage businesses where there is little or no market traction or proof of concept, it is important to not overvalue your proposition. This is not a deterrent to early-stage businesses, as there are many VCs that specifically seek out early-stage businesses, however, there are alternative routes to be explored such as family and friends and angel investors; these options help a business to either achieve the desired valuation or to bridge the gap to then attract VC investment once market traction occurs.  

Another key consideration to be made when approaching VCs is an exit strategy. Any shareholder in the business will ultimately be on board to not only see the success of a business but also to gain a financial return from their investment. It is key to identify through funding rounds how the financial performance has grown via achieving company targets, as well as how that sustained growth will ultimately come to an exit. Whilst everyone loves a success story of a family business, an investor would prefer to invest in a business with a projected exit.

4. Timing – too early or too late for the VC?

The timing of funding rounds is always a key point for both founders and investors. A business must understand its monetary burn rate and upcoming expenses. A business that is in a poor financial position will not be attractive to an investor when looking for funding. Although, whilst a VC or individual investor may not make a final decision based on low funds a business must note that funding rounds do take time! Business owners should be looking for investment anywhere from 1 year to 6 months ahead of the end of their runway to avoid financial pressures.

To refer back to the ‘fit’ section, timing issues will be less of an issue should one correctly identify VC’s who are looking to invest in your current business stage.

5. Governance – ESG, Financial filings, paying bills on time, business DD

The COVID pandemic saw a huge switch in methodology for a lot of investors, with ESG coming to the forefront of decision-making processes. ESG (Environmental, Social, and Governance) factors are key indicators of a business’s positive impact. ‘The Big Window’ reported that in 2020 69% of investors were considering ESG factors and had started doing so within the last 12 months.  

Another key governance consideration for founders is filings. All investment firms and sophisticated individuals are highly likely to carry out a level of due diligence on the investment deal. To leave your business in the best light when it comes to due diligence you must ensure your companies house filings are up to date to show good housekeeping, as well as ensuring bills are paid on time or disputed rightly. CCJ’s and bad debt can be big red flags for investors, it’s important to ensure you keep your record clean, just like a personal credit – as this can affect the financial offering you are looking to close for your business.  

How can I find out the financial position of my business? CreditServe Company Credit Check

6. Materials – Pitch deck, IM, Financials (considerations of expected, best, worst scenario) 

Unfortunately, investment decisions are not agreed upon over a coffee via one conversation – if only that was the case! Investors of all levels will expect access to a wide range of information to understand the potential and the history of the business, often meaning sharing private, executive-level information. It is important that you have the correct investment materials put together for VC’s or other potential investors to take your proposition seriously.

Materials for your funding round are fundamental, no matter who the audience is. Investors will expect to receive a pitch deck and financial information as a minimum. Requests for more information will often occur after an initial investment discussion. A good idea for founders is to have an investor-friendly data room to house investment materials. Before sharing disclosed information with any party, it would be recommended to have potential recipients of company information sign a non-disclosure agreement.

Below, is a list of documents you may want to include in a data room;  

• Teaser Deck
• Pitch Deck
• Investment Memorandum (IM)
• Current Financials - P&L to date
• Financial Projections
• Letters of intent & Signed orders
• Cap table & Shareholders Agreement

In Summary, ultimately, investment decisions will always be made on how strong the business proposition is, the problems that are being solved, and the financial opportunity that is on offer to investors. These 6 points are not a guide, but they are a tool to prepare you to make the first step towards VC investment and ultimately come across more professional, organised, and understanding of the requirements of a Venture Capital Firm.