What a Venture Capitalist (VC) really wants
Covid has defined radical disruptions and, more than ever before, raising private capital is under scrutiny for funding the next unicorn. The sad reality is not every entrepreneur will make it, and it’s not because they don’t have a brilliant idea. In our roles, we get candid insight from VCs on what they are really looking for, and the consensus seems to be:
Know your destination but explain your journey: Vision is key but not a substitute for a precise thought through plan. If you want to convince a VC on how your start-up will get from no revenue to seed, to Series A and so on, metrics on a pitch deck need to be realistic. If a pitch can quantify metrics, this opens the door for in-depth discussions about how VCs can help you on this journey. VCs want to find the right fit for their portfolio. If you are approaching a VC then it’s on you to justify the match. It is useful to highlight if the VC has invested in similar companies or at same lifecycle stage to you. If your plan is for expansion to a particular jurisdiction then you should research that (e.g. a VC with strong links to or an arm in China will give the best guidance on penetrating that market).
Overextended valuation is a turn off: It’s apparent quite quickly where a business is overvalued. VCs will want to understand why a funding round is being set at a valuation that is an obvious mismatch to scale. The urgency to close rounds leaves little time to properly evaluate deal terms but founders should avoid unexplainable dilutions on the company’s cap table. There is no right or wrong to what is an acceptable dilution but what should be clear is why that decision was made.When approaching a Series A or B round, VCs will be sceptical if founders are diluted beyond 35% as they want to ensure they remain well incentivised to make the business succeed. VCs are interested in hearing about the company’s valuation and if a founder cannot defend this – it’s generally an issue.
What’s my salary? Naturally an entrepreneur will want to be compensated for their hard work and VCs are closely interested in determining a founder’s salary. VCs understand considerations are different for varying circumstances (e.g. a founder-working-from-their-parent’s-garage and those who come later in life to entrepreneurship will have differing lifestyle constraints). The 2020 VC market view for a London based founder’s salary is between £60-120k p.a. where the business has raised at least £3-5m at Series A. VCs are mindful that founders need to be incentivised and a financial strain at home will impact the business eventually.
Walking on eggshells is a no-no: It’s a universal truth that no business is perfect and things will go wrong. It is at such times that VCs appreciate an engaged degree of transparency, where founders treat them as one of the team. VCs find manipulation of bad news challenging, as it leads to problems being experienced as ‘shocks’ by the VC. We have heard VCs quote Warren Buffet’s famous words “what you find is there’s never just one cockroach in the kitchen when you start looking around” and that is how VCs perceive poor founder communication. Speak to your investors regularly, even when you are not raising money, and share the downs as well as the ups.
UK vs. US VC market: UK VCs caution that founders shouldn’t just be tempted by the lure of big money from the US. It’s no secret that US investors don’t hesitate from giving the highest valuation, but UK companies should also seriously consider which VCs give them the highest optimisation. Most US VCs will want the company to relocate to the States, and many founders fail to appreciate that before progressing matters with a US VC.
Covid’s impact on VC investment: We spoke to various VCs and understand that investment activity is on the uptick as global economies resurface from lockdown. The general view is that any discouraging statistics should be considered with a pinch of salt as London’s start-up ecosystem is dynamic. During lockdown VCs have continued to hear pitches (albeit virtually) and come across start-ups that they would consider as right-idea-but-wrong-time. As a result, VCs now particularly consider long term sustainability of a business, and want to understand if a company would have grown in a normal market but has struggled only due to Covid. Investors are looking for companies with strong pre-Covid growth that can be demonstrated to eliminate doubts about the company struggling due to some other reason. VCs are particularly impressed by extraordinary founders who have navigated Covid by pivoting their business. Founders who have held their nerve through the crisis have received VC investment, where they otherwise wouldn’t.
There is no definitive list. In short, VCs want to feel connected with a business and confident that it will generate returns. Founders who can consciously and cogently relay that are what VCs really want.
Natalie Pringle is a specialist in Business Development for the equIP accelerator program at international law firm CMS. Mumuksha Singh is a corporate lawyer at CMS in London. The views expressed here are personal to the authors, based on discussions with London VCs.