Venture capital, accepting investment from growth investors ready to turbocharge your business, can strap booster rockets on your start-up. You could be joining the fabled ranks of WhatsApp, Facebook and Twitter, all of which made staggering returns for early backers.

Be warned though, the odds are stacked against you. Venture capitalists receive thousands of pitches each year but only around 1pc convert into investments.

What is a venture capitalist looking for?

Venture capitalists look for one-of-a kind businesses, the kind of businesses which can change our world, disrupt existing industries, and – crucially – make 10x returns on investment in less than seven years.

Investors ultimately invest in people, not just a business plan. They need to believe in you and your ability to deliver, not just your financial projections. It’s the whole package – your passion for what you’re doing, a solid business plan with a great executive summary and clear preparation. These are the things that are important for venture capitalists to see. Investors look for someone who’s hungry, and who will push themselves to succeed.

Tara Reeves, a partner at Omers Ventures Europe, whose parent fund was an early backer of Shopify, says: “Basically, we’re on the hunt for unicorns. Most venture capitalists are looking for businesses that have the potential to be extremely large. They’ll expect half of their investments not to turn a profit, and for the other half to do well. Usually, it’s just one or two do well enough to do what’s called, ‘returning the fund’ – making enough money to cover the whole investment portfolio.”

Matthew Evans-Young, investment manager of VC fund Foresight, says: “We’re really looking for domain expertise and a leadership position in an identified niche. We’re interested in proven management teams who know their industry, who have a clear understanding of their market product fit, and how they’re going to fit into that.”

How do you find a venture capitalist?

Evans-Young says that reaching out to founders is not something the market is particularly good at. At the moment, referrals are done through personal networks.

If you don’t do your own research, you’re likely to approach the wrong people. Research online, looking at associations such as the BVCA, and see what the firms you’re interested in have invested in before.

Most investors work within specific areas, so research will help you get a sense of what sort of investments they’re interested in; look at their websites and check whether the fund has previously invested in a business like yours, although not one which directly competes.

Reeves says: “I’m always surprised that founders don’t diligence their investors enough. It’s really hard to get investors off your board once they’re in. I encourage them to talk to existing entrepreneurs in portfolios about when investments have gone well and when they’ve gone badly.”

Get in touch with the owners of companies similar to yours that the VC has invested in. People are generous with advice. What should you know about this VC? Where is the gap in their portfolio? Could your start-up be the right fit?

The best possible introduction to a VC is from the CEO of a company it has already invested in.

‘A warm introduction is much more powerful’

Reeves says: “Those are the introductions I take most seriously because they know how hard it is to get investment from our firm and they trust our judgement. The next best way to get an introduction to a VC firm is through angels who’ve invested in their business. The truth is, a warm introduction is much more powerful.”

Do not waste your time approaching investors who don’t invest in your sector, or who invest outside of the sums you’re hoping to receive.

Also, some professional services firms such as PwC do run programmes for founders trying to raise, connecting them with investors.

What do the different funding rounds mean? (Series A, Series B, etc)

Essentially, each letter corresponds with the development stage of what your start-up is looking for by way of funding.

Historically, Series A is to identify product-market fit, Series B is to expand, and Series C is to double down on growth.

Series A

This kind of funding is to demonstrate that your start-up has a proven track record and the ability to scale quickly while providing a serious return for investors. Ideally, your Series A fundraise is for a market-proven product which already has angel backing, which will easily allow you to multiply your revenue within 18 months.

A Series A fund will typically be writing cheques up to £2.5m in funding rounds of £5-6m, if they’re leading the round.

Series B

If seed finance is raised on vision, and Series A on ambition, then Series B is raised purely on facts and figures.

Series B onward is all about building — expanding overseas, launching new products or simply scaling revenues. In this round, start-ups should be well clear of development and looking to expand their market reach. You are looking to compete against larger, more established competitors.

As for when to go for Series B, you should at least be about to turn a profit if not profitable. This is not about asking investors to suspend their disbelief and back you on potential.

A VC will probably write a cheque for between £10m-15m in a Series B funding round totalling £10m-£30m.

Series C

Series C raises are considered a safe bet from an investor’s point of view. You have proved to VCs that you will be a long-term success and can show how your original investor’s shares have multiplied in value. This stage of fundraise could also be used to buy a smaller competitor or prepare for acquisition yourself. The VC will also want to discuss its exit strategy, either through a trade sale or going public.

Other financiers including investment banks and private equity firms could also be involved in this funding round.

However, Evans-Young is sceptical about the whole idea of funding rounds. For him, there is just a certain amount of money that a founder is hoping to raise.

“There are too many terms: seed, post-seed, Series A … they don’t really mean anything. The core question is, are you ready for institutional funding? Are you ready for the higher level of institutional interaction? Or are you better suited to remaining with angel investment?”

Future funding rounds

One question you should ask is which funds has your VC gone on to raise funding from in later funding rounds? VCs spend all day talking to later stage funds about subsequent funding rounds. It’s a symbiotic relationship as later stage funds realise that seed and Series A funds are their source of deal flow.

Ask which later-stage funds your prospective VC has relationships with.

What can a VC offer besides investment?

Omers Ventures Europe sees itself offering three things in addition to VC funding: access to follow-on funding, help with recruitment and introductions to customers.

Says Reeves: “Many VC funds will have portfolio acceleration teams. Can they help you with recruitment? VCs can often help you close key hires.”

• Support services: Many of the larger venture capital firms have their own in-house marketing, legal, tech and recruitment teams which will offer their services to start-ups and smaller businesses receiving investment.
• Strategic introductions: Often experienced entrepreneurs themselves, investors or partners in venture capital funds should have a wealth of contacts that your business should be able to tap into. These could include potential partnerships with larger corporates, new investors or clients, or even potential hires.
• Prioritising strategy: Helping to formulate strategy and direction, a VC partner can ensure your business is prioritising properly – from the top down.
• Wider market knowledge: Venture capitalists can bring a wider view of the market to your business. A knowledgeable VC can provide insight into overseas markets, potential new clients and even exit opportunities.
• Best practice: VCs can add significant value by helping instil best practice in areas such as financial controls and reporting, business ethics and contractual issues and procedures.

Evans-Young says: “Ideally, there’s a network which comes with investing in multiple companies and that’s a combination of experienced people in industry and having seen what works and what doesn’t work. A lot of small companies that have similar challenges and being able to cherry pick and share best practice is a pretty important thing that VCs can bring to early stage businesses.”

How do you prepare for a VC meeting?

The business plan is critical. Venture capitalists see lots of these every day, so it’s important to stand out. When creating a proposal or business plan, put the important points at the front – if your business plan doesn’t grab them, they won’t bother to read your 10x multiple projections at the end.

Do you research on what companies the VC you’re meeting has invested in and, specifically, which companies the LP who you are presenting to has personally invested in.

Send your pitch deck over beforehand.

Evans-Young says: “That’s a good test for a VC. Have they read the pitch doc before they go into the meeting or not? If they have, then that’s a good indicator.”

You could always use your pitches to VCs you are not so excited about working with as practice sessions, giving you confidence to walk into the room with a VC you are keen to be with.

Share your worries

Fundraising can be an emotionally draining, lonely. Often a CEO cannot share with employees because they have to put on a brave face. The sheer effort of having to be happy and up all the time can be draining.

Find someone else, possibly an angel investor, who you can offload your worries onto. They can be a sounding board for you ahead of your VC pitch.

How to pitch your idea to a VC

Once you are in the meeting room, you need to have a polished PowerPoint presentation.

Foresight expects a pitch deck to cover the team and their background, the product or service, the market, the size of the opportunity, why the company is well placed to capitalise on that opportunity, and, most importantly, the financials.

Evans-Young says: “You would be surprised by how many of those pitching don’t include financial information in their presentation.”

At the seed funding stage, the deck should identify the problem and explain why the founder is the person to solve it. By the time you get to Series A, the deck is no longer a problem statement – you have to show the progress you have made tackling it.

Keep your pitch deck to 10-12 slides.

Your pitch deck needs to include the following points:

• Make your statement of purpose
• Introduce your team
• Identify the problem
• Present your solution
• Why now? Why is your timing so good?
• How will you make money?
• Five-year revenue projection
• What’s the potential size of the market? How can your investors make a 10x return?

How to behave in the room with a VC

Taking the time to invest in some presenting skills training can be a huge help, as it teaches you to get across your ideas in a confident and fluent way.

• A clear story helps you to stand out.
• Have a contingency plan if a VC asks what happens if things go wrong or your original vision doesn’t work out.
• Be upfront and transparent about weaknesses in your business plan rather than hope nobody notices.
• Do not be defensive.

One sign as to how engaged a VC is will be the back-and-forth and sharing of ideas, rather than a formal presentation with no questions.

Evans Young says: “Unlike Dragon’s Den, we’re not trying to trip people up for entertainment value – we’re genuinely interested in their business.”

Reeves agrees: “It’s not an interrogation. We want to understand why you as an entrepreneur have decided to go down this difficult path, which can have outsize rewards.

“VCs are basically optimistic people. Most of the good VCs will have seen their investments go from nothing to becoming huge unicorns. I approach every meeting thinking, what would happen if everything went right?”

What to do once you’ve finished your presentation

At this point you may want to set a ticking clock. You could give your VC a deadline by when they need to decide whether to invest in you or not. Otherwise you will try elsewhere. Make sure that ticking clock is real because of other interest though, not just a posture.

“It’s good to leave with an agreed action, whether it’s providing further information or an investor committing to feedback,” Evans-Young says. “Speed of response and speed of movement is generally related to level of interest.”

What if the VC says no to your pitch?

All it takes is one person to say yes. Persistence is the name of the game. Ask for feedback on what was wrong with your pitch and adjust accordingly. It may be that there is nothing wrong with your pitch, it’s just not the right fit for the VC at this time. Take on board what the VC is saying and, when you’re ready, go out again. It’s just a question of finding the right fit.

Further reading

Growth Business UK venture capital directory

Top 5 sectors attracting venture capital finance in 2019