Research from UK Innovation Hub and Tech City UK reveals what start-ups really want from their investors, with trust, understanding the company vision, and access to a large network of further investors topping their hierarchy of needs.
New board members, free office space and support when hiring, are the least important factors for these start-ups when looking at early-stage investment options, according to the survey. Understandably, the most important factor for companies considering raising external investment is personal chemistry and trust with the investor.
“These founders are dead-on,” says Matt Lerner, venture partner at 500 Startups. “Taking money from a VC is like a ten-year marriage. It really has to come down to trust and chemistry. That’s why it’s great to reference check your VCs before you take their money. My old roommate used to say ‘I only trust God and my Mom. And with my Mom, I cut the cards.’”
Interestingly, many of these start-ups have a fascination with equity finance. Two in three start-ups rely on word-of-mouth to find out about investors, and once they do, the majority look to angels (66 per cent), and VCs (54 per cent) for funding, and just over two-fifths turn to accelerator programmes. Only 4 per cent would consider a P2P loan and 14 per cent would consider a bank loan, making the pitch a crucial element for start-ups looking to impress the right kind of investors.
The surveyed 164 start-ups were bullish about their growth ambitions. Three in four have global ambitions, while 44 per cent believe they have the potential to become a billion dollar company, even though over two-thirds were pre-revenue in the last financial year.
36 per cent have already raised funding, with a majority funded by family and friends or a pre-seed programme. Only 9 per cent of funded businesses had received a Series A equivalent investment.
Access to a wide network of investors is the most important higher level need. Three in five entrepreneurs say this is key. Reflecting the importance of the personal relationship, over three-fifths would also value an investor who provides informal guidance and coaching.
“When looking for investment, it’s critical to identify your point of need (in excess of capital) and ensure the investor or fund you’re approaching is the right fit; they understand your stage of development, invest at the right stage for you and have a proven background to support you,” advises Carlos Espinal, partner at Seedcamp.
Personal chemistry emerges as a critical factor. There is near consensus from founders that the ideal investor will be someone they like and trust, and who is in tune with their product and vision. “We are incredibly proud to have built strong relationships with the founders we’ve backed over the past ten years and in a time of crisis or when looking for advice or counsel, our founders know they can talk openly with us,” Espinal adds. “It’s certainly not a case of investor injects capital and then the relationship ends. It’s critical that both founder and investor feel they have a fair deal that will allow them to work together for a long time after the investment is complete.”
The priority hygiene factors relate to the ease of on-boarding and reassurance that the investor has a strong track record. A low maintenance relationship is also important for over two-fifths of founders.
The survey also revealed that the top three needs for start-ups once they have secured funding is investment into customer acquisition, product development and talent.
Tech City UK’s Tech Nation 2017 survey found that just over half (51 per cent) of business founders or CEOs cited lack of supply of skilled workers as a challenge, whilst just over two-fifths (42 per cent) mentioned access to finance. In this survey, however, access to capital emerges as the number one growth challenge for entrepreneurs and aspiring entrepreneurs.
Nine in ten say this is a challenge, some way ahead of marketing, sales and access to talent. With the majority of survey participants being early stage businesses where they perform all the important tasks with the help of a small team, cash flow and sales are pivotal, while the challenges of growing a larger team are some way off.
In terms of hiring talent, 47 per cent of these start-ups say programming skills are the most in demand. Front-end and back-end developers are the most challenging hires for new businesses, followed by other product related roles such as UI/UX designers, mobile applications developers and product developers.