Some are blaming this decline on Brexit, whilst others believe this is part of a wider correction in the market. According to CB Insights, the volume and value of deals in the US declined in the last quarter by about 25 and 40 per cent respectively as compared with 2015. But whatever the reason, how can you secure venture capital funding in the current climate
Alternatives to crowdfunding and venture capital funding
Much venture capital funding in Europe have moved away from doing seed investments. Crowdfunding and others have filled some of this gap, but what are the other alternatives?
(1) Self-funding
It is often forgotten by many start-ups, but a company’s customers are the best source of funding in the long-term. Focussing on revenue and customers early in a company’s life is vital. Companies like Market Invoice or Satago provide invoice financing for SMEs, which can assist cash flow.
(2) Angel investment
Despite the rise of crowdfunding, angel investors are still an important source of financing for start-ups. Although we understand that the number of applications is down this year, Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) provide an attractive means for high net worth individuals to invest in early stage companies.
(3) Debt finance
Although, most early stage business will not qualify for traditional business loans, there are a number of schemes (such as Startup Loans and the Enterprise Finance Guarantee Scheme) which are aimed at start-ups. The government has also recently introduced the alternative finance platforms scheme to help SMEs access finance. Through this scheme, UK banks will pass on the details of small businesses they have rejected for finance to alternative platforms for potential funding.
(4) Research and Development (R&D) tax credits
A number of early stage clients opt to fund themselves using tax credits. Up to 32 per cent of the money spent on R&D can be reclaimed from HMRC. The funds are either received as a refund on corporation tax or, in the case of loss-making companies, a cash credit.
(5) Government grants
There are a number of UK and EU-backed grant programmes available to startups. These programmes aim to support early-stage companies carry out research and development projects.
Continue reading to find out what investors are looking for.
Image: Shutterstock
What are institutional investors looking for?
In the current climate, whilst venture capitalists may look more closely at regulatory or currency exposure (amongst other things), broadly their investment criteria will remain unchanged. In general, investors will be focused on the following:
(1) The team
This is probably the most important criteria. Regardless of how good the product or idea is, investors are unlikely to invest if they do not believe in the team. We have seen instances, where the investor goes into an investment with the idea of replacing the CEO, but this rarely ends up being a great investment.
(2) Market size
Investors want to invest in big markets. They want to see how big a company can become. Companies will need to convince investors on the potential of their product, the current state of the market, the competitive landscape and show that there is a demand for their products.
(3) Traction
Each fund will have their own definition of traction (revenue, user numbers, customer contracts, etc.). What investors are really looking for is familiarity with the product/company and its progress. It is therefore important to (i) engage with investors early and (ii) maintain that dialogue (whether you are fundraising or not).
(4) Investment
Investors need to invest a certain amount of capital in order to make the returns they want. They are very focussed on the investment amount and the amount of ownership they receive. Investors need to own a certain percentage (typically between 15-20?per cent of the company) in order to get the returns they want. Also, receiving £20m for a £1m investment (regardless of ownership) may represent a great return, but it probably doesn’t move the needle if you are a £400m fund.
Giles Hawkins is a partner in the corporate team at Ashfords?
