What VCs want

Although private equity is getting a hammering in the media at the moment, there is one area that needs to be differentiated, and that is venture capital.

It needs to be said that venture capital is a different area altogether from large, leveraged buy-outs and has everything to do with growing companies (often loss making), which are seeking to raise relatively small amounts of money.

This is the high-risk and high-reward sector of the private equity world and it can be a lifeline for a growing company hungry for better margins. I see it as a key ingredient in UK Plc’s ability to foster and develop mostly high-tech companies outside the large multinationals.

So the excessive gearing and bank loans to the sky that you see among the private equity giants, which the British Private Venture Capital Association is currently engaged in reviewing, isn’t relevant here – you can’t gear up on a company with virtually no assets or profits.

For many of you, venture capital funding is an important option to consider when expanding. So from the viewpoint of a venture capitalist, what are the things that switch them off or make their eyes light up with pound signs?

Let’s start by discussing sectors. If you’re in a ‘hot space’ like the internet, bio-technology or alternative energy, there will be more interest than in a start-up software company in point of sale or accounting.

Whatever area you’re operating in, the younger the company, the higher the risk and hence the need for the potential rewards to be bigger. This will include ventures for which the price paid for comparable businesses has been very high.

This is more likely to be in sectors that show real potential. Not just growth of five per cent to ten per cent, but 50 per cent-plus. Global market opportunities are also helpful but not essential.

The business cycle relevant to that sector will also be important for VCs. Some sectors are mature and a business plan for a roll-up or consolidation play will be more likely to be of interest than raising money for general business expansion.

Why invest?
There also needs to be a compelling reason to invest. I’m talking about something that excites the potential investor, firing their imagination, but also providing reassurance that the expertise is genuinely there, like seeing evidence that a management team has knowledge of how to generate profits in a similar sector.

In mature businesses, it may be as simple as the entry price for the investor. By this I mean that if it is cheap or if the management team can really demonstrate how to make a loss-making business profitable with a few logical steps. This, too, would work.

Over the years, I’ve found that the following guidelines provide a good rule of thumb:

• First and foremost, your investor must trust your integrity. They may not even like you but if they don’t trust you, you haven‘t got a chance.
• Don’t overpromise in your first meeting. Make your projections sensible, with a range of potential scenarios good and not so good.
• Be candid about the areas of concern in the business, but also have a clear action plan on how to deal with them.
• Legal agreements sound good in theory, but they won’t cover all the bases. As most investors know, taking a risk on a business is one thing – being ripped off is quite another.
• Show you have a rounded team, as opposed to the company being driven by one person. Where there are gaps, possibly because you can’t afford to hire all your needs
• At this stage in the businesses development, make it clear you are aware of them and give examples of people you know who could fill the gap when you can afford too.
• Make sure your business plan is clear, crisp and covers all the major points, particularly the financials and your marketing and sales strategy.

Above all, when you have the first meeting with a potential investor, remember not to appear too product focused. Sure your product is good, but being a rounded businessman is more important than being a technical guru.

You probably only have ten minutes that really count so make sure you articulate your business so that it is simple to understand.

You will be amazed at how often people come in and take forever to explain what they really do!