We recently hosted our first Venture Capital Funding Breakfast where six of our fastest-growing customers pitched to over 20 venture capital funds for investment. They had just 3 minutes to deliver their pitch and 5 of the 6 successfully went on to secure follow up meetings with investors. Following the event, we’ve dived into the world of venture capital finance to bring you a 4-part series that looks at:
Is VC funding right for your business?
What do VCs look for in a business?
How to deliver a successful pitch
Alternative financing options if your business isn’t ready for venture capital
In our first article, Gareth Jefferies from Northzone talks about 5 key things to consider when determining whether VC funding is right for your business. Northzone is a leading European venture capital fund that has, over the course of 20 years, invested in 120 technology-enabled businesses such as Spotify, iZettle, Trustpilot, and MarketInvoice.
Part 1: Is VC funding right for your business?
By Gareth Jefferies, Northzone
Companies that need capital to grow their business have several options available to them: business loans, personal loans, family and friends, crowdfunding, angel rounds, services like MarketInvoice that free up working capital, venture debt, re-mortgaging, the list goes on. Venture capital is just one of these, and only makes sense for a very small proportion of businesses. To put into context, here at Northzone, we see around 1,000 companies per year, and invest in about 1% of these.
Venture capital investing means a fund purchasing shares in a business to hold a significant minority stake, usually in the range of 5-25%, with a view to selling this stake several years down the line either in a trade sale (i.e. an acquisition) or in rarer cases, an IPO. If you have evaluated all the options, and think venture funding might be for you, there are five key considerations to bear in mind before you start perfecting your pitch deck:
1. You understand the VC model and the fit with the type of business you are building
VC funds operate a fairly specific model and the businesses they fund reflect that – because investments are risky and (sadly) many fail, VCs need to believe that there is a strong chance that the business in which they’re investing will create very large returns to the fund. As a result, venture capital isn’t a great fit for ‘lifestyle’ businesses, where the end game is to scale to a few million in revenue and generate solid profit – VCs need to look for entrepreneurs that are shooting for the moon. This means a large addressable market and the ambition to take it on and scale fast. Fund size and the stage of your company will also come into play: exit expectations scale proportionally with fund size.
2. You’re comfortable with the implications
Venture investment brings with it a number of fundamental implications – dilution, board composition and control, a fiduciary responsibility to an outside shareholder and so on. It’s crucial to understand and manage these and make sure you’re comfortable with what they mean for you and how you run your business. Of course, you may have already taken in angel investment, in which case this will likely be familiar to you.
3. You have a plan and are ready to act
Venture capital investment is really about adding fuel to the fire, and enabling you to move fast. Once you can set out what milestones you want to achieve and how you’ll achieve them, you can calculate what capital you need to do so and use that as a target for the funding round.
4. You understand where your business is at
Very few institutional investors will invest at ‘idea-stage’, or before the founders are working full-time on the business. Broadly speaking, the various stages of investment have the following characteristics, which may help you figure out what kind of stage your company is at:
- Seed Stage – Investment is generally used to bolster the core management team and product, sort out the commercial model and generate some customer acquisition.
- Series A – By this stage, there’s generally a meaningful amount of traction, a good grasp of the unit economics, and the business is fundamentally ready to scale. Funding is generally used for customer acquisition, further team building and product development.
- Series B and beyond – Team, product and customers are in place, at this stage the funding will enable you to scale significantly in core markets, grow in new ones and expand into new product lines to reach new customers.
5. You’re in it for the long-haul
If all goes well, the VC-entrepreneur relationship is a long-term one. Early stage investors may be involved for 10 years, and even later stage investors may hold a position for 5+ years, so it’s important to be conscious of that before bringing a new investor on board (and doubly important to choose your investor carefully!).
If you’re happy with all that and you’re ready to kick into gear, VC funding may be right for your business – it’s definitely not right for everyone, but when done correctly it can help you take your business to amazing new heights.
Gareth joined Northzone in 2015 where his main area of focus is consumer and B2B technology, in particular the fintech ecosystem in the UK. Prior to Northzone, Gareth spent his formative years at OC&C Strategy Consultants, advising on a mix of pure strategy projects and commercial due diligence. He holds a degree in Economics from Cambridge University.