Raising Finance

The anatomy of a venture capital deal – as told by a menswear entrepreneur

16 min read

11 July 2017

Former editor

It’s often the poison of choice for ambitious entrepreneurs looking to fuel growth, but what exactly happens in a venture capital deal? Real Business goes under the bonnet to find out.

The growth of smaller funds has meant that smaller pots of institutional capital are now more widely available. To find out what it’s really like to raise money through a venture capital deal we asked Jonathan Kruger, co-founder and CEO of The Drop, to take us through the six key stages.

We’ve also got comments from Matthew Bradley, investor at Forward Partners, who saw potential in The Drop. Forward Partners is a UK-based investor in startups, supporting the best applied AI, ecommerce and marketplace startups and founders, from pre to late seed.

Initial approach

Kruger: The idea for The Drop was formulated during early 2016. I thought that in order to make a big impact and to truly be in with a chance of changing consumer habits, we would need external funding. Lots of people told me to drum up a small amount of money from a group of angel investors with experience and an interest in tech/fashion/ecommerce.

However, I was keen to not only get funding but also hands-on help, so I considered going down the route of seeking out a value-add venture capitalist – an investor who would not only offer a cash injection but also operational support.

Jonathan Kruger

Jonathan Kruger

I started drawing up a list of early stage venture capital firms with an interest in ecommerce and experience investing in fashion tech startups at the early stages. Most investors’ websites indicated that they would need to see a £1m run rate in order to invest, but this wasn’t an issue for Forward Partners.

Bearing this in mind, my co-founder Steve and I went to the Forward Partners Live event at the end of October 2016 and briefly explained the concept to managing partner Nic Brisbourne at the end of the evening. He asked me to send some info by email which I did the next morning – a short email with a link to our demo and an indication of what we thought was a huge opportunity to disrupt the fashion supply chain.

Matt Bradley emailed back and highlighted a concern around scalability which I rebuffed at length. He said I should pop along to the next Forward Partners Live event and have a chat with him, or if I was interested, that he would reserve me a space at the next Office Hours pitch day, which was happening later that week.

Matthew Bradley

Matthew Bradley

Bradley: The morning following our Forward Partners Live event, Nic Brisbourne talked to me about meeting Jonathan and highlighted potential interest in The Drop. The concept was exciting as we know first hand that “full stack fashion” can be a great startup opportunity – we had already witnessed it with partner companies Spoke and Thread. The men’s market is still fairly poorly served for style and fit, so I figured that The Drop was worth investigation

To be fair, what Jonathan and Steve were purporting to do sounded a little like witchcraft and I had my doubts about how possible it was (more on that later). Nevertheless, we’re in the business of financing the improbable so I was excited about the prospect of meeting the guys at Forward Partners Office Hours – a session each month when we throw open the doors to Partners House and invite entrepreneurs to come in and pitch.

It was great that Jonathan was keen to attend office hours at such short notice. It showed keenness and pure belief in his idea.

Keep reading to find out how the office hours pitch went, with only a few days preparation.

Office Hours pitch

Kruger: Steve and I met Matthew at the end of November a few hours after getting back from a visit to our overseas production team.

We gave the backstory to the business and highlighted what we saw as structural inefficiencies within the global fashion supply chain and why we thought that gave bad value to consumers. We showed our demo again and presented a view on what we thought could be a better fashion-buying experience.

Matthew indicated straight away that he would be interested in meeting us again. We met him again the following week along with fellow investor Luke and went through a bit more detail about the traction we had gained so far with our offline business, how much funding we were looking for, what we hoped to spend it on and how we would scale-up.

Bradley: Jonathan and Steve came along to office hours and their pitch was utterly impressive.

When you come across some bright people, who seem like hard workers, who have a great idea, and who are a great “fit” for the pre-seed Forward Partners model, then I’ve got no hesitations in saying that we need a full hour meeting to explore the idea in further detail.

Visit the next page to see how Kruger and the team pitched to a wider audience.

Full pitch

Kruger: In mid-December, we met the full investment team (now including managing partner Nic Brisbourne) and were grilled further on the defensibility of the business, the supply chain, etc. We also looked at the macro ideas around the way the clothing industry was changing and how we could fit into it.

We were very excited to be talking at this level at this stage of the process.

Bradley: At the full pitch stage, I was really impressed by Jonathan’s backstory with Jon Kruger London (the offline manifestation of his business), the way in which he approached customer learning and his hustle in sorting out foreign supply chains (something that I have experience of).

The guys presented a really strong case and I liked how “non-venture” they were – they seemed up for creating a great business, full stop. It’s the type of thing that I’m sure they’d have managed with or without venture funding and that’s a great thing to show.

There were some residual concerns about how possible this “magic fitting suit” witchcraft could be – and then we started mystery shopping.

Read on to see how Forward Partners got closer to the business by dropping in a product partner.

Lean canvas workshop

Kruger: Having spent months getting bogged down in the finer details around the technology and operational aspects of the business, the lean canvas workshop presented a great opportunity for Steve and I to take a step back and look at the business again almost with fresh eyes.

Now joined by Dharmesh Raithatha, Forward Partners’ product partner, we looked at the fundamentals of the business from a high-level view – what were we selling, who we would sell to, how we would find our customers, how we would make profit and what overheads would we expect. We then drew out various assumptions around which the success of the business would rely on and made judgements on how quickly and easily these could be tested.

Given that Forward Partners invests in tranches, with only a relatively small amount of initial capital, we realised that it would be vital to execute the business with as lean an approach as possible – i.e., to test quickly, learn and re-iterate. It was refreshing to see that Forward Partners had considerable experience supporting their investments through this process.

Bradley: As mentioned, we’re super familiar with the markets that The Drop is going after and perfectly suited to provide the support and guidance that the guys needed.

Throughout the lean canvas, Jonathan and Steve continued to impress – happily engaging in reductive thinking on their idea, open to suggestions and happy to collaborate on what the business required and needed to prove over the coming months.

But there was still this damned “is this possible” niggling doubt.

Find out how Forward Partners overcame this niggling doubt on the next page.

Due diligence and referencing

Kruger: We had one major insight from user-testing that led us to the idea for The Drop – that young guys are finding photos of outfits on Pinterest and Instagram that they want to wear, but don’t know how to find them or whether they can find them to fit or even within budget.

Our early customers used to send us photos of outfits they wanted and ask us to make them in their size. We highlighted that many of our early users had quite specific tastes for instance “a jacket with wide lapels”.

In early January, we received an order by email from someone who wanted to buy a jacket with wide lapels for his brother as a surprise and needed to know whether we could obtain his measurements from a few photos. We turned this around in about two weeks and were not so surprised to see that we had been mystery shopped by the Forward Partners team!

There were a few issues around the fit, and given that our ability to determine someone’s measurements from a few photos was one of our core components of scaling the business online, Forward Partners were keen to test this further and so sent us photos of eight people working in the office to see how accurate we could be compared to taking measurements by hand. After carrying this out and refining our methods and formulae we were offered a term sheet.

While the lawyers were working their way through it, Matthew carried out his reference checks on Steve and I and we did the same on Forward Partners, speaking to several of their other portfolio CEOs.

We wanted to get the inside view and, more importantly, get a real understanding of how to get through the first tranche of funding and onto the next stage. Given that both of these companies had achieved this in the last two years, their insights and experiences were invaluable.

Bradley: Both Martin’s suit and Nic’s jacket with MASSIVE lapels were pretty good but they weren’t enough for us not to want to do some more tests. I took pictures of a few other guys in the team and asked Jonathan to estimate the measurements from photos. The estimates ranged from perfect to ~5% out (which is too big).

Jonathan came back, visibly disappointed, and suggested some basic rules (no scarves, no overhanging shirts, etc.) and that we ran the test again with some different subjects. We did so, and there was a manifest improvement. That improvement and seeing Jonathan react so positively to me giving him a bit of a hard time over this was enough to encourage me to go to the investment committee.

Keep reading to see how the venture capital deal was finally signed, sealed and delivered.

The investment

Kruger: We already had an bid on the table from a group of five angel investors, but the offer from Forward Partners was much more comprehensive and we believed it would give us a far greater chance of success.

After a bit of legal back and forth, we signed the docs on the 16 March and moved in on the same day. We kicked off the day with a brief presentation to the product team who would help us launch over the coming weeks

Bradley: Unsurprisingly the due diligence called to the surface lots of good stuff about Jonathan and Steve, plus a couple of development points which was great – after all, we can support people better when we have a fuller picture. I’m also pretty nosey and direct when I want to be, I quite enjoy this process.

It was a fairly quick deal to go through – both sides were focused on getting back to the business of the business – and moved to a speedy completion.

We were all super pleased to welcome The Drop into the Forward Partners portfolio.