Should early stage businesses consider VCT funds?

My experience at Semafone has taught me the importance of giving potential investors reasons to say ‘yes’, while knowing that it’s all too easy to find reasons to say ‘no’. ‘It’s too early stage for us’, ‘the team is too inexperienced/experienced’, ‘the product is not ready/too advanced’… I’ve heard them all!

Having a proven product with patent protection certainly helped us to secure funding, but we also learnt that perseverance is key – don’t lose heart because people tell you that they’re not interested. Consider all the different funding options available. Family and friends may be your best bet to begin with because they trust you as an individual, but they’ll still want reassurance that you have something to fall back on if plan A doesn’t work. Angel investors will say yes if they feel they understand the industry and think they can add value, but they’re also more likely to want a large amount of equity.

If you are looking for a higher sum without having to give away a significant proportion of the equity, however, you may want to consider Venture Capitalists (VCs) or Venture Capital Trusts (VCTs).

Although VCs focus on early stage businesses, they tend to look for an established track record of sales, which cuts out a large proportion of young start-ups. VCTs, on the other hand, were created to support the growth of smaller companies and to nurture entrepreneurship in the UK. They offer attractive tax breaks to entice investors despite the higher risk of the business portfolio.

VCs can be hard to get to know. Sometimes it is difficult to find out exactly what they are looking for until you’ve already started talking to them, but remember that these guys are managing a portfolio of existing investments, so it’s worth looking at all of them to see if there is an angle there for you. An introduction from a company in their existing portfolio can also be a good way in.

No start-up is perfect and if an investor isn’t actively looking for reasons to say ‘yes’, they will always find justification for saying ‘no’. To qualify for VCT status, 70 per cent of the fund must be invested within its first three years so managers are actively looking for reasons to say ‘yes’.

VCT funds offer highly professional investors with a lot of experience in helping small companies grow. On the plus side this means great access to networks of contacts, introductions and ‘been there, done that, got the t-shirt’ experience. The minus is that they will keep your feet to the fire in order to get the return they expect!

Whichever funding option you choose, you should consider the following:

Start early

Don’t just seek investment when you are out of cash but start talking to potential funders early on. You can get to know each other over time and you’ll be able to demonstrate progress and growth.

Think about how each fund can add value

Remember that the connections and support they can provide will vary. Take references from portfolio companies and make sure you walk into the deal with your eyes open. In a competitive situation this puts you in a great position to choose the best funder for you.

Consider whether you can offer some kind of mitigation against a big risk in their existing portfolio

I remember one VC being extremely interested in the overseas possibilities for Semafone as a hedge against his existing portfolio’s exposure to the macro performance of the UK economy. 

Get the team right and the money will follow

Work on attracting A-grade people to your company. Not only will they be the real driver for the business, but they’ll also be critical when attracting funding.

Know your numbers

Make sure you understand every detail of your business.

Be passionate

Show your passion and excitement for the opportunity.

The VCT route has worked for us. We approached the Ventures team at Octopus Investments in 2010. They very nearly showed us the door in the first five minutes of meeting them because they thought our corporate finance advisors were trying to rush them! Despite that early hiccup, however, the team recognised Semafone’s potential and we received £1.9m investment from Octopus’s Titan VCT fund later in the same year.

Tim Critchley is CEO of Semafone.

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