Valuable insider insight on how to approach a venture capital investor
8 min read
30 July 2015
Will Gibbs, a member of the ventures team at Octopus Investments, provides behind the scenes tips on the best way to first approach, and then secure investment from, a venture capital firm.
It is one thing having a great idea that has got off the ground. It’s another thing making that idea a high-growth, sustainable and profitable business, with the ability to disrupt and dominate an industry.
At Octopus we have been fortunate enough to work with some incredible founding teams such as BehavioSec, Swoon, YPlan Zynstra, Zoopla, SwiftKey and Secret Escapes. These businesses may not initially appear to have much in common – they are of different sizes, with different business models, from a range of industries – however they all share two factors of paramount importance; strong relationships with their investors and world class teams.
While the chemistry between investor and management teams cannot be pre-prescribed, there are some top tips which every entrepreneur should bear in mind when deliberating approaching a VC.
Know your funding strategy
Before you approach a venture capital house, think about whether venture capital is actually the right source of funding for you. If you have explored many routes to raising capital then you will have also received a lot of feedback. This feedback is essential in helping you prepare your plan and approach – and will provide a guiding hand as to what sort of funding is the best fit for your business. In particular, any savvy investor will identify any gaps in your pitch. If you have been informed by other parties of any potential gaps or issues, or given advice on what sort of funding to go for, do this before approaching a VC.
Another important initial consideration when approaching a VC is how you present your vision for your business – try not to fall into the trap of attempting to optimise your business purely for VCs, or indeed any other source of fundraising. Consumers are the best and cheapest source of capital and therefore should be your primary focus – an investor will be wary of bridging a shortfall in income if consumers are unwilling to buy your product.
Importantly, entrepreneurs must also consider what support they need from investors beyond finance. Different types of investors will have different skills. For example, some venture capital investors have deep and specific sector knowledge, while others will have invaluable networks and contacts which can help you grow your business. It’s always worth considering if a VC is able to provide access to talent beyond their own team – for example with entrepreneurs-in-residence – or if there are any specific synergies with any of their existing portfolio companies.
Read more about venture capital:
- The best of both worlds? Financing a £30m venture capital firm with crowdfunding
- Charting the development of a 15-year venture capital investment: From initial backing to exit
- The UK takes the lead when it comes to VC activity in Europe
Approach the right investors
The best way of pinpointing who to approach is to identify which venture capital houses are investing in early-stage companies in industries similar to yours. Industry blogs and conferences are a good way to help with this. Follow other startups or early-stage businesses too. There is nothing stopping you approaching a company that recently received venture backing, as they may be able to give you the direction you require, having just gone through the funding process themselves.
Your network not only supports you in acting as a sounding board, but also in making valuable introductions. If you don’t have personal contacts who know people in venture capital houses, then corporate financiers advising companies may well be able to support with introductions. Warm leads into venture capital houses help provide context and accelerate a first meeting. Investors generally look through hundreds of business plans a month – an entrepreneur who has already been validated by someone close to the VC is in a much stronger position to get funded than a cold introduction via a business plan. At Octopus, for example, the success rate of cold approaches for funding is about one per cent.
Remember it’s actually all about you
There is a difference between VCs that invest in certain vertical markets and those that actually invest in you, the entrepreneur. When Alex Chesterman and Simon Kain came to Octopus seven years ago, Zoopla was one of over 20 property search websites, and the UK was approaching a financial crisis. However, Chesterman – with whom we had a preexisting relationship – was inspiring, personable and we already knew he had the characteristics of a strong leader with the potential to build a really valuable business. He presented his plan and vision with absolute confidence and in 2014 the Zoopla Property Group IPO-ed in London with great success.
Preparation still wins over confidence
Regardless of how dazzling your performance may be in front of a panel of investors or how confident you are of your financials, before making any approach you should consider the following:
- What kinds of investments the team you’re presenting to have made in the past
- What kinds of deals they are looking for currently
- How investment decisions are made
- How much detail should be provided
- What the style of the VC is and what their sector interests are
It’s a two-way relationship
VC investment is often likened to a marriage – it has to be a two-way relationship, built on trust and cooperation. This is why chemistry is so important. A mismatch with an investor typically won’t result in a long-term working relationship, so be sure to do your preparation and research beforehand. Ask around your industry, talk to portfolio companies from a range of VCs and make an assessment as to who you think would be your best possible partner.
Remember, venture capital is much more of a partnership than any other type of investment. So planning and forethought are essential to help you find and secure the backing of a VC who can best help you build an industry-defining business.