It was a bustling event in central London on the afternoon of Wednesday 14 November for the annual BVCA Series A Forum, sponsored by none other than your humble growth capital adviser – Price Bailey.
Venture Capitalists (VCs), angel investors, entrepreneurs and thought leaders connected via quick fire in-depth panel discussions, interactive presentations and break-out sessions to share insight on the series A market and provide guidance on how scale-ups could take the next step in their growth journey to intergalactic stardom. Three key messages stood out for us:
- The UK market is still prime for Series A
- Early preparation is key
- Superstar CEO’s need to be humble!
1. The UK market is still prime for Series A
UK deal flow is consistent and better than the rest of Europe. Funding into UK companies now represents an impressive 40% of all EU activity.
According to Eric Burg, Managing Editor at PitchBook, the first six months of 2018 saw more than 850 companies receive a total of £2.56 billion of VC investment and it’s the early-stage investment fuelled by crowdfunding that continues to increase each year, despite the slowdown in angel investment.
As we see Brexit reaching an initial conclusion, we await an answer on how much capital the British Business Bank will provide once the European Investment Fund diminishes. Meanwhile, a number of family offices are coming into the UK market to provide capital for UK based scale-ups. This is great news of course, however, David Mott, Founder Partner of Oxford Capital and Chair of the BVCA Venture Capital Committee wants more. While significant capital has entered the UK venture capital class, the UK still lags the US, especially in its ability to finance scale-ups with larger amounts. David believes that one solution would be to free up more pension fund money given the UK VC market has one of the lowest pension fund allocations in the world.
2. Early preparation is key
There is a lot to think about when preparing for Series A funding, but the overall consensus is to prepare as much as you can as soon as you can.
A. Researching and strategy
Carina Namih, Partner of Episode 1 Ventures believes that founders should demonstrate the huge potential of the opportunity using data from a bottom-up research approach. Your research should also allow you to answer questions on timing. Is the opportunity too late and the market too crowded? Or is it too early? Is the industry ready for this or are you trying to fund academic research?
Strategy sessions are also vital during the pre-market stage so that you can create a picture of what the business will look like in a years’ time. You could start to speak to investors at this early-stage if your proposition in 12 months fits with their criteria.
B. Prepare a flexible model (or two)
Georgia Taylor-Foster, Partner at Playfair Capital, suggests that you establish what the metrics in the model need to look like to raise series A. Do the assumptions reflect the reality of your minimal viable product (MVP) and are those assumptions aligned with the market research? Does your business model allow you to be flexible, allow you to run sensitivities and enable you to Pivot? Your financial model will lead to an understanding of the valuation of the business and how much funding you require. This is the correct method, according to Chand Chudasama Director at Price Bailey and not the reverse method which Chand sometimes sees, whereby founders start with a high valuation initially and then work backwards to populate their sales data.
Your cap table is also important as you need to think seriously about new personnel that you need to take on beyond the raise and how these decisions will affect a shareholding structure, business valuation and investor returns.
When you have done your business case model…do another one. Seriously. A pared-back, slower growth, ‘investment case’ model will be required for most Series A investors. Tim Levett of NVM Private Equity, an investor of £1-12m in growth businesses needs to see two models in all of his cases.
C. Get to grips with governance
Fiona Dent, angel investor with 24 Haymarket and CEO of Makerversity, which supports 100 creative innovation start-ups from its HQ at Somerset House, is telling you to start this process as early as possible. “For early-stage companies it’s good to get into the habit of diligent board governance and reporting from the beginning so that the rigorous oversight required by investors does not come as a shock to the system. If you have the right content within your reports and ensure it is read in advance of your board meetings, you can keep the conversation big picture and utilise the experience of your board in the most effective way.”
A slick process of data capture, analysis and presentation will enable founders to step back from the process and view the performance from a different perspective. The underlying data and information will also be extremely useful during the due diligence process. “Investors want to see information and data when they ask for it, so make sure you can get it to them in the correct format at the right time’” says James Lewis, Investment Director of Downing.
3. Superstar CEO’s, be humble
One of the first questions an investor will ask after seeing the business plan is ‘Is the CEO a superstar?’ Carina Namih and the investment partners at Episode 1 are only looking for superstar CEO’s that head a good team and are bound by a strong team dynamic. Ego, however, should be left at the door.
It is too often the case that ego gets in the way of a successful raise. Valuation expectation is one key area that usually requires patient discussion and open dialogue meaning that hubris and close-mindedness need to be overcome as soon as possible. The growth journey requires a long-term partnership between founder and funder, and it’s an easy decision to walk away from an opportunity if the founder or CEO is unreasonable. “We want to work with people that don’t need our help but want our help” (Carina Namih, Episode 1).
On the advisory side, Chand Chudasama also agrees. “Humble management teams who can really embrace their weaknesses and who make decisions based purely on the business, rather than based on ego, are key. Everyone believes in the strength of their business idea, and the upside of the opportunity – which isn’t special because there are a lot of good ideas out there. Fundamentally investors have got to want to work with management and what we see is that humble management teams are much more investible because they bring in a rare set of soft skills that make a complex set of relationships work. This is essential to attracting quality investors.”
The BVCA audience was fully engaged when the stage was handed to Rafael Jordà Siquier, aerospace engineer Founder and CEO of Open Cosmos, a company that offers a turnkey, end-to-end system for launching satellites into space. The company has just taken on $7m, led by BGF Ventures to back Rafael’s plans to democratise satellites in the same way that computers became easier to use in the 1980s.
Our mind is still boggling at Price Bailey HQ as we try to get to grips with this aerospace disrupter; however, one thing we know for certain is that this very humble, superstar CEO is destined for intergalactic success.
This post was written by Mark Rowntree, Investment Manager at Price Bailey. If you need further information on any of the above, please feel free to get in touch with Mark using the contact form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.