9 March 2021|Investing, Latest Posts
By Teresa Horscroft. Following a cultural shift that is changing who consumers buy from and who they don’t, more businesses are evaluating their purpose beyond profit. How responsible a business is – towards employees, customers, the environment and society – has become a critical consideration for the future. People are more prepared to boycott brands that don’t share their heartfelt beliefs, attitudes and concerns and companies are responding.
The investment ecosystem seems to be a step or two behind this shift. Most Venture Capitalists are still focused on profit. The wellbeing of the founder, supporting ventures that are not yet product-market ready, advising and guiding founders are still not in the playbook for most VCs. Failure to adapt could mean the death of the venture capitalist (VC).
The current pandemic doesn’t seem to have stopped innovative founders from venturing forth. If anything it has increased the innovation that Britain has become known for. Even before Covid, 64% of UK workers say they want to set up a business according to SME Loans. Recessions can be a good time to start a business with AirBnb, Uber and even Crowdcube being born in the last financial crash. Seedlegals data shows that Covid19 hasn’t had the devastating impact on start-up funding that many predicted, with funding rounds at end July stable and the number of term sheets issued rising. Crowdcube too has seen an increase in the number of investments on the funding platform compared to the previous year.
“Downturns, and pandemics it seems, create problems that innovative self-starters can solve,” says Dan Simmons, founder of early stage accelerator Propelia that identifies the founders who are best equipped to navigate complex markets at an early stage.
“Yet unless investors adapt to the changing trend of being more responsible and caring, many of these great ideas might never get the backing they need to succeed.”
Julie Barber, CEO of Spark and author of the no.1 bestselling book Investor Readybelieves that “early stage founders lack essential skills and knowledge to raise money; often spending time identifying and targeting inappropriate VCs, and lacking the ability to articulate their vision in the current pitch deck formula leading to ‘hockey stick predictions’ for sales growth that are usually wildly unrealistic.”
It is not surprising then that, according to the IoD, 82% of start-ups are self-funded.
Simmons argues that rather than the funding problem being with the founder, it is the VCs that are stifling early stage investment. “Founders are put off by the time and stress of dealing with VCs; they have become inaccessible,” he says. “They are often far too focused on future cash flow and profit predictions, which is rarely appropriate for early stage ventures. As a result they dismiss great ideas and ventures that are not quite ready to get off the ground.”
Crowdfunding emerged as an innovative concept to plug the funding gap for start-ups a decade ago. Simmons believes we are about to see a similar shift happening with early stage ventures.
“Early stage ideas are where the more complex and disruptive ideas are born,” he explains, “yet they often miss out on VC or angel funding because they are not product ready. Founders ready to ‘beta test’ their app or product are often most likely to tap into scarce VC and angel funding. In reality they’re probably closer to Seed or even Series A growth funding.
Asking entrepreneurs to provide figures or validation for a market that isn’t there yet not only creates stress for the founder; it’s also not fit for purpose.”
Marion Marincat, founder of the hearing wellness platform for sound friendly ventures, Mumbli concurs. Having raised sums in excess of £10 million for renewable energy ventures in the past he found raising funds for his impact business a different experience entirely. “It’s so much easier to get funding when you have a very clearly presented revenue model even if what is presented is an inflated or made up value proposition and the company is not built on a sustainable principle or vision,” he says. “EIS and SEIS tax breaks should motivate investors to invest in strong teams and founders who are solving problems, not just in revenue models!
VCs and angels play a critical role in the development of early stage businesses and should always be about more than the money but they are not,” continues Marincat. “Social impact businesses don’t seem to fit in the minds of many investors. It seems to be you are either an investor or a philanthropist and never the twain shall meet.
Mumbli addresses a problem affecting more than 50% of the population – socially, health wise and even as a day-to-day experience – and yet investors are more focused on how much money we’ll make in five years more than they want to understand how we are solving the problem. Although the Hearing Wellness market is at the intersection of three giant industries – a £1 trillion market! – we waste time talking to investors who instead of going on the journey with us to understand the opportunity, take you away from the very thing that will generate revenue by asking irrelevant proof of future success; or for a certain type of pitch deck; or a crystal ball reading. Early stage funding needs to adapt to early stage problem solving.”
Propelia’s Simmons suggests that VCs throw out the three minute pitch deck and the use of tools and evaluative methodologies such as Net Promoter Score (NPS), Objective and Key Results (OKRs) and Key Performance Indicators (KPIs). “These are designed for much more mature businesses rather than fragile and iterative ventures that are just getting off the ground,” he says. “They are no longer fit for purpose.”
Instead VCs should consider what their purpose is beyond profit. The very nature of an ‘angel’ is as a guide, advising the founder on their journey but many angels are behaving more like the VCs, according to Simmons who suggests, “VCs and early stage investors should think of themselves as Co-Pilots similar to the way that many angel investors work as more caring advisors, talking a few times a week and helping founders think things through.
Innovative start-ups in the finance sector have long sought to cut not just investment complexity but also time to closure. Seedlegals has empowered founders to take more ownership of the legal process for their raise. According to Seedlegals co-founder Anthony Rose, “When the VC’s lawyers controlled the process the agreements tended to be investor friendly and founder unfriendly.
When we started Seedlegals we didn’t know whether investors would want to use the platform and whether lawyers would agree to the deal documents on the platform, but they have embraced both the simplicity and speed of our process.”
The Seedlegals platform creates a middle ground between investor and founder and, importantly, speeds up the sharing, reviewing and signing of all of the legal documentation.
Seedlegals had expected their platform to appeal to tech savvy younger founders, but its simplicity of use and the way it moves deals almost instantaneously appeals to founders of all backgrounds. As founders start to love using the platform, Rose expects them to continue to use the platform as they grow. He says, “It is slower to change older habits as you get to later stage rounds but change is inexorable.”
Simmons adds that speed of closure for early stage founders is critical, particularly in fast moving markets. “A slow deal close can negatively impact the ability of a founder to start his venture which might mean they fail to benefit from first to market advantage in some instances. It is ridiculous that deals should take 6-9 months to close.”
Renewed focus on early stage founders can only be a boost of investment. Leaving behind the traditional evaluators of potential which are more focused on how the product fits into the market will increasingly be replaced with a look at how the founder is going to scope the market. In this way it is a much more linear progression for VCs to become catalysts to growth, co-piloting the founder not just with capital but also with critical support, insight and guidance over the first 6-12 months of their journey.
About the Author:
Teresa Horscroft has spent 30 years working as a PR consultant for start-ups and corporates in a range of sectors including fintech, media and marketing, fmcg and sustainable technologies and has launched companies such as Securicor Datatrak, Crowdcube and Magway. She founded Eureka Communications in 1998, a virtual team of independent and experienced storytellers.