19 Oct 2020
Low interest rates mean money is cheap. Understandably, many FinTech founders are asking whether now is the time to dust off the business plan and seek new investment?
Is this really the moment to scale up or is it better to sit tight and see how the post-pandemic landscape takes shape?
Delving deep into the subject, ICON’s recent ‘The Good, The Bad and The Ugly’ webinar lifted the lid on the do’s and don'ts of raising investment with contributions from Fliss Berridge, Director and Co-founder of payments company Ordo; Nick Sturge MBE, former Director of The Engine Shed, and SETsquared Bristol; and Sarah Kenshall, IP expert; Alex Lloyd, senior lawyer at Burges Salmon.
The future may seem unclear due to the pandemic, but some strong investment opportunities are emerging. ICON believes that digital transformation driven by tech start-ups will play a key role in the post-pandemic economic rebound. “The tech start-up ecosystem has experienced tremendous changes due to COVID-19 with entrepreneurs, investors and other stakeholders having to adapt to the new normal. However from an investment perspective, investors still prioritise backing the best teams and it is increasingly important for teams to demonstrate that they are agile” says Monica Shupikai Simmons, Director at ICON and moderator of the event.
For business owners ready to seek venture capital investment, these are the ICON webinar team’s top tips for success.
Tip 1: Prepare early for your investment round
It can take six months from engaging an adviser to completing the investment, but there are several things you can do in advance to speed the process:
- Get your documents in order – ahead of your capital raise prepare your financial forecast, produce an investor deck with fewer than 25 slides, and draft a compelling one-page teaser designed to grab the attention of investors.
- Create your data room – here you’ll keep all the vital documentation relating to the deal – financial model, cap table, IP, minutes, customer and employee contracts, as well as other business and regulatory documentation.
Tip 2: the three Ts: team, tech, timing
At ICON we believe in the 3 T’s:
- Team: Ultimately, investors invest in teams, and in the current environment there has been a refocus on investing in teams that can navigate through uncertainty to deliver the strongest results.
- Tech: There are always hot sectors to watch. Most recently, those within digital transformation, as the demand for remote office, online education, and enterprise digitization has greatly increased, and the bottom layer has huge opportunities for the construction of digital economy and technology. Big data, databases, and networks required for cloud computing will all usher in fundamental changes; cyber security, InsurTech and FinTech have been leading the march powered by AI and machine learning. Start-ups in these sectors always get a closer look and ICON is seeing a continued strong emergence of global sector focused funds.
- Timing: As the saying goes, timing is everything. So too in investments. Currently, investors are flush with cash and looking for the right opportunity, so in many ways the time really is now!
Tip 3: Do you need an advisor?
Appointing an adviser is an important step for any business seeking funding. For more mature businesses, working with the right adviser is key. Your adviser is more than a black book of contacts that helps you fine tune your documentation for the capital raise process. The right advisor provides strategic advice about what groups of investors to target and leverages their relationships to get you in front of the right person/people within the VC or Corporate VC.
Tip 4: Identify your IP assets
Do this exercise early on in the process as you may find you have some work to do to put your house in order (see Tip 5) says Sarah Kenshall. It’s vital that companies identify their own intellectual property (IP) before an investor begins the due diligence process. What’s more, you may find you have more IP assets than you realise eg a company’s IP assets also includes brand collateral like logos, style guide and the look and feel of a website.
Tip 5: Protect your IP assets
Having identified your assets, is there work to be done to make sure they are properly protected? Do trademark research to make sure there is no competing brand. If you have been using branding without a registration, and can demonstrate you have built up goodwill, you may be able to use the Law of Passing Off to prevent others using the brand. Always seek advice if you are unsure. If you’re protecting an idea, and working with freelancers and contractors, a non-disclosure agreement (NDA) will give you protection from inappropriate use or disclosure.
Tip 6: Manage valuation expectations
Valuation is a topic near and dear to entrepreneurs’ hearts. The key to managing your expectations is to remember that the market determines the valuation, not the founder, not the board. ICON typically offers clients a valuation range reflecting a number of valuation methodologies. Ultimately, competitive tension between competing VCs drives valuation up and a strategic investor can often justify paying a higher valuation.
Tip 7: Presenting: tailor your message for the investor
Ensure your investor pitch speaks the investor’s language. If you are pitching to a VC, focus on market growth and the 3-5 year financial growth window. If you are pitching to a Corporate VC, talk about what pain point your offering will address and the opportunity for cross-selling to your existing customer base. You can listen to a recent webinar hosted by ICON on Preparing for Investment here
Tip 8: Align with the investor
Entrepreneur Fliss Berridge, Director and Co-founder of payments company Ordo, speaks of working closing with strategic investors – in her case, Nationwide Ventures. Fliss says the key to a successful Corporate VC funding partnership is to work with an investor who shares your vision and values. Successful strategic partnerships result in a powerful win-win situation.
Tip 9: Tricky term sheets
Alex Lloyd offers pointers to bear in mind when considering two often misunderstood investor protections that directly impact value: liquidation preferences and anti-dilution mechanisms:
TIP: So that the liquidation preference acts as a true downside protection for the investor and does not skew upside returns, push for the inclusion of a ‘catch up right’ so that exit proceeds are distributed as follows: 1st to the investor up to the amount of its investment (or multiple of its investment); 2nd to the other shareholders up the amount of the liquidation preference (that’s the catch-up right) and 3rd pro rata between all of the shareholders.
TIP: Make sure that a ‘broad based weighted average’ formula rather than a ‘full ratchet’ is applied to avoid excessive founder dilution.
Alex recommends taking a look at the British Venture Capitalist Association (BVCA) investment term sheets guide for further detail and explanation.
Tip 10: Be agile
Nick Sturge, MBE, former Director of The Engine Shed, and SETsquared Bristol believes that the pandemic has demonstrated how things can change unexpectedly and so the start-up winners will be those that are most agile. The ability to steer a start-up in response to the changing attitudes of customers during the pandemic will be key to survival and ultimately, success.