The investor landscape is changing – with more focus now being placed on what market problem the business solves, in addition to how inspirational the person pitching is. There is also more of a focus on emerging sectors and ensuring businesspeople from more diverse backgrounds receive investment.
To find out what investors are looking for from business owners – Business Leader brought together an expert panel that operates across the full business cycle, investing in start-up and scale-up companies.
Do you find that most pitches for investment you receive have what you’re looking for?
John Stapleton: “Most don’t. Occasionally, there is a gem, but these are the exception to the rule. However, this stands to reason, given the explosion in start-ups and early stage growth businesses in the food and drink sector.
“Many entrepreneurs pile into the food and drink sector – which is where I specialise – because they believe they have identified a gap in the market but have very little idea how they should go about addressing it.”
Heather Frankham: “I would love to say yes – because I receive a lot of pitches, however only 10% are relevant to me. The pitches I spend time looking at are those that understand what I’m looking to invest in. Unfortunately I get many pitches, often through LinkedIn, where they have not even read my profile and understood the areas I’m interested in investing in.
“I would always advise those seeking investment to carefully consider what they are looking for and then focus on finding an investor who can support them achieve this and who is looking to invest in their area.”
Tim Smallbone: “We receive a large number and range of proposals which vary in terms of quality as well as our ability to back them. We are looking for companies which are well established, led by ambitious teams, with a rhythm of profitable growth, typically with profits in excess of £2m.
“If a proposal is clearly outside of our parameters, whether because of size or maturity, we politely and swiftly decline so that we don’t waste anyone’s time.”
Ian McLennan: “No, in fact most pitches we see are unfortunately not what we are looking for. We receive over 1,000 opportunities a year in terms of companies looking for funds.
“Often the most basic problems are that companies are slightly too early stage for us to consider and that they do not fall within our investment themes (Impact EIS and B2B Software). Many companies are completely pre-revenue generation and we only allocate a max of 10% of funds to that stage.”
Andrew Boyle: “Most pitches focus on financial forecasts and detailed projections. However, I believe pitches would benefit from including more detail around non-financial metrics, further information on areas such as the human capital and physical resource required, the knowledge that has to be gained to properly market the product or service, the skills that need to be developed in the company and the corporate culture that should be fostered to enable the business to deliver and succeed.”
What don’t you like to see when you’re being pitched?
John Stapleton: “Valuations which are not based on reality. Evaluating an early-stage business is notoriously difficult and, is quite subjective. However, the entrepreneur needs to base their valuation in the real world, reflecting all three elements: potential, evidence and momentum. Secondly, not having a target market. In FMCG, it is essential to define one’s target market very carefully.
“Thirdly, entrepreneurs who don’t listen. I’m all for being challenged and being pushed back by the entrepreneur with a better idea or reasoning for doing something differently. However, when an entrepreneur simply ignores or becomes defensive in the face of a challenge or searching question, then I lose interest rapidly. Finally, business ideas which are not scalable.”
Heather Frankham: “I don’t like to see pitches that only tell part of the story, or ones that look like an academic exercise rather than a real business. A good pitch tells the full story of the business. Firstly, it must tell me why – why is it a good idea and why are the founders better placed than someone else to deliver it? It needs to be clear on what it is. You would not believe the number of pitches I read where I still don’t know exactly what the business does at the end of the pitch!
“Finally, it needs to have sensible financial projections – that relate to the rest of the pitch! Cost of sales need to be consistent with the proposed route to market and ideally should reference related examples.”
Tim Smallbone: “Because we only back established, fast-growing companies, we don’t like to see lumpy earnings growth. Equally, we want management’s ambition and enthusiasm to extend through the company, and so look for engagement of staff. Therefore, high turnover of key staff may suggest the team isn’t as cohesive or ambitious as we’d like to see.”
Ian McLennan: “At a high level we don’t like to see a pitch that is too rehearsed – we like to see an honest explanation of the founder’s story. We don’t like to see labour intensive, one-off revenues. So, for example, a business that has a large element of consultancy work may be one that is good for the consultants, but it is unlikely to be one that is attractive for venture capital. We prefer to invest in less capital intensive, less labour intensive digital or software products where companies or consumers will sign up for repeat business.”
Andrew Boyle: “Probably the element in pitches that investors most recoil from seeing is a hockey stick revenue projection with no substance to support it. The pitch has to make clear what capital requirement is needed, how much investment, what are the overall costs that will be incurred to deliver on the forecast so potential investors can take an informed decision on whether the revenue projection can be achieved or not.”
What are the emerging trends you are seeing amongst the companies that pitch to you?
John Stapleton: “Over the last five years there has been an explosion in food and drink start-ups. Several drivers have fuelled this such as the difficulty big food is having trying to convince consumers (particularly Millennials and Gen Zs) that they have their best interests at heart.
“Younger consumers are increasingly sceptical of big food claims and motives and find start-ups, with savvy entrepreneurs explaining how they are going to make the world a better place, much more convincing.”
Tim Smallbone: “In our 20 years of backing businesses, we’ve noticed a shift in what founders and owners are looking for when they seek a partner for their growth. “We’re seeing more UK businesses looking for support to grow their businesses internationally.
“Many companies are seeking capital as they wrestle with technology changes in their markets. We are also seeing an increasing number of deals which seek to provide liquidity for existing shareholders who wish to cash out.”
Ian McLennan: “Some emerging areas where we are starting to see good ideas are the circular economy; open banking; the agile workforce and wellbeing.”
Andrew Boyle: “We see three sectors dominate regarding companies looking for investment. Fintech firms; Healthcare companies, principally, Medtech and biotech firms, and engineering companies.”
Jenny Tooth OBE: “I am delighted to say that I am receiving more proposals from female founders and co-founder teams, although still not enough.
“I am also seeing more entrepreneurs coming from the regions outside the Golden Triangle to seek investment, but this also reflects that gaps in funding that still exist in many other parts of the UK and which we are working with all key players to resolve.”
in your opinion what more needs to be done to encourage investment into female entrepreneurs?
Jenny Tooth OBE: “A key challenge for women entrepreneurs is the lack of gender balance among the angel and venture capital community and this results in either deterring many women from going forward for investment or affects their experience when pitching for investment.
“We need to attract many more women to engage as business angels across the UK since we know that women who invest tend to back female entrepreneurs. With so many women who are now successful in business and other professions, we need them to bring their spare financial capacity and business experience to back more female entrepreneurs.”