How to raise venture capital investment for your startup
John Treharne is one of our Virgin StartUp mentors, and the founder of The Gym Group, which disrupted the UK’s fitness market by introducing a range of no-frills, 24 hour gyms. After research revealed that 70% of gym-goers didn’t use all the facilities, taking away the non-essential aspects of health clubs such as swimming pools and saunas enabled the Group to provide access to exercise equipment at much lower costs. The Gym Group is now a leading UK budget healthcare provider, opening over 60 clubs since the first was established in 2008. Here John talks about how what venture capitalists look for in startups, and how startups can give themselves the best chance of winning venture capital. (To find out more about the differences between venture capital and angel investment, read our guide here.)
Know what investors are looking for
Venture capitalists are always looking for one-of-a kind businesses – that’s the nature of venture capital. They’re looking for businesses that can change the world, disrupt existing industries, and – crucially – make returns on investment.
Investors ultimately invest in people, not just products. They need to believe in you and your capabilities, as well as your idea. It’s the whole package – your passion for what you’re doing, a solid business plan with a great executive summary, clear preparation. These are the things that are important for investors to see. Investors are looking for someone who’s hungry, and who will push themselves to succeed.
Where there are some industries where people will always be looking for new and exciting prospects, such as IT, property, and social media, you need to remain innovative. If you’re just copying someone else, you’re unlikely to win VC funding.
How to approach investors
The key thing to do to avoid frustration is to do your research first. The business plan is critical, and being at the front is critical. Private equity and venture capitalists see lots of things every day, so it’s important to stand out. When creating a proposal or business plan, put the important points at the front – if your business plan doesn’t grab them, they won’t bother to read to the good stuff you’ve hidden at the end. Imagine you have a maximum of two pages to get their attention, and focus your energy on creating a brilliant executive summary and succinct business plan.
The business plan should establish the sort of people you’ll be talking to, and the amount of money you’re seeking to raise will help you decide the most appropriate form of support. Ironically, raising more money can be easier than raising less when it comes to venture capital, as just as much work goes into a small investment as a big one.
Focus your energy on the right place
If you haven’t researched properly, you’re likely to approach the wrong people. Research online, looking at associations such as the BVCA, and seeing what the firms you’re interested in have invested in before. Most investors work within specific areas, so research will help you get a sense of what sort of investments they’re interested in – that should be your focus. Don’t waste your time approaching investors who don’t invest in your sector, or who invest outside of the sums you’re hoping to receive.
Know your options
Private equity can be frustrating, as lots of investors don’t invest in startups – though this seems to be changing, with schemes such as the Enterprise Investment Scheme giving more incentives (more on this below), and the increase in game-changing, high-growth startups. Far more people will invest in a proven idea, as startups are high-risk. Angel investors are often a better source, as they do a lot of investment in startups. A general rule of thumb is that if you can fund the startup yourself, it’s easier to raise secondary funding, as you have a track record of success. It’s also easier to raise venture capital for a second business, as you’ve proved yourself already – that’s where angel investment comes in.
If you don’t have a proven track record, schemes such as the Enterprise Investment Scheme give investors more reason to invest in you by offering tax relief and other advantages – they can also help you negotiate a better deal, so be sure to see how these can make your offering more attractive to investors.
My top tips
- Preparation is everything. The biggest mistakes I see are people with poor business plans, and those approaching the wrong investors – you’re wasting your time, and theirs.
- It’s a huge help if you can get advice from someone who’s done it before. Speak to businesses in your industry who have won VC funding and see if you can get practical tips on their approach, as well as thinking about what sets them apart.
- Taking the time to invest in some presenting skills training can be a huge help, as it teaches you to get across your ideas in a confident and fluent way.