Article last updated 11 June 2024.
What do investors look for when they’re approached by an entrepreneur? When is the best time to approach a potential investor? How do investors value a business?
These were some of the topics discussed during our breakfast for female founders. Hosted by myself and my colleague Isabella Galliers-Pratt, we were thrilled to welcome over 50 female founders who received brilliant insights, knowledge and expert advice from our panel of female investors:
Ala Alenazi. Investment Principal, Ascension.
Amelia Armour. Partner, Amadeus Capital Partners.
Itxaso del Palacio, PHD. Partner, Notion Capital.
This inspiring panel are a representation of the great investors community in the UK who support and invest in female founders.
Thank you again to all the founders who attended, it was an energising and inspiring start to the year for the Rathbones Inspire programme and I am excited for the year ahead.
Main criteria investors are looking for:
The founding team
A strong co-founding team with chemistry, who can show they are aligned on the objectives and have the necessary skills to execute the vision and plan. This is important, especially at the early stages when there is low or even no revenue generation - the investment will be strongly based on the team. Investors will invest in solo female founder businesses but to make it stronger, the suggestion was to empower a senior person to take the role of a co-founder, and/or to have a chairman who is a sector expert who could also help to negotiate your exit successfully.
Large market potential
Investors must be able to access a great return, hence they are looking for companies who have big market potential, for example, demonstrating the ability to upscale across geographies and to a multitude of clients. Entrepreneurs who only have one client should be wary of this.
Demonstrable high customer tractions and fast revenue growth
Investors need to see clear indicators of success. Depending on the stage of the business this could be from the results of pilots, customer feedback or low/zero attrition. In the case of those companies already generating revenue, investors want to see fast revenue growth already in place as this is an early indicator to them of potential future growth.
Strong IP
This is a key factor for deep tech companies and those who are not yet generating revenue, i.e. life science, med tech companies. Investors want to see creativity!
Key advice from the panel
Do your homework
Approaching an investor can be daunting. There are many different types of investors, both in terms of stage of businesses, sector focus and structure so make sure you’ve done your research before approaching them to ensure it’s a good match and you meet their investment criteria. Look at their website for information, also their past investments. A little reverse engineering also goes a long way, by that I mean that you understand the objectives of the fund and you know what its desired return will be.
Fundraising timings
The average cycle of a successful investment round is six months, so it is advisable to allow eight months and stay focused during this time. Treat the investment round like a sales opportunity, build your pipeline and work through it. In addition, use opportunities to build relationships with investors. They are time poor so identify opportunities to keep them updated and engaged so you’re front of mind but not taking up a lot of their time. It’s also vital to keep on top of your cash flow, it will be very difficult to negotiate if you are running out of cash!
VC investment is not for every business
Venture capital funding is for those companies who are planning exponential growth and who can return multiples to the funds. But not all businesses (female and non) can deliver that growth. This is where female founders can sometimes feel VC investors are not supporting their businesses, but it is simply the lack of ability to return those multiples, so don’t get disheartened.
Valuations: The market determines the value
Valuations have varied a lot recently, although they have stayed consistent at seed stage which has no specific metric, it is more of a ‘black art’. Then, as rounds get more advanced, specific metrics come into play.
The market determines the price of what investors are willing to pay, so they are looking at how much other investors are willing to pay and what return they could get at the point of sale. As a founder, if you generate interest from multiple investors, your price increases.
Important! When negotiating with investors be sure not to give up more than 30% your equity especially in the early stages. You want to ensure that you have enough equity to use for the following rounds.
Your customers matter
Investors will take it as a good sign if you can show that your customers are transacting, engaged and showing velocity. Investors may ask to speak to customers to get feedback so it’s important to prioritise your customers satisfaction.
And finally…avoid making these mistakes
- No competition. Never say that you have no competition, investors will take the view that you lack the self-awareness of your market. The best founders list their competitors and demonstrate how they can counteract their strengths and take advantage of their weaknesses.
- Avoid being negative. When pitching always be positive and optimistic, focus on your strengths, your achievements to date and your ambitious plans. Let the investors figure out the negatives and then be ready to answer how you will address them.
- Think outside the box. Never underestimate the funding you could get from those who aren’t investors. ‘Ask for money and you will get advice, ask for advice and you will get money’.
If you’d like to learn more about Rathbones involvement with entrepreneurs, please contact me:
paola.cuneo@rathbones.com
