Thursday 12 February 2009

Views from VCs: Notes from The Investors' Forum

Yesterday evening I attended The Investors' Forum, an event jointly organised by CUE and CUTEC in Cambridge, aiming to show that there is still investment available for start-ups. On the panel at the event were Reshma Sohoni (SeedCamp), and Laurence John (Amadeus Seed Fund), who talked about (pre-angel) seed funding; Kerry Baldwin (IQ Capital) for injections of around £1.5 million; and Simon Cook (DFJ Esprit) and Sitar Teli (Doughty Hanson Technology Ventures), for investments of £10 million or more. Alex van Someren (nCipher) moderated and gave the entrepreneur's viewpoint. Here's my notes on what they said:
  • The economic downturn has affected some funding decisions. Seed funds are asking companies to try to do more with less investment, and to have working demonstrations in less time. Larger funds have been used to their companies not being able to obtain bank loans, hence there has always been a sort of "credit crunch" in that area, thus no effect. However, Sitar Teli pointed out that some businesses (such as semiconductor manufacturing) would need to take on debt at some point, and at present that type of company would not be a good investment.
  • Software start-ups were more likely to receive seed funding than hardware start-ups, due to their need for smaller amounts of money. However, hardware is still an option (Laurence John).
  • Proposals seeking VC investment need to show both a strong business case, but also a robust customer base. Previously investors would not have checked as rigorously as now how strong the market is (Kerry Baldwin).
  • Investors did not believe that they were using the economic downturn to drive down the price they offered entrepreneurs for equity stakes.
  • When coming with a proposal, it was emphasised that the amount being asked for should be planned to result in a real step change in the company. Similarly, a plan of what funding will be needed at which points in the business, and what the end dilution and valuation will be, is hugely important in order to ascertain whether an investor will even consider the company. If the end valuation means that the investment does not gain very much value, evidently investors will not be interested.
  • Getting to know VCs before asking them for money was recommended. This allows them to be more confident in you at the point where you ask for investment.
  • Select which VC to court carefully. There is little point going to one that invests £10 million minimum if the company only needs £250k.
  • Try to court multiple investors, in order to allow the market to set a fair price for a stake in the business. Otherwise one investor can effectively set as low a price as they wish.
  • The relative importance of teams versus ideas was debated. For seed funding, where ideas are at a malleable stage, the quality of the team was regarded as most important (Reshma Sohoni). For larger investments it was less obvious which was most significant.
  • Experience was regarded as hugely important in obtaining large investments at the start (unsurprisingly). First-time entrepreneurs should normally start with seed funding. The exception was if there was significant, patentable IPR behind the business idea.
  • In any presentation, get to the point, and explain how much investment is needed, and what it will be used for.

All sounded sensible, though valuable as it goes to show that some investor attitudes have changed, whilst others have not.

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