Price Bailey
Please note that, as of March 2021, this article is only applicable to early-stage founders (<£500k revenue and pre-profit) seeking equity investment.
Why pay an advisor for an investor list?
It seems like a strange question.
Surely finding names of investors is as simple as Googling ‘Series A investors’ or looking at websites providing lists of investment funds and angel networks?
We think not.
We have around 100 pre-profit businesses ask us to help advise them on growth and then raise equity funding each year. We only work with around 3 to 5 that fit our very specific criteria to raise funds. The other 97 or so, we help as far as we can and often assist with strategy, forecasting, valuations and market research, but do not work with them to place funding. The question is, what happens to the rest? Do they ever find investors?
At Price Bailey, we have relationships with a lot of investors, hundreds of angels and probably a hundred or so investment managers and directors at various venture capital funds. Investors have very specific criteria, and, sadly, most businesses asking them for funding either do not fully understand this or do not appreciate the importance. It can be heart-breaking for everyone to see a founder with emotional fatigue endlessly sending out pitch decks, occasionally getting to chat to an angel who may invest a small sum, but really hoping that Sequoia, Accel or Index call back. Yes, the US has a better market for early-stage funding, but unfortunately, no, it is not likely a UK business without any current US activity will raise US VC investment (though our experience suggests corporate investment from the US is very possible at an early-ish stage).
Whilst, for most funds, the money is there, and investors want to invest it, what we tend to find is that the lack of interest comes from companies not fully understanding the funds they are approaching.
Funds have rules and criteria. They also have target returns to meet, which vary considerably. They can be closed or evergreen. They can have rules to comply with regarding tax-advantaged monies. They have typically ‘sold’ an investment thesis to their investors and need a founder’s pitch deck to clearly and realistically show how they fit in. While many funds are increasing their focus on sustainability, diversity, and social causes, they still have to make money for their investors and money for themselves (how they do this is really important).
Despite founders being told they don’t need to care about this stuff, how a fund is structured, how they finance the day-to-day, if they have any money (funds run out of cash frequently) and how they produce returns to their investors are, therefore, critical pieces of information.
Added into that is the answers to questions around how a fund does a deal, for example:
- What stage do they invest?
- What are some live examples of recent cheque sizes and valuations?
- Have preference shares been used?
- Was EIS money mixed with VCT money?
- What types of businesses did they invest in?
- How experienced were the Boards?
- What traction does the typical investee company have?
- Do they co-invest at an early stage, and if so, with who?
- Do their early-stage investments all already have angel and/or grant funding?
We believe it is critical for founders to understand this type of information about the investors they are reaching out to.
Knowing this stuff enables a founder to make an informed choice about who to go to, why and what to expect. They can profile investors properly, with more accurate data than Google can provide alone, and with commentary and analysis that helps unearth possible angles that show why investing in their business makes sense for that specific fund. The outcome is higher probabilities of success, a more informed approach and a shorter, smarter list of realistic investors.
In other words, knowledge is vital.
This is particularly important because in our experience (and we ask a lot of investors this question directly), once they have rejected an early-stage equity funding opportunity, they very rarely say yes later; even if they say ‘no’ by saying “you’re too early for us”, that is still normally a hard no. This means that if you go to the right fund at the wrong time, or worse with the wrong plan, the odds of you getting a “yes” later are very low in our experience. We would suggest to founders who get told this line (“you’re too early for us”) to ask the investor if they have ever bought into a business that has been told that later on. There will be exceptions, we’re sure (please also tell us as we would love to know!).
Relationships do help, and we rely on many of ours, particularly for transactions involving more established and more complex businesses. However, particularly for equity cheques under £1m, investors prefer to deal directly with founders than go via pure success fee driven brokers. Unfortunately, time has proven they can’t be trusted. What matters most is the relationship and trust between the future shareholder and founder team. That’s the critical part. Brokers on a success fee can muddy this and do not help build trust – they have been known to exaggerate, they do not advise on diligence, terms and legals effectively, and when the investment sums are small, a 5% or 6% share is quite a lot. Advisors like accountants, lawyers and corporate financiers do help build trust, but they are expensive, and the economics seldom work at an early stage because they will want to be paid to say “you should walk away”. Therefore we think that, for early-stage equity funding, founders should be building relationships directly with investors, not through a broker on commission.
Most importantly, if the right group of investors all say “no” and provide feedback on why then a founder has clarity. There are only 5 outcomes. Their concept has to:
- Look for corporate investment.
- Wait for new angels or newly formed funds to come along.
- Bootstrap and grow organically, ideally funded by customer revenue, or if not with founder/family and friends funding and reduced costs.
- Sadly come to an end.
This is a tough pill to swallow, but the certainty of the outcome provides many founders (and their closest loved ones!) with much reassurance.
So, coming back to the question, why pay for an investor list?
We don’t really mean ‘just a list. We mean a short report that gives founders exactly what they need. This includes:
- Listing the most relevant investors (angels and funds).
- Providing the rationale as to why they are relevant based on deals completed, interests, history and criteria. This way, you are focussed on the most meaningful, relevant and likely investors, not a long list for whom you’re not going to be relevant.
- Giving real case studies (not the ones investors show online!) with real data to show what really happened.
- Giving real deal data and insight into terms, investment sums, dilution – this means diving into transaction data and the Articles of Association. This way, you can know what to expect if a deal happens.
- Details into how the funds are structured, what they may be trying to achieve and what that means for investee companies.
- And of course, where publically available, contact details.
Combined, we think this gives the founder a shortlist of the most relevant investors and arms them with exactly what they need to know to present themselves in the best possible way.
We think this is a powerful tool because:
- Googling only surfaces a tiny proportion of the overall number of funds and is not a reliable tool for finding an exhaustive list of relevant investors. Advisors have knowledge, experience and expensive tools that do this.
- Google will not tell you why a fund invested in one early-stage company but not yours.
- Deal data on cheque sizes, dilution, stage of investment and the size of companies that have taken investment is hard to access without some of the tools and databases that advisors have.
- Understanding the fund structure and criteria is key knowledge to have at your disposal. What a fund shows online and what comes out of deal data can be very different – what matters most is the recent deal data.
- Case studies on deals for similar businesses at similar stages are incredibly helpful in assisting founders in describing why they are a great match for certain funds.
- Early-stage investors typically want to hear from founders directly.
- If the right investors all say “no”, you have 5 clear choices.
We think empowering founders with all of the above is the right way to raise early-stage equity funding successfully. It is our way of trying to help those that, during the earlier stages of their growth, it is not financially viable that we support and gives passionate founders the chance to still find equity investors who can help unlock their business dreams.
We do charge for this service as a fixed fee.
If you do find an interested investor from those that we have identified for you, all that we ask is that we, as advisors, receive first refusal in negotiating the deal between you and the investors. You will not be committed to working with us on this, but we would like the opportunity to continue building the relationship together.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide, and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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