Every day some of the smartest brains in finance busy themselves chasing down a unicorn in the making. Not the mythical horned horse of fairy tales but rather the term given to next company to go from startup to a billion dollar valuation in just a few years.
Venture capitalists (VCs) are part investor, part futurologist. They will invest in an exciting startup for a share in the company in the hope their stake will make several times more when it is bought by a large rival or floats several years down the line.
On the one hand, that can mean an investor, such as the co-founder of Mangrove Capital Partners, Mark Tluszcz, can lay claim to some major success stories. His $2.5m investment in Skype in 2001 is now worth $250m. However, he admits no VC has a better than 50:50 chance of making or losing money.
“Around half of the companies we invest in will fail,” he says. “Around 20% might make our money back and another 20% will probably treble our stake. It’s the 10% that are the big hitters that can make ten times your investment that keep a VC company going.”
The venture capitalist industry has come a long way in the last twenty years. From a niche filled with financiers, the number of firms has greatly increased. The total amount loaned to UK companies by VCs between 2011 and 2016 jumped from £453m to £1961m, according to research firm Pitchbook.
Many VC firms are now staffed by entrepreneurs, such as Atomico, which was co-founded by Niklas Zennström, who is also the co-founder of Skype. Mattias Ljungman, a partner at Atomico, believes this is more in tune with the wave of young people looking to build a business, not just a career.
“Having entrepreneurs guiding decisions fits in well with the trend we’re noticing,” he says. “A lot of the brightest minds are leaving college now and wanting to launch their own startup, so they can sometimes need some help on the business side.”
However, one aspect that is not changing fast enough is the lack of diversity. Entrepreneur-turned-investor Debbie Wosskow became so disillusioned by the fact that around 95% of all VC investments are made to male-led businesses, typically by male VCs, she co-founded AllBright, an investment fund dedicated to female founders. The aim is to make the UK the best place to be a female entrepreneur. The recent case of a prominent Silicon Valley investor resigning over sexual harassment allegations, is putting a spotlight on the issue.
“Recent events in the US have brought the issue of sexism in the VC world to the fore and now is the right time to have similar frank conversations about the same issue here in the UK,” she says.
“Research from Harvard Business Review shows that VCs frame questions differently when talking to female entrepreneurs. With female founders, it is through a lens of potential losses and with male entrepreneurs, it is through a lens of potential gains. Whatever the reasons for sexism, now is the time for change.”
Any company going before a group of VCs will need to sell their vision for how they will revolutionise an industry and make the founders and investors a healthy return. What they should avoid, according to Suranga Chandratillake, a partner at VC firm Balderton, are “lazy MBA” presentations filled with jargon and a claim to be the “Uber” of their industry.
“Someone needs to excite us that they’re a shooting star, a big hitter that’s not just there for organic profits,” he says. “They need to show how they’re going to revolutionise an industry and convince us they can get the right people excited to join their team.”
Jillian Manus, managing partner at Structure Capital has witnessed her fair share of bad pitches since becoming a judge for the US podcast The Pitch, where entrepreneurs pitch in front of a panel of investors. The worst, she reveals, was for a mirror that purported to show up flaws. “Who wants a mirror like that, isn’t that what all mirrors do?” she says. For her, the best pitches come from co-founders where one has a tech background and the other is in operations or sales. The pair need to sell their dream and the road map of how they are going to get there, they need to excite her and they need to be honest.
“My crucial question for all startup founders is to tell me how they’ve failed,” she says.
“If they tell me they never have, I know they’re either lying or they’re not self-aware. To get an investment, an entrepreneur has to show they’ve learned from mistakes because the original idea they’re pitching to me will not always work out and the company may have to go down a different path. You’ve got to recognise when something’s not working and be honest.”
There is a crucial, and very simple question, any company chasing venture capital has to ask itself, Ben Grech warns. He is the co-founder of Uniplaces, which helps students find accommodation, and recently received a £15m investment from Atomico. From what he has seen, the main source for potential friction between a company and potential investors is an entrepreneur not knowing what they want.
“You have to know what you’re getting in to,” he says. “Founders have to be honest. If they’re going for venture capital they have to be geared to fast expansion and scaling up. If that’s what you want to deliver, then venture capital is a great way to get the funds to do it at pace. There’s nothing wrong with a lifestyle business that ticks over and earns you a good income, but founders have to be honest. If you haven’t got it in you to want to expand internationally very quickly, then venture capital’s not for you.”
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