By Simon Glass, CEO, Qodeo
Human relationships are behind the most successful venture capital deals. The chemistry between an investor and an entrepreneur, and their ability to work in harmony is vital, particularly when you consider that VC firms hold their investments for between five and seven years. That’s a long time to keep civil if you don’t actually see eye to eye on the future of the business.
Such endurance makes the initial search, and getting a clear idea about mutual goals, very important. Like any other relationship, what both parties are looking for is a good match. For many entrepreneurs, however, setting off on the path to raising funds can be daunting. Even the language is confusing. Terms such as ‘stage’, ‘series’, ‘pre-seed’ and ‘seed’ are well known everyday expressions if you are a venture capitalist or work in a private equity firm, but even the difference between those types of funders can be confusing.
Getting on top of the funding process
It’s understandable that trying to get to grips with the sector can take entrepreneurs hundreds of hours. According to research conducted with the business school INSEAD many make huge investments in time, and in money too, only to give up or reach a dead-end.
A director at Qodeo, and the former Deputy CEO of Coutts Bank, Paul Wright, says the process of fundraising is like ‘pinballing’: being bounced from firm to firm without getting a result, or even in some cases, getting any kind of reply. Investors are interested, but they are simply overwhelmed with approaches and don’t have time to react to everything they receive. What is even more frustrating is that it is difficult to find out who the most appropriate contact would be. An entrepreneur can spend days trying to get on a shortlist, only to find out that the VC they have been targeting is not the right fit for them.
Outside London and the major conurbations, start-ups can also struggle to be noticed. It is discouraging for them to see firms that are very similar, but based in, or near to, major financial centres, announcing deals when they are unable to access the same sources of funding. Among this group – although the same happens in city-based firms too – there is a tendency to ask for too little money. This sounds counterintuitive, but deal size has grown exponentially in recent years. If an entrepreneur asks for only £500,000, they will automatically fall outside the VC radar, and into the business angel market.
Investors need to expand their networks
The difficulties of connecting also exist on the investor side of the equation. For decades VCs and private equity firms have fished in the same pool, using established networks, often forged in school or university, to find opportunities. We conducted research with Cambridge Judge Business School among 85 investor firms from across the UK, and when we asked about deal flow, we found that 29% were sourcing deals through entrepreneur contacts and referrals but only 19% said they used alternative channels.
Given the vast numbers of start-ups and young businesses that are ripe for investment right across the UK, this narrow approach needs to change if investors are to find more diverse opportunities and better returns. An examination into this topic by Paul Gompers and published in Harvard Business Review found that: “Diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. And even though the desire to associate with similar people—a tendency academics call homophily—can bring social benefits to those who exhibit it, including a sense of shared culture and belonging, it can also lead investors and firms to leave a lot of money on the table.”
The question, to date, has been: how can entrepreneurs and VCs connect successfully? And the answer is through a trusted network supported by technology.
The funding dating service
Qodeo is an example of this. It is a digital subscription service that matches successful, diverse entrepreneurs with pre-vetted venture capitalists and private equity firms. The database of companies is not just regional or national, but in fact, draws from across the world, so if a UK-based company wants to expand into Africa or Asia, for example, a match can be found.
For a small subscription of just £10 per month, entrepreneurs can make use of this funding ‘dating’ service to dive into a wealth of reports and research, gain an understanding of the funding environment by attending talks and webinars, and get guidance on building a profile. This is essential, since the service uses an algorithm which, based on their profile, determines the best investor match for the entrepreneur. It will match female investors with female companies, if that is what they want; but primarily it is strategic, aiming to make connections based on identifying specialism matches or filling skills gaps, creating the foundations for a working relationship for the long-term.
Technology-based services like Qodeo rely on the quality of their data and there is a reason that it is so rich. Venture capitalists may be keen to expand their horizons globally, but networking outside their usual groups does not come naturally. Most are not outward-focused or gregarious, and as we said earlier, they are very busy. So, they are signing up to be part of a database that is only being used by companies looking for funding, allowing the matching algorithm to do all the networking for them.
Dating services are not new, but this is the first time that their principle has been applied to the traditional funding industry, and it’s long overdue. After another disappointing search for money, entrepreneurs no longer need to hear that there are plenty more fish in the sea. Likewise, funders can, at last, break out through the walls of convention, and find new, exciting opportunities to make a big return.
