Post-money valuation explained
Preparing to talk to potential investors? You’ll need to know your pre from your post-money valuation. In this post, we...
SeedLegals Chief Legal Officer, Deb McGargle joined UKTN for a Series A roundtable in August 2017. While raising a Series A round isn’t quite rocket science, it’s no mean feat either. To try and demystify the process, UKTN gathered a group of startups and industry experts to chew the fat over this hot topic. Here’s what they said:
In most instances, a Series A is usually preceded by a Seed round. The problem is, according to Michael O’Brien, partner and head of technology at accountancy firm Kreston Reeves, many companies that have raised a Seed think the process for raising a Series A will be the same.
“Some of the companies we see going from Seed level up to Series A have a lack of understanding about how big a jump that can be,” he explained.
“There is quite a big jump in terms of what they need to have prepared. Some businesses have this expectation that, because they’ve already raised a Seed, they’ll go and see a VC and will receive a cheque the next week.”
This sadly isn’t the case, O’Brien added. In many instances a long courtship is required, relationships need to be nurtured and trust needs to be built.
“You’ve got to have a credible business plan,” O’Brien’s colleague Simon Jordan, corporate finance partner at Kreston Reeves, chipped in. “People get carried away with an idea. You need to step back into reality, think about it hard and knock your own product and business plan down. If you can build it back up again, it will stand the test of time. It sounds like a rather strange way of doing it, but trust me, it works,” he explained.
Andy Bellass, co-founder of HR benefits platform HiBob, said his company did exactly this in its early days.
“We switched the lights on on October 2015, we had a beta product out at the end of January, so after just three months, and we gave it to people for about a month and then I invited them to come back and ‘kill our product’. About 10 people came down for four hours one evening and after an hour and a half of literally killing it, I stopped the conversation and asked why they were there, and they said ‘it’s because we love your vision and we think it’s going to make our lives better’. That became such a great story to tell prospective investors,” he explained.
Bellass and his team used the feedback from this session, and subsequent sessions, to rebuild the product, iron out bugs and strengthen their proposition. It seems it did the trick, as HiBob went on to raise a total of $25m (£19.4m) across two rounds, the most recent being a $17.5m Series A back in April.
Clive Hall, founder of Manchester-based consumer insights platform PlaceDashboard, is back towards the beginning of the startup life cycle and is gearing up to raise his first Seed round. He said one of the issues he is facing is a lack of funding opportunities in the North of England.
“There’s not a huge number of routes to funding and the angels I spoke to said they wanted a proven track record – evidence of revenue. There’s a myth that people are willing to take big risks – they’re not,” he explained.
Since being knocked back by an angel investor nine months ago, Hall’s team has worked hard to grow revenues and acquire a “nice set of very large corporate customers”.
“You have to get to the stage where you’ve actually got real revenues with a real product and real customers. In one sense that’s a little frustrating because that is the big challenge a lot of business struggle with,” he added.
Charlie Walker, vice president at Silicon Valley Bank, agreed that UK investors, particularly those outside London, are much less likely to invest in new businesses. He referenced data that showed, out of £120m raised by Manchester tech companies in the past few years, £90m was secured by companies founded prior to 2012.
“That certainly says something about the risk appetite of investors in Manchester. It seems to be about building a very stable business, and then funding it for growth, whereas what we have down here in London is you fund a business to build itself, and then grow,” Walker explained.
Newcastle native Deb McGargle, chief legal officer at SeedLegals, which streamlines the startup fundraising process, argued that Seed funding can be found in the north, but entrepreneurs just need to look a little harder for it. She said VCs based in Boston, Massachusetts, are increasingly paying attention to tech in the north of England. “They’re looking at our businesses. They can see very openly the teams in the north without having to fight through a crowded marketplace, such as London.”
Figuring out when is the right time to raise a Series A can be tricky. McGargle’s key advice on this is to make absolutely sure your product is ready before trying to raise.
“We knew that before we could even approach investors to raise a round, we just had to concentrate on building a product. And this is where I think a lot of early-stage businesses fall over, because they focus on raising money before they’ve got anything for an investor to be able to invest in.
“We were super keen that we would be post-revenue, post-product with a good customer base that we could take to investors before we even decided to raise, and I think that focus really paid off,” she explained.
Shing Lo, a partner at Bird & Bird specialising in venture capital, private equity and M&A, agreed, saying that she is often contacted by early-stage startups seeking to raise funding.
“Sometimes I come across startups that are just so focused on the money, and when you ask them about their product, they find it really hard to articulate it. And I think that’s where they fall foul,” she said.
Bellass said deciding when to seek funding was certainly one of the biggest problems his firm faced.
“Because we were still very young and we took the decision to be big and not small – we saw the opportunity to be not just another little niche player, the real opportunity was to create something that lives as the plumbing, as the operating system within businesses. We knew we needed capital in order to build this,” he explained.
“So we made the decision to do the Series A early on.”
Walker suggested there is no ‘one size fits all’ when it comes to figuring out the right time to raise a Series A.
“We see it as being very different depending on the vertical. So if you’re an enterprise SaaS company, you might be raising a Series A when you’re pre-revenue. Contrast to that, if you’re a marketplace platform then to raise a Series A you’re definitely going to need to have some sort of MVP and show some traction with it first,” he said.
While deciding the right time at which to raise is one problem, getting noticed by investors is another. Charlie Taylor, growth and analytics lead at FinTech startup Curve, said securing a set of well-connected advisers early on helped his company when it came to raising funding.
“Those initial advisers bought into the original idea, then introduced us to Seed investors. And those connections gave us more connections, so it was absolutely the initial advisers and the first set of Seed investors who gave us access to a much bigger set of VCs than we otherwise would have had,” he explained.
Taylor said those first advisers came on board following a lot of cold calls and persistence. Curve’s founder went to about 200 or 300 meetings, he said.
“One guy, at the fifth time of us asking for a meeting, said ‘I’ll give you 30 minutes at Heathrow airport’, so our founder went to Heathrow, met him in a Starbucks for 30 minutes and at the end of it he said ‘alright, I’ll be an adviser’,” Taylor added.
McGargle said she’s a huge advocate of the “Techstars approach” to contacting VCs.
“You go in through your founder network,” she explained, advising people to first do their homework and put together a list of VCs they would like to contact, then look at the businesses in which these VCs have already invested. Next, go founder-to-founder and ask portfolio companies about their experiences with their VCs. Form strong relationships with founders, McGargle advised, then ask for an introduction or recommendation to their VC.
“You can’t be shy,” advised Lo. “You’ve just got to keep networking and you’ve got to talk to investors very early.”
She explained that she recently introduced a founder to one of her contacts at a prominent VC firm. The founder was looking for Seed funding, and was at too early a stage to be seeking investment from the VC, but the VC was very happy to see them because they wanted to get to know the founder at this very early stage so that they would be on the founder’s mind when they later go to raise their Series A.
Walker stressed that founders shouldn’t overlook associates when trying to build contacts at VC firms.
“People only seem to want to talk to partners. I think people see the word ‘associate’ and they think ‘oh I want to talk to the main man’, but actually associates are very trusted within VC funds and would be your biggest advocates if you have been a deal they have nurtured for 18 months/two years. And remember – they are the future VCs, the future partners,” he explained.
Bellass said, regardless of whether you approach a partner or an associate, the key thing to possess is confidence.
“In the startup world, you’re surrounded by a lot of hope and desperation and you mustn’t forget really important things like confidence and belief. As much as you want someone else’s money to help grow your business, VCs smell desperation a mile off, so it’s really important to go into these conversations incredibly strong,” he said.
Bellass advises founders to take control of meetings and make it clear they’re not there to beg the VC for money, they’re there to tell the VC how brilliant their product is going to be and to give them the opportunity to invest.
It’s important that founders keep a cool head in the fundraising process, said O’Brien. He agreed that founders should approach VCs with confidence, and should also make sure they don’t just jump on the first offer they receive.
“The VCs are going to do a considerable amount of due diligence on your business and, likewise, you need to do due diligence on the VCs. Ideally this is a long-term relationship that you’re both going to be adding to for the greater good and you’re both going to come out the other end in a considerably better place,” he explained.
“The cash is there, it might take a bit of time, but you’ll find the cash. Don’t just go for the first person who offers it to you. Go with the one that is going to add value, provide distribution links, customer base, a network and contacts. The one that provides more than just a cheque,” O’Brien advised.
McGargle said founders need to make sure they understand what a potential investor would expect from them on a monthly basis.
“Not just in terms of what you would be delivering for traction and metrics, but more in terms of reporting, such as management accounts. It’s a hard enough journey without having an investor screaming at you every five minutes because they haven’t got this or that,” she explained.
On this note, Jordan said it is important for founders to manage VCs’ expectations.
“Set the expectation on what you know you can deliver, not what you think they want to hear. Be very upfront to start with. If you miss giving them the management information they want after month one, the whole thing gets off to a bit of a bad start.
“If you can’t deliver, tell them early, then explain why and give them specific date when you will be able to deliver and you’ll be back in the good books. It’s all about that basic psychology and it’s amazing how many people don’t think about that,” he explained.
O’Brien agreed, sharing advice from a corporate finance and legal stance: “Check the small print on the term sheets, contracts and the like. Know what you’re signing up for. Make sure the expectations are reasonable and achievable.”
Bellass gave the final piece of advice from the discussion, stating that, investors aside, those striking the deal need to make sure all the founders are on board with what is being proposed.
“Make sure everybody is on board with the journey you’re going to make.”
Do so, he added, and the founders, VCs and advisers should hopefully all be on the path to a happy and successful future together.
If you’d like to learn more about choosing the right VC or how to prepare for your Series A, book a call with one of our experts today!