The next level up in raising funding for your business
2 November 2022 | Newsletter
Welcome to The Fight for Fairer Funding newsletter where we share the latest in the fight for fairer funding in investment, raise awareness and provide education in line with our Mission. This newsletter from Funding Focus founder, David B. Horne, is part of the platform that sheds light on the uneven playing field that female and under-represented entrepreneurs of all genders face when it comes to raising capital for their businesses. We hope you enjoy it!
Read our latest edition below.
This week we dive into the next level of fundraising for your business: Institutional Investors.
With crowdfunding and angel investors, you are typically dealing with the person who is investing their own money, whereas with institutional investors — VC, private equity (PE), wealth management firms and family offices — the people investing the money are doing so on behalf of someone else. True, in many cases, the investors will also put some of their own money into a deal, but the vast majority of the money being invested belongs to someone else.
The money behind the investment may be from a pension fund, a university endowment fund or a wealthy individual or family being managed across 90 generations. Because of this, the checks are tougher and the investor involvement is higher.
Over the next few weeks, we’re going to be touching on various types of institutional investors as covered in my book, Funded Female Founders: How to traverse the uneven playing field and secure funding to grow your business:
- Venture Capital
- Private Equity
- Family Offices
Venture Capital (VC)
VC is incredibly competitive with many VC firms receiving thousands of proposals each year. For this reason, an introduction to the firm is extremely beneficial.
VC firms tend to specialise in a specific industry or sector of an industry. It may be they invest in FinTech, media or healthcare-related businesses, but their focus tends to be narrow and each will have an expert in the field. This person will be brought in to dissect and challenge your business plan, so it must be rock solid. Companies generally raise between $500,000 and $10 million using VC firms, so although the risk is high for both company and investor, the growth potential is tremendous.
We previously shared an article on what you need to do to successfully raise money with a Venture Capital firm. If you’re at this stage and looking to apply, I’d suggest you have a read here: https://www.funding-focus.com/venture-capital/
To learn more about VC’s here’s a case study extract from my book, Funded Female Founders.
CHANGES AS ABC SECURES VC FUNDING
A few years after Nigel and his network invested in ABC, the business was growing well and the founding team decided to expand the company by targeting a new industry vertical showing great potential. Nigel was supportive of this move, but his angel network didn’t have access to the $3 million which ABC required to make it work. Fortunately, Nigel had good contacts into a leading technology VC firm which had funded one of his early ventures and done well from the deal.
Nigel was able to secure a meeting with his friend Rebecca, one of the partners in that firm. This was hugely beneficial to ABC since none of the founders had any VC contacts.
Knowing VC firms are data hungry, Nigel was able to guide the founders in putting together a compelling presentation with the level of detail he knew Rebecca and her colleagues would want to see. They met at the VC firm’s offices. Rebecca was there with another partner, three analysts and a person who was introduced as the VC firm’s technology expert. Expert he was, with PhDs from both Cambridge and MIT. Every technology deal this VC firm considered at partner level had to be passed by him before it would make the investment.
It was a gruelling meeting with detailed questions coming from every conceivable angle, and at the end Rebecca said she would get back to ABC within a few days. The wait was agonising. The expert had given nothing away when the ABC representatives answered his questions. He was stone-faced and spoke in a soft monotone. The other members of the VC team had also been at pains to appear neutral throughout the meeting. Nigel tried to reassure them the pitch had gone well, but Annabel, Briony and Charlotte were anxious. They had never been subjected to that level of scrutiny or questioning before and had no idea whether it would be a yay or a nay.
Three days later, Rebecca rang with good news. The VC firm was interested in making the full $3 million investment, but she and her colleagues were challenging the valuation of ABC and wanted a bigger stake than they had been offered. After lengthy discussions between the founders, Nigel and his co-investors, they agreed to accept the indicative offer.
The next step was for the VC firm to conduct due diligence. Nigel had warned the founders that ABC would be carrying the cost and they had already set aside funds to cover it. Representatives from top law and accountancy firms showed up at ABC and crawled all over the books for two weeks. The technology expert spent several days going through ABC’s code and plans for developing the product for the new industry vertical.
ABC passed the due diligence and the terms of investment were agreed. As part of the deal, the VC firm appointed an independent chairman of the board from its network of approved chairs and Rebecca also joined the board of ABC. The business continued to grow successfully over the next several years. It was a real adjustment for the founders, though, because the company had to grow up quickly. Things became much more formal: there were monthly board meetings and the independent chairman was a stickler for ensuring the board operated properly, distributing comprehensive packs a week before each meeting which he expected everyone to read and digest so they could have meaningful discussions as a board. Early on, Briony made the mistake of not reading the pack before a board meeting and was unable to answer a number of key questions which came up in the discussions. Following the board meeting, Briony was invited to a private meeting with the chairman. She never made that mistake again.
Do you have any questions related to institutional investors? Let me know in the comments below!
Until next time…
With love and gratitude,
David
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