It has been reported that venture capital funding for European technology startups has dropped by a third in Q3 2016 and that crowdfunding in the UK has dropped by about 20 per cent.
What are institutional investors looking for?
In the current climate, whilst venture capitalists may look more closely at regulatory or currency exposure (amongst other things), broadly their investment criteria will remain unchanged. In general, investors will be focused on the following:
(1) The team
This is probably the most important criteria. Regardless of how good the product or idea is, investors are unlikely to invest if they do not believe in the team. We have seen instances, where the investor goes into an investment with the idea of replacing the CEO, but this rarely ends up being a great investment.
(2) Market size
Investors want to invest in big markets. They want to see how big a company can become. Companies will need to convince investors on the potential of their product, the current state of the market, the competitive landscape and show that there is a demand for their products.
Each fund will have their own definition of traction (revenue, user numbers, customer contracts, etc.). What investors are really looking for is familiarity with the product/company and its progress. It is therefore important to (i) engage with investors early and (ii) maintain that dialogue (whether you are fundraising or not).
Investors need to invest a certain amount of capital in order to make the returns they want. They are very focussed on the investment amount and the amount of ownership they receive. Investors need to own a certain percentage (typically between 15-20 per cent of the company) in order to get the returns they want. Also, receiving £20m for a £1m investment (regardless of ownership) may represent a great return, but it probably doesn’t move the needle if you are a £400m fund.