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An insider’s guide to startup funding

In this edition of the Product Leadership Podcast Tom is joined by Jonathan Hollis from Mountside Ventures.

They chat about the wide range of startup funding options available, how Jonathan’s company makes the fundraising process more efficient for both investors and startups, and the effect Covid-19 has had.

Along the way they cover:

  • What startups should do in preparation for taking their proposition to market. πŸ‘©β€πŸ’»
  • Why the UK is a great place to invest in early-stage companies (and to be an early stage company!) πŸ‡¬πŸ‡§
  • How funds have responded to the need for remote investing, and what goes on in an institutional investor’s head. πŸ’­
  • How similar the startup funding process really is to the one we see on Dragons Den. 🐲

Grab Mountside’s list of funds still active during Covid-19 here. πŸ‘€

Transcript

Tom:

Hey everyone. Welcome back. I’m pleased today to be joined by Jonathan Hollis from Mountside Ventures. Jonathan, welcome to the podcast.

Jonathan:

Thank you very much.

Tom:

Why don’t we start with a background about you and Mountside for people listening?

Jonathan:

Sure. We set up Mountainside with the purpose of making the fundraising process for startups and investors much more efficient. Typically, founders might spend nine to 12 months from their fund raise, investors will continuing looking for deal flow. So we thought there’s a number of ways that we can do to actually make that process better for both the startup, but also for the investors. I set that up with a couple of colleagues from PWC. Prior to Mountside Ventures, we set up PWC’s early-stage startup propositions over the last couple of years.

Tom:

Awesome. Today, I think we’re going to be talking about funding as a whole, the routes that people can go to get funding, how you guys might help. But on a broader picture of the funding world. Is that correct?

Jonathan:

Yeah. That’s right. I’d love to share a little bit about why and how we’re set up to support entrepreneurs and therefore, give you a bit of flavours to some of the process that require some of the preparation that you can do before a fundraise, to eliminate much of the disruption that’s typically associated when startups go out and about to market.

Tom:

Nice. Sounds great. We get lots of people asking us about how to go about doing this a lot of the time, because we work with startups and have done for some time. So I’m sure I’ll learn quite a lot today as well. Let’s start with the world of funding and then the basics, an intro to that.

Jonathan:

Sure. Typically, the UK and has been in a rather privileged position over the last decade or so. The government, a long time ago, set up a number of different tax shift and tax efficient schemes since around EIS and VCT funds that effectively gave a whole bunch of incentives for individuals to invest in early-stage companies. This came through tax breaks, so lower in their income tax liability. All these things meant that actually, a lot of high net worth individuals and a lot of investors could invest in startups, and take significantly less risk based on some of the benefits that HMRC provided. This in itself was a bit of a catalyst for making the UK and London the centre for much of the venture world across Europe. If you’re an investor or if you’re a professional investor, you could effectively invest in companies and get a high percentage back straight from the tax man.

Jonathan:

Then if that company then went on to fail, like many companies do, unfortunately, you would then get a further rebate back from income tax liability. This is one of the key reasons why the UK is where it is. One of those most common funding options when you’re starting a business is through, of course, family, friends, and your own funds. But once you’ve gone through that process, the next one is through SEIS and EIS funding, which is these tax efficient schemes that we’re referring to. You can often get investment from 150K for SEIS, and significantly more under EIS structure. This can be both from individual investors, so angels. Or it can be channelled through a institutional investor, so a fund. Other sources outside the venture world, and there’s a number of different options available to you as a founder, include corporate venture capital.

Jonathan:

So receiving money from a large corporate themselves. A couple of reasons why they might do that. They might want to invest in you as a business to save their own skin, and that they might be worried that you might one day be a competitor, so why not take a chunk of equity in one of our competing businesses? Or they may invest in you specifically to use and implement the technologies that you’ve got on offer. This could be to reduce their costs or to increase the way they can provide better customer service to their existing clients, by leveraging some of the technologies. You may go straight to angels and family offices. An angel is just an individual with significant mouth capital who’s interested in investing in early-stage company.

Jonathan:

The family office is simply that same individual who may have already made their millions, and now they’re looking to invest professionally into organisations. Therefore, structure that investment a bit more formally through a family office, either in-house or outsourced. The other options might include the government support that we’ve seen recently through COVID. So this could be through the future fund, or it could be through the various different initiatives to grow in some loans that the government have produced, and also of course, debt. But typically loans and debt are more relevant for companies that are EBITDA positive volume when there’s more money coming in and money getting out. Of course, for many early-stage companies, the opposite, of course, is true.

Tom:

It’d be good to move on to how people would go about choosing the right thing for them, and maybe the process that you’d run through with people to attract investors and start that engagement going.

Jonathan:

Yeah. Absolutely. The companies might want to work with an advisor, but if they don’t, that’s absolutely fine. There’s a couple of things that if you’re looking to raise now in the future, you can absolutely do to make your life a lot easier. First thing you need to do is prepare. The biggest mistake that founders make is they go out into the market with a deck. They haven’t really thought about the possible questions that investors might ask, such as; what size of the market are you going after, how ready is your product, do you have a product market fit? Tell us a bit about your team, tell us about your competitors. Often, what slows down founders from actually receiving capital is having to answer these specific questions to different investors.

Jonathan:

That takes a considerable amount of time. The first thing you can do is prepare yourself with a very clear deck, very clear model and a very clear business plan. The business plan feels a bit like you’re back at school, doing your enterprise. We quite liked to call that the investor FAQ, IE. But list of all, the possible questions that the investors may ask you. By preparing those questions, A; increases competitive tension. Because it shows that if an investor asks you a particular question and you’ve got the answer for it, it’s not the first time that you’ve been asked that questions, and which implies other interested parties in the race. B; it just saves you a lot of time. If you’re a founder and you have to answer question time and time again, it just takes a long time.

Jonathan:

Actually, if you have to create a model from scratch, when asked for a model, that could be one week, two week delay. Different investors have obviously got different appetites. The first thing you can do is prepare, but the second thing you can do is research the investors before you actually meet them. There’s a number of different resources online, and we can share things that we’ve put online on our website. But typically factors like, does the investor have any capital to deploy, are they halfway through deploying their capital or they at the very start of their fundraising journey, do they actually have money to inject in your business? Question number one. Question number two is, are you at the right ticket size? If a funder has a 50 million pound fund and you’re raising a couple of hundred K, clearly that 50 million pound fund is unlikely to be relevant for you. Because the economics involved in them closing a couple of hundred K deal will be similar to the economics involved in them closing two to three million.

Jonathan:

A 50 million pound fund is much more likely to be investing at the higher range, than the lower range. The second question is, what’s that typical check size, minimum and maximum, and do you fall within this bucket? Then of course, the third question is all around the sector of choice, so do you fit their remit and are you an architect business, are you as a digital agency business, are you a business that falls into their specific mandate? If the answer to those three questions is yes, then it’s probably worth pursuing an engagement with that investor. That initial filtering can save you 15, even hundreds of meetings. Then the third thing you can do is really fundraise when you’ve hit the metrics that are typically associated with that race. If you’re looking to raise a couple of million pounds and looking to give 20% of your business away with a valuation of 10 million, then it’s likely that you will need half a mil, 1 million, 2 million of revenue in order to be able to secure that funding at that higher valuation.

Jonathan:

If you’re raising a couple of hundred thousands and you’re pre-revenue with a valuation of maybe two, three, four million, then of course you won’t need hit those revenue metrics. It’ll be even easier if you need to raise that sum of money. Before going out, it’s also important understand what stage you’re in and ensure that your expectations are reasonable so that just that you don’t get the same message again and again from investors. Because the most common message you get back from VC specifically is that you’re too early.

Tom:

It sounds like a standard matchmaking thing, certainly when you’re going out to find your investors. Is it quite common that people get this really wrong? Because it seems to me, obviously, you pick the people on the right size to make sure you’re reaching out to the people that are going to engage with you the most. Is that a really common thing to people to get wrong?

Jonathan:

Unfortunately, yes. It is. The way you’ve described it, actually, a lot of this is common sense. Reportedly, people just go out… I was speaking to a funder this morning and it’s 50% of the inbound cold emails they receive are from entrepreneurs that haven’t read their website, haven’t read their thesis. If it’s a series B funds or asking for half a million pounds, or if it’s a seed stage fund and they’re all looking for a couple million, they just haven’t done these basic tracks. I guess the reason for our existence is that takes time. The fundraising takes time for your fund, that takes time away from running your business. Actually by engaging with someone who’s done a bit more prep than you, it probably makes sense so that you can save you three to four months of a pain long journey.
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Tom:

What’d you guys come in then, what’d your role be in this and how do you handhold people through the process?

Jonathan:

Our role comes in from the start, so there’s a number of one [inaudible 00:12:27] that’s just charged for the introduction. What we believe is that actually to provide a well-rounded service on their fundraising journey. We want to cover as much ground as possible and really support them from the start of their fundraising process, around supporting them with their documents, supporting them through that business plan, their pitch deck, their data room, their financial model. Actually equipping them with the tools and templates that is relevant for that fund size, to helping them effectively get investor ready in a nutshell. All the way to introducing them to relevant investors who have capital to deploy, who are relevant for their own sector.

Jonathan:

Ultimately, and this is where a lot of the value that we get told from people that we’ve worked with come from. Actually, supporting them in negotiating the timesheet at the end. We’ve seen a number of these timesheets from different investors, and actually we can be in a good position to say, “This is market standard, this isn’t.” Maybe have some of those more difficult conversations with the investor directly.

Tom:

Do you generally deal with people who have not gone through this before, or are you often helping people several times go through different rounds of funding?

Jonathan:

It’s been a real mix. Typically, we like to work with companies that have got some seed money, got some angel money, and they’re going through their first or second institutional round. They could have got maybe three, four million pounds from a pharmacy retail investor, and actually be looking for that for the next round of funding. We can absolutely support them on that late around as well, because there are some new nuances between different funds and actually between the different funding rounds. Sometimes, the founder gets lucky and they seed with the investor. Part of their job is to source and find them a decent series B investor. But often, there’s other things on their minds and they might have other portfolio companies that they need to work with. So we can come in and support that side of things.

Jonathan:

A lot of our inbound referral was actually come in from seed investors. A seed investor might put in a million pounds into a company, and they’re looking to bring their company into the market to raise a bigger round. They might introduce us to that particular startup, and then we would then support them on their next round of funding.

Tom:

Someone who is attempting to do this on their own, how would they go and find investors? Or what advice would you give them to start to build up a lot of people they might go and approach?

Jonathan:

We’ve actually published a list of active investors, 150 funds that have recently raised capital themselves in the last nine months. You can find that on our website. That’s available with fund names, fund size and fund dates. Alongside that list, we’ve also published 30 or so investors that have deployed capital in the last four weeks. The best way of knowing which funds are really active and are actually actively deploying is just to look at the data. Otherwise, there are a number of other lists online that you can find them investors who might be relevant for your different sectors.
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Tom:

You mentioned government stuff as well. How much do you know about that and how people would go around approaching these government funds, or is that not really the area you get involved in?

Jonathan:

Yup. Government funding has been changing week by week, it seems, and the government is continually looking at ways of supporting additional early-stage companies. The number of ways currently, the most significant advance a mentor did was on the future funds, and this is around 250 million pounds. But this was a pot of money that was going to be matched by private capital, going into early-stage companies. There were two main problems with it. The first one is it only impacted companies who have already raised 250,000 pounds beforehand. Then the second problem was that it didn’t impact the ones that were benefiting already from the tax efficient schemes, I mentioned at the start of the session. But having said that, I think there was an overwhelming support when it did come out, because it was aimed specifically at these loss making companies. You may recall when the government announced all the loans, actually the issue with early-stage companies is that they are not profitable yet.

Jonathan:

Therefore, the majority of loans, irrespective of COVID, would not have been applicable to those companies. The second bucket of loans and grants, and that, I think there’s a 50,000 pound loan, there’s a 5,000 pound grant. These are fairly material, if you’re looking at growing and if you’re a scaleup rather than a startup. The government has done that bit. You can argue that startups and early-stage companies, isn’t the bright thing. Because majority of people employed in the UK aren’t from very early-stage companies and therefore, the government has to prioritise the large corporates. But I think now, it’s coming to more pressure from some of the startup lobby groups and also probably a realisation that many of the large corporates themselves were once startups. Actually, a lot of the growth that’s being driven from the economy is down to some of these early-stage technology companies.

Tom:

Yeah. It’s great for everyone involved already, because obviously there’s a lot of cool stuff coming out of the UK. We’ve always been pretty respected as a place where startups can grow and thrive, so it is good to see the government doing stuff there.

Jonathan:

Exactly. As I mentioned at the start, the UK, we’re privileged in the sense that we’re probably the only nation in Europe with such great incentives. France, and President Macron is now looking to follow the lead. He announced the Tourist Visa a couple of years ago. Now he’s looking at ways of supporting and incentivizing a structure, much like the EIS and SEIS structures in the UK. But really the government has done a lot for companies through the grants, through R&D credits, through all of its different schemes.

Tom:

Yeah. There we go, R&D credits every year. It’s very helpful, so good stuff to be taken advantage of. I didn’t realise it was quite unique to the UK, and I didn’t realise that that wasn’t common around the rest of Europe or the world.

Jonathan:

Yeah. Essentialy, you get half of your money back when you invest in the stocks and through, if you can afford it, on new income tax liability, which is insane really if you think about it. Some people were even talking about how they should increase that to 70, 80, 90%. This is for individuals that have got considerable pot of money, and imagine an investment banker who’s earning 300,000 pounds a year, and that investment banker pays 150,000 in tax. They can invest in a company and they can claim back a lot of that investment through a lower tax liability. A lot of people now are lobbying the government to increase that to 80 to 90%. Which means, the fact that if you were putting in 200K into a company, you may, if successful, only actually be taking a hit on 20,000 pounds.

Tom:

Yeah. It means it’s kind of a no brainer, isn’t it really?

Jonathan:

Exactly. It’s a no brainer that is driven the early-stage funding market in the UK.

Tom:

Interesting. That was pretty cool. You mentioned coronavirus, so COVID, we are deep in the midst of it. How has that changed the other aspect, the kind of funding process or the appetite for investing in startups at the moment, do you think?

Jonathan:

Yeah. It’s been probably a mixed response. Some funds were already very well prepared for remote investing. Some funds weren’t [inaudible 00:00:20:49], and say the ones who had already started investing on a remote basis, of course, we’re ready, we’re prepared. For the ones that preferred face to face meetings, that was very difficult. I think the vast majority of investors, I would say, are still quite cautious about injecting half a million, one million, two million or more capital into a company they’ve never met face to face. Because as you know the limits of human chemistry, they’re not understanding really what the aspirations and ambitions of a founder. You speak to investors in the [inaudible 00:21:26], what is the principle driver for investing in the company, nine out of 10 of them will say team. The team is the single biggest determinant of success and failure.

Tom:

So you can imagine that things will… Just as everyone else has had to adapt, it doesn’t look like our worker situation is going to change hugely in the next weeks or months. I’m assuming they’re going to have to get used to how they continue to do business and overcome that.

Jonathan:

Absolutely. Which is why we shared the list of those funds that were active recently, and also active from a funders perspective. Because there are also a lot of funders that aren’t going to be deploying capital in the next six months. Because if you put yourself in the funders shoes, why enough would you invest in new companies when you have a portfolio, maybe 15 companies in your own portfolio, that’s a need of capital, or that’s in need of support? If I have a certain amount of hours in the day, and I’ve got 15 companies that at risk, it makes sense to me to spend my time supporting those companies

Tom:

Absolutely. Makes total sense. The links to those blog posts will be in the show notes for this, so people can check them out there. My only real experience of investing is watching Dragons’ Den. How much like that is it in real life?

Jonathan:

There’s some points that actually are true, and some points that aren’t. The point is that definitely true, it’s the preparation that I mentioned at the start and the fact that you only get one time to make a first impression. There’s no second chances. But the negotiation that you see, clearly is… I wouldn’t say i fictional, but actually the issue with it is that they film, and we had a couple of clients go through the process. The filming might take an hour, and they show three minutes. In fact, if you saw the whole hour, maybe it might be a bit more realistic.

Tom:

I’m assuming they don’t have stacks of cash sitting around as well.

Jonathan:

The footage they shows glorifies a little bit. But I’m sure the full hour of a pitch and the Q&A might resemble a lot of the meetings. But fortunately, it’s not detailed, is it?

Tom:

No. That’s pretty dull stuff. Oh, that’s great stuff. Is there anything else you want to add?

Jonathan:

Maybe touching upon little bit around the VC fundraising journey. Because often, this is one of the things that founders don’t often realise that investors and VCs fundraise themselves, and they go through the very similar pains than a founder does. But instead of taking maybe six or nine months, it takes them two to three years. They have their own investors to worry about. Often, the advice we give founders is to really understand the process from that point of view. Actually, that partner and the manager, and the director that you’re speaking to has likely gone through a very similar process with their investors. When they’re asking for different questions around your model and around your business plan, and your competitive analysis. Sometimes those aren’t questions that they particularly need to answer, but their investors themselves need to answer.

Jonathan:

When they’re pitching your business in front of their investment committee, there also a need to satisfy their own shareholders and investors that your business is suitable. A lot of the time, the key difference between pitching to an angel or pitching to family is that you can look at them in the eye and say, “Yep, this business is great. I’m going to invest in him or her.” Whereas the key difference between your institutional round, is that the people you’re dealing with, it’s not their money. They’re managing it on behalf of someone else. If you remember that whilst they’re asking you all these complicated questions around your business and around your model, why produce a five year financial model? Who knows where you will be in two years time, let alone in one month’s time? Often, the answer lies behind the funder. They need to then pitch your business to their own team and then to their own investors. That difference often explains a lot of the process that founders have to go through.

Tom:

Awesome stuff. Well, I think that’s been really interesting. I’ve certainly learned loads. Now, I’m pretty sure that I can put together a really good pitch for Lighthouse and make several million pound for us.

Jonathan:

Great.

Tom:

Where can people find you online, if they want to find out more about you and Mountside Ventures?

Jonathan:

If they just Google Mountside Ventures, I’m sure they’ll find us on Google. We’re open to resources. We’ve got VC lists that are active. We’ve got some tips on pitching remotely. There’s some resources on there, whether to check if you’re ready for institutional round or not. Also, our latest article is also around how to structure your pitch deck. Before you pitch Lighthouse for these couple of million, figure out what contents defend your pitch deck.

Tom:

Well, nice one. Thanks so much for your time. Really good to talk to you. Cheers for everyone for listening, speak to you again soon.