This week on the startup to scaleup journey:
How we find well-matched investors
Sifting through the myriad of potential investors to find the ideal match has become a formidable task for startups. 20 years ago, a little black book of VC contacts was often enough to get a company funded. But Europe now attracts 20% of global VC funding, up from 5% just two decades ago. Venture investment has increased 100x from less than $1B a year to $92B (2022) over this period. Even in a market downturn, Europe is on track to have its third largest year in terms of funding raised. As both the number and type of venture investors has mushroomed, so too has the complexity of finding those that will truly resonate with the investment proposition. And as founders often come to realise, not every startup is right for 'mainstream VC', so they must seek out alternative categories of venture investor that court different aspirations and expectations. These include corporates, family offices, asset managers, small cap PE funds, and a wide array of other private investment vehicles. Finding the right audience and understanding their needs has become as important to selling equity as it is to selling product. This is why, when we talk to founders, investor profiling is one of the first things we get asked about. So today, we're sharing some insights into how we find well-matched investors for startups.
As a professional advisory firm, we are fortunate in having access to some of the very best investment research. One of the core tools in our tech stack is the Pitchbook platform. With granular detail on the full gamut of global investment transactions across both private and public markets, this dataset is hard to beat. Transactional data is primarily sourced directly from the investment firms that use the platform daily. This immediately sets it apart from the free and low-cost databases out there that often depend on crowdsourcing or web scraping for data acquisition. But the real power of a high-end platform like this is in the analytics. To identify investors, we first run a 'Companies and Deals' search - based on the profile of the company we are advising and the deal to be done. This generates a 'peer group' of similar companies and deals - a similar approach to other tools. But then things shift up a gear: The results can immediately be 'pivoted' (one click) into a participating investor list ranked by # deals done, or any other of our detailed selection criteria. The strongly thematic and stage-centric investors (of which there are an increasing number) rise to the top and are instantly revealed. Working with those that have the highest frequency of investing against our chosen criteria, the list can be filtered and sorted by a further range of parameters, such as # deals led, AUM, geographic focus, typical check size, and median valuations, to name but a few. We now have a ranked 'long list' of targets, but it could contain hundreds of potential names. So what's the next step?
All founders have investor preferences, and these are key to filtering down to a short list. They might include the type of investor, the size of fund, the location of the fund, or the fund's favourite co-investors. We then highlight our own ‘soft’ intelligence from 14 years of dealmaking – insider perspectives about funds and what they are like to partner with. With the shortlist generated and agreed, we then identify the partner in each fund that has the most relevant track record in the sector, with whom the proposition should most strongly resonate. From a different part of the same dataset, we bring up the partner's full investment biography, their contact details (including phone, email and social), media profile, and their network - this includes all the fund team members, board members and other portfolio executives with whom they are connected. This level of detail is a game changer. Such information is invaluable when investigating who might be able to affect a warm intro. As the campaign progresses new insights will emerge that can be used to refine the selection criteria and quickly iterate to better matches. This all aids founder productivity, ensuring the greatest energy can be constantly applied to the most likely candidates. In some ways this process is reminiscent of the journey to product/market fit. Except this time, it's the journey to startup/investor fit, which is every bit as important over the long haul.
Founders must prepare for deeper due diligence
As venture markets have tightened, capital-raising processes are taking longer. Much of this is down to investors being more thorough in due diligence. One area receiving much greater scrutiny is the competitive landscape. Here investors are being ever more resourceful in gathering market insights. Many are now using powerful investment research tools to help scope market size, decipher the market structure, and assess the key players. This is all helping investors formulate questions that can put a founder on the back foot if they are not well prepared. That's why we've recently beefed up the peer group analysis we undertake for startups as part of investment preparation. This competitive deep dive reveals 2 key pieces of information for founders: First, it provides insights into how competitors are positioned in the market and how well-financed they are. Second, the 'funding journey' of similar companies can be discovered. Finding patterns that have worked for others can be very helpful in informing the new funding strategy. How do we undertake this peer group analysis? Using the same 'Companies & Deals' search we use in Pitchbook to identify investors, we combine an industry classification, a vertical market category, and a range of 'keywords' that describe the startup we are working with. This pulls up every other company that has a similar or related profile. With this list of peer group companies we then pivot the data to create a 'market map' showing where each 'sits' in the global ecosystem.
A market map is an interactive, ML-driven research tool that provides a visual rendition of a market and all its participants. The best way to describe its power and utility is by using an example: We recently advised an Indoor Farming company that was developing a funding strategy for a scaleup round. For the peer group analysis we used industry classifications of 'Food Products' and 'Cultivation', vertical market categories of 'AgTech' and 'Climate Tech', and keywords that included of 'indoor farming' and 'urban farming'. This revealed over 300 other related companies in the Indoor Farming sector globally. Pivoting this data into a market map, it immediately became apparent that the Indoor Farming market is segmented into Growers, Growing Systems, and Component Technologies. At the same time we could also see that Indoor Farming is itself a subsegment of the much bigger AgTech vertical, with thousands of other companies across a diverse range of areas such as Precision Agriculture, Animal Agriculture and AgriFinance. This mapping of the complete ecosystem allows prospective investors, who also use the same or similar research platforms, to more deeply assess the positioning of any business in the market and identify its likely competitors. Our job during investment preparation is to make sure that founders have this very same market information, the value of which can extend way beyond the funding process.
The market map also provides a method for identifying prospective investors. By pivoting the entire map, this reveals all investors that are active within the ecosystem and at which level they operate. In the AgTech example, we could immediately identify a cohort of highly thematic investors that invest widely across nearly all AgTech subsegments. Others had specialised in specific subsegments, such as Indoor Farming, whilst another group had clearly been focusing heavily on Growers. A closer look at the different investors in each cohort then revealed that certain types of investor were more active than others, depending on the subsegment. For example, Growers had attracted a much higher percentage of debt providers - necessary to finance farming facilities. These insights not only enabled us to identify well-matched investors but also assess the maturity of the industry and its constituent parts by looking at the trend of capital flows and the different types of exit activity emerging (via PE buyout, M&A and IPOs). This analysis provided pointers on how companies were most likely to get funded at each stage of development (from grants to Crowdfunding to Seed finance, then Series A, B, C to growth). Taken together such insights not only help inform the funding strategy but also prepare founders for due diligence questioning to a level not previously possible.