IN-DEPTH 8 May 2017
How start-ups should go about securing investment
From venture capitalists to start-up company CEOs, Gambling Insider speaks to specialists about the journey companies embark on when seeking investment, varying from the common mistakes to the do's and don’ts when trying to pitch your future.
By Caroline Watson
Advice for start-up companies
Confidence in yourself and your project will always work in your favour, with Evan Hoff, Founder and Director of Belo Partners, adding that you should “know your economics backwards as well as having some initial metrics that show you are on the right track”. In a pitch, you should be able to explain your business in a “back of a napkin sort of way”. As a start-up, you lack credibility that other well-established companies benefit from, therefore you need to prove yourself as a “good bet”, and one that the investor wants to enter a relationship with as “going out there with
a begging mentality will get you nowhere”.
The key word here is “relationship”, although the start-up is the one seeking investment, venture capitalists are also looking to benefit from the deal. CEO and founder of Oshi, Nick Garners says start-ups need to “stop thinking about how investors can help you and start thinking how you can be valuable to them”. It’s key to remind yourself that “investors are in it for making more money and they need to know you are a good bet.” Investment is a two-way street, with both parties on either-end seeking to reap the rewards.
A fine line exists between aiming to impress and just looking desperate, as “the ‘cavalry’/investor is never going to come. When you’re in a desperate position, you’re desperate and you’ll start making bad decisions. Moreover investors will sense your fear and desperation, so they’ll just walk away”, Garner adds. As Benjamin Ball, Director at Benjamin Ball associates states: “Securing investment for a start-up is a lot like looking for a romantic partner. You wouldn’t spend two hours on a date delivering a monologue about yourself. Yet many start-ups use this approach with investors. Instead it should be a two-way process of discovery.” In a similar manner when beginning a relationship, start-ups should “aim to pique investors’ interest a little further at each stage, adding detail as you move closer to a potential long-term commitment.”
When entering discussions in the hopes of securing investment, honesty is paramount. As Benjamin Ball states the building of a long-term relationship “requires mutual trust, transparency and honesty. Some investors will terminate pitches immediately when they spot misleading data or are given vague elusive answers.” Instead of shying away from the truth for short term gratification you should “admit what’s not gone so well and talk about what you’ve learned from those mistakes, or how you’ve changed your strategy as a result.”
Common mistakes made by start-ups
When evaluating the common mistakes or misconceptions start-ups make when seeking investments, Nick Garner claims that “generally people get involved in start-ups because they believe they can do ‘it’ better”. The journey with venture capitalists tends to be a long and often grueling process and “there’s generally no such thing as a free lunch or an easy win, there’s just commitments to your beliefs and following through”.
Gambling industry consultant, Aideen Shortt says: “Every parent thinks their baby is the most beautiful in the world. Not every parent is correct. Although founders by default need to be passionate about their product, it is imperative to be acutely aware of the flaws. “There are very few truly ground-breaking ideas. Innovation is mostly new ways of doing existing things, with those ways being better, cheaper or more interesting,” Shortt adds. “To this end, I think many start-ups fail to ask the question – why hasn’t somebody done this before?” A start-up must almost have a degree of self-deprecation about their project, asking themselves the tough questions that inevitably an investor will capitalise on. Shortt adds that founders must be wary as “to understand why their idea hasn’t been developed or if it has been developed why it hasn’t worked”.
If a start-up goes into a pitch unprepared, more often than not the reaction to a challenging question is not something bound to impress an investor. Benjamin Ball states that if start-ups are asked a particularly unfavourable question then they tend to “become aggressive or defensive, which immediately shuts down their chances of investment”. Although this point may seem fairly obvious, pertaining knowledge about every aspect of your project is vital, the good, the bad and the ugly. Honesty with investors and an understanding of the flaws within your project will essentially create a longer, healthier relationship and one
that will start with the advantage of transparency.
Nick Garner also points out the fundamental factor of time and money, which is always a complex issue when breaking away from the norm and investing efforts elsewhere. He says: “Start-ups generally underestimate how long it takes to learn what’s going to work and most often run out of time and money before they get to that special place. So in my opinion, if you think it’s a six month project, make it a year. If you think you can go full-time, go part-time and find the ‘truth’ that will make your start-up a success.” As goes with most start-up ideas, you have to figure out what works best for you, but it’s probably not a good idea to run before you can walk.
Main problems investors have with start-ups
The start-up business is much like any other, there’s a huge overhead to pivoting and/or changing a knowledge set, “to a large extent your idea is either hot (right place right time) or not.” As Garner states: “If your idea is simply a good solid moneymaking project, with no game changing innovation or ability to scale hugely, then there may be an investor for you, but it’s less likely.” Investors are essentially looking for the “next big thing”, an idea or a project that makes you stand out from the crowd. But standing out from the crowd is easier said than done as for any start-up, it will be most likely be entering an incredibly saturated market. Nonetheless, Benjamin Ball states: “In terms of standing out, start-ups need to think about how they can come across memorably. It’s almost never from delivering a 135-slide PowerPoint deck: the only thing investors remember from these is how bored they felt!”
It’s difficult for an investor to see a future with a start-ups idea unless the start-up shows a real understanding with its short and long term plans, in other words they need to be fully prepared. As Nick Garner agrees whilst many start-ups believe they have the potential to go the whole nine yards, without “a deep understanding of their business model and where the revenue will come from” it will be difficult to secure investment.
Why established businesses have it easier
For a start-up, having a little bit of perspective can take you a long way. In Aideen Shortt’s experience she has seen “plenty of start-ups that are arrogant enough to think that they are smarter than big companies.” And whilst this may or may not be the case, there is one advantage well-established businesses hold over the heads of start-ups, and that is brand trust. Although Garner says: “It’s amazing how unproductive many larger established businesses are, but at the end of the day, they have momentum and brand trust which is hard to win away from these organisations.”
Summing up the disadvantages start-ups face when entering the already saturated market, Garner explains that “matured businesses generally have a profitable business model and a large amount of accrued knowledge within it. Start-ups have none of this. So, to get over that hurdle in my view, it’s about starting within a niche that is emergent and therefore
too high a risk and/or not profitable enough for established business to get involved in and then grow from there.”
A start-up does not get to experience the luxury of putting their feet up as they constantly have to be aware of “where the second cheque is coming from” as Evan Hoff puts it. New projects lack a valuable historical performance, providing credibility that well-established businesses relish. As Benjamin Ball says: “Start-ups need to persuade investors that they can deliver a solid return based on the mix of skill and expertise in their team," not by focusing on a non-existent track record.
It’s all in the timing
Arguably picking the right time to seek out investment is dependent on a number of variables. Benjamin Ball explains, “Every business is different. If you can get away without raising external money then all the better. Where your business model requires investment, then, as the saying goes ‘raise money before you need it’.” However, Hoff argues that the earlier you jump on the bandwagon the better, “especially if you bootstrap initially just know that it can take around six months to close a round”.
Nonetheless, it’s not always so simple. “The irony is that when investors will be most hungry to work with you, you will probably be least likely to want with them,” adds Garner. “It’s not so much which time is ideal to get investment, I think it’s more when you do have to get investment and when does the ecosystem ‘soften up’ to the point where investors are interested? If you can bootstrap your project, in my opinion it’s a far better use of your time to grow organically than seek investors. When you’ve got a viable and provable business, perceived risk drops and doors open for you.”
“Look for investment too early and you have no substantial proof of likely success, in this case the power is with the foolish investor, but smart investors will probably stay away. The exception is if you’re one of those few individuals that has a huge reputation, great personal networks and a sure-fire model that’s just going to work.”
It's vital to find the right balance between the amounts of money you need to ensure the growth and future of your project and the amount of equity you are willing to give away. Benjamin Ball adds: “The earlier on in your start-ups lifecycle that you seek out investment, when valuations of your company are lower, the more equity you’ll need to give away in exchange. So think about raising money in stages, at each stage raising just enough to get you to the next stage of the business growth.”
Can it ever be too soon?
Building relationships with venture capitalists does not necessarily mean that you need investment straight away. Ball says: “It’s never too soon to start building awareness and relationships with investors. In fact investors tell us that calls from start-ups who aren’t trying to raise immediate investment are rare but welcome.” Whilst well-established businesses have brand trust, you can create trust by building credibility with the investors prior to pitching your project.
The market essentially decides when funding will come through and Garner believes that it’s important for start-ups to “do their time”, in order for them to learn “whether they are the kind of individuals who can build a business. Once they’ve got beyond that point, then getting funding makes sense because everyone knows what they’re in for.”
Again, it’s important not only to think short-term but think ahead into the future. Whilst finding investors can be a numbers game, “be careful about burning your bridges. If they say no today, they may say yes in six months time.” As Aideen Shortt says “there are appropriate times to seek investment but it’s important to seek the right investment level for each stage, don’t be too greedy too early – because each round has different negotiating variables for both the start-up and the investor. Investors aren’t in the business for altruistic purposes, and they’re probably more experienced at negotiating, so the start-up should initially get as far as humanly possible down the road before they throw themselves to the lions.”