There was a time when founders were practically turning cash away. Today couldn’t be more different. The funding climate is tough: Higher interest rates have made speculative investments less attractive, borrowing has become more costly and, as the global economy takes its foot off the gas, would-be backers are feeling the pinch. Some high-profile VCs are even laying off employees, a situation that is usually unheard of.
“Let’s be clear: People are still investing, but the competition for investment is fierce at the moment,” says Anna Macrae, Senior Director, Mid Market Investment Banking Origination at HSBC UK. Here, we speak to the leaders of two successful UK tech scale-ups, Speechmatics and Ultraleap, which grew out of Cambridge and Bristol universities respectively. Both have negotiated multiple successful funding rounds and have critical advice to offer companies at any stage of their investment journey. How, for instance, do you identify the right investors? What are they looking for in your business? And, more to the point—what should you be looking for in them? Here’s their guide…
Figure Out What You Need, Not What You Think You Need
Get a definitive picture of how much money you require and what you plan to do with it. That starts with a clear-eyed assessment of your financial health—cash flow, debts—and honest appraisal of what investment time-frames are appropriate for your situation. “We’re a deep tech company, so that means you typically need to look for ‘patient investment’—investment that’s not on a three- to five-year timescale—because you need enough time to build the company and maximize the value of what you’re doing,” says Tom Carter, founder of Ultraleap, which makes AR/VR technology. This was non-negotiable—so if they had not been able to find patient capital in the UK, Carter would have been willing to move the company to California.
If you need a longer timeframe, be prepared to accept a lower valuation. “Being pragmatic and taking ego off the table is probably the most important thing,” says Katy Wigdahl, who took over as CEO of speech recognition company Speechmatics in 2020. An overvaluation will typically come with a tighter return schedule than may be appropriate; failure to meet this could trigger a sale. “We didn’t take the highest valuation, which was absolutely the right decision.”
Do Not Underestimate The Search Phase
The pitch isn’t the start of the process, it’s the end-game. Finding the right investor in the first place is essential. Desk research is a good place to start—look for who has previously invested in companies in a similar space—but there’s no substitute for a recommendation. “Professional connections are a great route,” says Carter. “That can mean using connections through the board, through existing investors, or through partners that you’re working with to find the right people to talk to. That’s always been the best route, because then you get a warm intro, and you’ve probably got a higher success rate of that being an appropriate investor.”
If you are considering multiple investors, find a framework to help prioritize them. Speechmatics ranked its investors on four criteria: Financial, strategic, geographic, and cultural. Once you know who could be most useful to you, start building connections. “I developed strong relationships over two years with multiple investors, and every quarter, I checked in,” says Wigdahl. “So by the time we got to the investment round, I had an active relationship with probably 15 to 20 investors—many of whom participated with term sheets.”
Speak To Their Hearts Before You Speak To Their Heads
When it comes to the actual pitch, says Carter, don’t lead with the stats—lead with the company’s story. You need the investor to fall in love before you offer the cold, hard credentials and logic to justify the investment. “That’s just the way the human brain makes purchasing decisions. With the emotional part of our brain, we go, ‘I want that’,” says Carter. “Then, the rational side of our brain kicks in, and we start figuring out if we can justify it.”
Personalize The Pitch
When you’re crafting that rationale, tailor it to that investor specifically. Explain what they can bring to the strategy, and where—with their involvement—the company could be in the next three to five years. It’s also important to be honest about weaknesses. “Be vulnerable,” says Carter. “Admitting where you have gaps shows intellectual rigor, and also means that people will know where they actually do need to help you.”
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Dolby is a prominent investor in Ultraleap, for example, and what they bring to the party is not just money but expertise in scaling companies that sell middleware. “Dolby is an audio codec company; you should probably never have heard of them,” he says. “But every time you go to the cinema, their logo plays in front of the whole audience. So how do you do that? How do you get that level of recognition, even though you’re in the background?”
Prepare For Due Diligence
Most people can predict the typical line of questioning investors will follow. They will ask about your business model, about potential competitors and, of course, for details on the returns they can expect. One thing that might be less obvious is the level of due diligence they may do.
“As part of the round, the investors spoke to around 30 of our customers for an hour and did a deep dive on why they work with us,” says Wigdahl. “They had an honest discussion about why people choose to partner with us. What was important about the relationship? What works? Where can we improve?”