A venture capitalist's guide to raising VC

Fred Ursell, investment director of Pembroke VCT, reveals how institutional investors think
Fred Ursell
Pembroke invested £1.5m in fast-growing womenswear brand Ro&Zo in November 2022

Looking to raise institutional funding? You will not be surprised to hear you are not the only one. It is currently harder than ever to secure investment, recent data from Beauhurst and Sifted shows seed-stage first-round investments are down 28% year on year. This is in contrast with an increase in second-round funding, showing a shift of investor behaviour to supporting their existing companies over investing in new ones The competition for raising investment might be heating up, but there are fundamentals which are beneficial to have in place before opening a conversation with investors. We share our tips for founders and management teams to maximise their chances of a successful fundraise, breaking the process down into three phases:

Phase 1: The preparation

It is always a good idea to start early, with the goal of approaching investors with a minimum of 6 months of cash runway available. This precautionary measure takes into account the typical timeline of at least 4 months to secure a deal. You should prepare a full suite of documents and information in a data room (there are many online resources detailing what to include) and get in the habit of updating it on a regular basis.

When building the data room and pitch documents, you should also develop your brand story. We were particularly impressed by the story behind one of our portfolio companies; ethical glasses brand Bloobloom. From market research, they discovered that premium glasses contained a hefty markup that incumbent businesses did not want customers to know about. In response, they launched a brand with a transparent approach to pricing, sharing the breakdown of raw materials, tax, R&D and profit for every pair of glasses they sell. This transparency allowed Bloobloom to create a USP, communicate their integrity to customers and simultaneously undercut the competition without compromising on service or product quality. We were also impressed by early engagements with one of our recent investments, fashion brand Ro&Zo, as they really understood their customer, their distribution network, and their supply chain.

Another tip for the preparation phase is to research potential investors and understand their investment criteria and why you meet it. We suggest curating a tiered list of target investment funds (1st, 2nd and 3rd) to manage your time and prioritise the ideal partner. Alongside this list, having a project plan with clear timelines will help you manage the process.

Phase 2: The approach

When ready to approach investors, using the tiered investor list, you should start with your tier 1 targets and move down the list as rejections come in, targeting a two-week period of initial meetings. Ideally, you should approach investors via a warm intro, but a cold email can be just as powerful if well-researched. An entrepreneurial way to get a warm intro is to network with a fund’s portfolio companies to understand how they work with businesses and ask them to introduce you. Assuming a positive response to your initial approach, we always suggest pushing for face-to-face meetings rather than video calls to give you the best chance of winning them over.

Phase 3: The process

Your initial approach has piqued interest and now the real process begins. Inevitably you will be asked to present your business idea to investors, potentially multiple times. Storytelling and providing samples or an engaging product demo is a great way to bring the business to life. Using data also helps to validate and build the story and demonstrates an understanding of your business’s key metrics and its ‘value drivers’ (the factors that will increase the worth of both your business and the product or service it provides). This data can include your Customer Acquisition Cost (CAC), Lifetime Value (LTV), product margins, growth rate, retention, churn, etc.

A brilliant pitch from virtual food delivery business Peckwater Brands tipped us toward investing. They demonstrated a deep understanding of data throughout and used it to explain and demonstrate the value its services brought to all parties – Peckwater itself, and the restaurant and delivery platforms it partners with - a true ‘win-win’ business model.

To have an effective process, you need to manage it tightly. Following an initial meeting, sharing a summary of your project plan (a fundraising timeline) is a great tactic. This will not only help manage the process, but it reflects your approach to closing new customers.

While 5-year forecast financial models are necessary, we advise prioritising the next 12 months. Offering a detailed 12-month plan to investors allows them to assess the plan's accuracy while conducting due diligence. Furthermore, ensuring you achieve or exceed the short-term forecast during the fundraising process builds investor confidence, maximising the chances of closing a deal. This focus on the short term also helps mitigate potential mistakes driven by overly ambitious goals, ensuring a solid foundation.

Communication and transparency between meetings are essential to avoid surprises. If possible, spend time with investors outside of formal pitches or financial model sessions to help them understand the people behind the business. Exposing different team members to the investors instils confidence and may reduce individuals’ workloads.

Fundraising is difficult, especially in the current climate. While implementing these fundamentals does not guarantee success, we hope these tips increase your chances of securing the funds your business needs to thrive.

Written by
Fred Ursell
Written by
June 7, 2023