Investing in a startup is 'like buying a house'
While pitch decks, stats and credibility all play a part in attracting startup investment, the process still relies on a certain amount of gut feeling, says Jonathan Hollis, founder of Mountside Ventures.
Founded by Hollis and two former Big Four colleagues, Mountside Ventures aims to help other startups raise funds by making the process more efficient and equipping them with the tools, know-how and expertise to understand the fundraising landscape in Europe.
The business helps clients throughout that uphill journey, from working on the financial models, to the pitch decks or business plans, or helping to network with relevant investors and closing the round. But being born from a startup itself, and having launched in the middle of a pandemic, Mountside Ventures can relate to experiences felt by their clients.
Startups can be challenging
“The first challenge was building a brand from scratch,” Hollis says. “Of course we had a lot of relationships, which we developed in our previous life, but the first challenge is that startups and supporting companies and engaging with funds is all about brands.”
The young company overcame this problem by publishing a lot on social media, running a lot of reports, partnering with Beauhurst and the British Private Equity & Venture Capital Association to get the brand out. That has allowed for more inbound business. The second challenge Hollis cites is hiring quality staff with startup knowledge.
“The third challenge was getting regulated, which took time, and ICAEW was helpful with that,” he says. “But a lot of the other advisers in the space are not regulated so it is not a level playing field.”
Hollis says he found it difficult making sure to hire the right people during a pandemic when you cannot meet them face to face. But in that same vein this meant he didn't have to pay for office space as the new staff could conduct remotely.
Advising on venture capitalists
Mountside Ventures is not only involved with startups, but also provides advisory higher up in the chain, helping venture capital (VCs) fund raised money to then invest in startups.
Ultimately VCs are a good source of funding for startups because of the nature of the risk. “Startups are risky businesses that usually fail, VCs understand that risk and understand that they need to invest in 10 companies to hopefully have one that delivers the expected returns.”
For startups to talk to VC funds to get funding there are a number of tools they need, Hollis explains. “They need a pitch deck template, a financial model and a data room. They then need to understand the funds that are relevant to them based on their sector, their geography and their stage."
They then need a list of funds to understand which funds are more relevant to them, he continues. “Then they need to understand what the market standard is for terms, so they need to build competitive tension, and they need to build FOMO, when they go out to raise.”
The five most important aspects of a pitch deck are the problem the company is facing, the solution (ie, the product it is offering), the market, the team – who is building the product, and then the ask – “how much are they raising, why are they raising, and what are some of the recent exits in the market”.
Trust that gut feeling
After all the facts are taken into account, investing in a startup is a bit like buying a house, Hollis suggests. Beyond the floor plan, the price and the location, there is a gut feeling when buying a house on whether this is a home where the buyer can see themself live for 10 years.
The pitch deck is the technical part that gets a startup in the meeting room, but it’s not just a technical process, Hollis says. “You need the facts that show credibility but ultimately you're selling a dream of the future – and it’s a people driven process, if you have a great background but I don’t get along with you I won’t invest in your business.”
Once successful and upon receiving an investment offer, founders will have to assess the terms of the offer to make sure they are right for their business. And here it doesn’t get any easier, there are hundreds of things to check, Hollis says. But the top five would be “the valuation, the preferences on the shares, investor veto rights, deal fees and of course, investor references".