Archives for the month of: August, 2016

Me

You have identified a large and growing market, built an MVP and acquired a few customers. You believe that you will have a business that will be attractive to VCs in 12–18 months but you need £250K to hit the metrics that they demand. Everyone is telling you that you need to find an angel investor or more likely a group of angels. However, finding them is easier said than done.

I was chatting to a Russian investor yesterday. He has made investments in London, Silicon Valley and Tel Aviv and put forward the view that early stage investment was often controlled by a small group of insiders. In the Valley, for example, the best startup investment opportunities are never put out to the broader investor community. He is sometimes asked whether he would like to ‘join’ an investment opportunity as if it is a special privilege.

It got me thinking about the London investor scene and whether something similar exists here. I believe it does, but it is much smaller and therefore even more difficult to penetrate.

Some of you will be familiar with those lists of investors that have circulated on groups like London Startups on Facebook. Well, surprise, surprise, these are not reliable. The VCs are usually accurate because they are easy to identify simply through their websites. However, the angels are either already invested out, were never investors at all, are in the wrong territory etc.

I started to think how best to build the ‘real’ list and realised how important it is to identify the movers and shakers. These are the guys who have been there and done it before. The founders of startups such as Just Eat, Transferwise, Shutl, Songkick, Love Film and the likes. In addition to these there are small numbers of potential tech investors embedded in the main angel networks plus a group of newbies who have the money but not experience. These are good to build a round behind the lead investors.

I have ended up with a list of 100 influencers. These are people that I believe can make a round happen by bringing a combination of expertise and capital. I am meeting as many as possible and inviting them to review the startups on our platform. I have learned that building a round is very strategic. Founders need to be well prepared and pitching at the right level. They don’t get many bites of the cherry, exactly because it is a small community of investors.

Blog by Paul Dowling — Co-Founder of Dreamstake the world’s first tech startup platform to match over 16,000 founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders create profiles on the platform and get curated introductions to investors. We are constantly looking for great early stage tech startups. Investors please contact [email protected]

Me

The whole concept of democratising capital is very compelling but does it really work?  The UK has led the way in equity based crowdfunding, with firms such as Crowdcube and Seedrs in the forefront of the trend. Now other nations are set to follow, but does it really work?  What are the alternatives?

I am a great believer in the idea that platforms change the world.  We see this with the likes of Uber and Airbnb.  Platforms are great for aggregating the market and reducing the cost to serve. They are very efficient and can grow rapidly through network effect. AngelList has achieved great things in the US as a professional funding platform but has failed to achieve such strong traction in the UK.

I have often observed that VCs don’t exactly eat their own dog food when it comes to building scaleable businesses for themselves. Platforms can change all this and make it possible for investors to engage directly with founders.

However, I would argue that equity crowdfunding has severe limitations.  There are simply not enough high quality startups to sustain the existing players. This will lead to compromising acceptance criteria and higher risk for investors. Investors have reduced control in the crowdfunding model and are less likely to have the skills to carry out the same level of due diligence.

Crowdfunding also relies very highly on market hype.  The man in the street will only invest in high risk tech if he believes that he is investing in a future unicorn. Once the heat goes out of the market, the stimulus to participate disappears.

Angel Investment is highly technical and only sophisticated investors fully understand the the need to diversify their investment across a broad portfolio limiting overall investment to a small percentage of their overall capital.  Investing in one or two startups on a crowdfunding platform will almost certainly result in losing the original capital investment.

Founders love crowdfunding because they believe that they will get a better valuation and access to a broader base of investors.  They also get the opportunity to build user base during the fundraising process. However, most platforms recommend that founders bring their own investors before launch.  Sophisticated Investors will increasingly refuse to play ball because the process is against their interests. We have seen a couple of high profile founders pull their crowdfunding campaigns due to lack interest from investors. This can be a disaster because it signals failure to the whole market.

So what’s the choice?

Professional funding platforms such as Dreamstake provide certain advantages to investors and founders;

  • We work with the founders over many months to get to know them, providing support through Dreamstake Academy and other activities. This allows us to conduct proper due diligence.
  • We have built a database of qualified investors and a high understanding of their investment preferences
  • We provide tools such as a dealroom to help investors build the round
  • We match deal flow through to the most appropriate investors and therefore increase the chances of success
  • We allow lead investors to set the term-sheet and negotiate the valuation

Professional funding platforms offer many of the same advantages of crowdfunding platforms. They aggregate both investor and startup databases and matchmake to increase the probability of closing the round.  They deploy the experience of sophisticated investors  to carry out due diligence and ensure that terms are balanced. Only time will tell whether crowdfunding becomes the norm. Angel and VC represent a tiny percentage of the overall investment market. This is largely determined by the number of investment opportunities. I would rather see innovative ways for institutions to deploy capital into venture than open up investment to investors who are going to get burnt.

Blog by Paul Dowling — Co-Founder of Dreamstake the world’s first tech startup platform to match over 16,000 founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders create profiles on the platform and get curated introductions to investors. We are constantly looking for great early stage tech startups. Investors please contact [email protected]

 

At first glance, investing in technology startups looks highly attractive. The best ones grow into billion dollar companies in amazingly short timeframes and fortunes are made by those that spot the winners. Even without betting on individual unicorns David Rose of New York Angels estimates an annualised IRR of 25% for angel investors. Not bad by any standards.

So where is the dilemma? The problem is that when you look to make your first investment all technology startups look high risk and of course they are. There is at least a 50% chance that the startup you are reviewing will fail and only 10% that it will be that billion dollar unicorn. It is only when you diversify the risk over at least half a dozen startups that things start to look more rosy.

I recommend that the first decision to make is whether to be an active or passive investor. You can choose either approach but your tactics will vary depending on which strategy you follow. To passively invest, you will need to follow others. Pick investors who you trust, investing in sectors that they understand. These are often HNW’s who have made their money from successfully selling or IPOing a company. Let them do the due diligence and set the term-sheet and invest alongside them.

If you choose to be an active investor, you should do a lot more research up-front. This kind of investment has to be fun and is often best driven by a passion. The tech startup sector is very diverse and it is rarely possible to pick a sector that has more potential that the next because everything moves so fast. If you are based in a city such as London, you can predict the sectors which will get the most support from Government and corporates. In the case of London it might be FinTech and FashTech. You might alternatively choose to bet on the future and take a look at sectors such as EdTech or HealthTech. You can also take a technology focused approach, looking to back emerging technologies such as Virtual Reality, Artificial Intelligence, Robotics or Big Data. Whatever choice you make, base it on research.

Active investors sometimes choose to invest in smaller portfolios. The reason for this is that it’s difficult to manage more than a few startups at once.

Finally, there is nothing wrong with taking a hybrid approach. This would involve investing in a small number of startups as the active lead and then build the rest of your portfolio by following other more active investors.

So the main tips to angel investors are;

  • Always diversify your investment across multiple investments
  • Only actively invest in what you understand
  • Follow other angels when you don’t fully understand a sector or technology

Blog by Paul Dowling — Co-Founder of Dreamstake the world’s first tech startup platform to match over 16,000 founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders create profiles on the platform and get curated introductions to investors. We are constantly looking for great early stage tech startups. Investors please contact [email protected]

We have also recently launched an exclusive tech angel investment club in partnership with The Hoxton. HoxTech Angels will run invitation only angel

Everyone knows the innovators dilemma.  As companies grow they lose the ability to innovate. The odds are stacked against them as shareholders tell the management team to stick to the knitting. All desire to take risk evaporates and suddenly they find they have been disrupted by a nimble startup. Just look at what Airbnb has done to transform the travel sector, or Uber in transport.

More and more big corporations are beginning to recognise how important it is to get involved with early stage tech startups. Big names such as Telefonica and Barclays have started to build collaborations between themselves and startups with the very clear strategy of exploring new technologies and innovative business models.

MassChallenge produced an interesting report that shows a shift in the dynamics in the behaviour of corporates towards embracing startup culture in the U.S. The same trends are perceptible in Europe and in particular the UK and we have clearly identified a number of corporate strategies happening here :

The ‘GodFather’ approach: Google operates a whole building to nurture startups – Campus London has 5 floors of event space, free and not so free co-working places, plus offices for a couple of London accelerator funds. A sort of micro silicon valley ecosystem on the edge of the City of London.

The ‘ Getting them early’ approach’: Early stage accelerators are quite a popular model for big corporates. They increasingly focus on niche market segments rather than generic technology and only take the startups that have a direct value to the corporates. They usually partner with large strategic players and they take equity in exchange for subsidence capital. A recent example is the last fashion tech accelerator by Asos , who is partnering with Wayra.

The ‘Lets see what happens’ approach is an interesting model that is taken mainly by financial institutions or players with deep pockets, sometimes resulting in non-equity accelerators.  These nurture startups, usually from a specific niche, such as Fintech.  The main goal is to keep an eye on what’s happening and potential make an investment in the future. They try to build goodwill by giving a lot of value in the form of free office, mentoring and PR. A good example is Winton Capital, that have recently put through their first cohort of ‘big data startups’.

Most corporate accelerators are roughly based on the Y-Combinator model. This involves picking limited size cohorts and providing light mentoring for a set period of time. The goal is usually to introduce the startups to investors at a ‘demo day’ at the end of the programme. Common problems in running accelerators include; poor picking of startups,  bad mentoring and lack of investor interest at the end of the programme.

Dreamstake is able to draw on a community of over 2,000 startups reaching across Europe through a virtual ecosystem. We also bring 10 years of startups experience which we are willing to share with corporate clients looking to harness the potential of early stage technology.