By Simon Glass, CEO, Qodeo
Despite the economic uncertainties that have ruffled the feathers of US VCs and private equity firms, the slowdown does not spell disaster for UK-based entrepreneurs. For too long the biggest funds have dominated the market, focusing on their own areas of interest, bidding up prices and skewing valuations to the detriment of the entrepreneurial community.
As those with deep pockets keep their distance, their preferred model of investing overseas – taking the business back to the US and leading it to an IPO – is likely to change. Downward pressure on valuations will open the market to smaller investors with a more diverse portfolio and in turn, this will give entrepreneurs from every background, sector, and region a chance to sit at the table.
Make no mistake however, anyone who has entered the funding race before will know that there are multiple hurdles along the way and jumping over them is highly challenging, especially while running a growing business.
Finding the right investor is the first place to start. What this means is a funding partner that is collaborative and delivers more than just money. Alfred Lin, a venture capitalist and partner in VC firm Sequoia calls this ‘capital as fuel’. It is smart money, and it could provide contacts that are invaluable for growing a sales network; it might come with skillsets that propel the company forward technologically; or it could be leadership ability which allows a strategy for the future to be laid out.
Smart money comes from investors who are interested. They want to understand the business and help it grow and ideally, they will challenge established views and offer new perspectives. But they are not interested in controlling the day-to-day running of the company; their role is to help the CEO run it more successfully and with greater returns.
In theory, raising finance through investment should be straightforward, but in practice it is often not. Historically VCs have fished in small pools that are limited by their known network, geography and diversity bias. Gender is a well-known issue, and many female entrepreneurs say that they are overlooked repeatedly, however, regional bias has meant that sources of VC capital, in the UK for example, are harder to get the further away from London you are located.
Stephen Fusi, an innovation expert, formerly at US Duke University, and member of Qodeo’s advisory board at funding matchmaker, Qodeo says: “Many entrepreneurs can rely on old university networks, personal and professional connections, and word of mouth. But what happens when the entrepreneur isn’t part of traditional business-school alumni, or they’re located in smaller regional areas? What if they have a fire in their belly but weren’t born with connections and a silver spoon in their mouth?”
He points to studies that have shown that a lack of ethnic diversity in investment firms limits their ability to look at investment opportunities from different perspectives. Paul Gompers (colleague of Qodeo Advisory Board member Professor Josh Lerner) writing in Harvard Business Review outlined his examination of the decisions of thousands of venture capitalists and tens of thousands of investments: “The evidence is clear: Diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. And even though the desire to associate with similar people—a tendency academics call homophily—can bring social benefits to those who exhibit it, including a sense of shared culture and belonging, it can also lead investors and firms to leave a lot of money on the table.”
Cutting out the VC noise
Now, when the market is shifting, entrepreneurs and VCs with a more open-minded approach have a unique opportunity to find each other and bring about change.
Enabling that search for a match is technology – namely dating platforms for funding. Qodeo, for example, has a database of more than 6,500 VC and private equity firms, not just in the UK, but across the world, that have been pre-vetted. This means that time-poor CEOs and finance directors no longer must spend the 350 hours on average that it takes entrepreneurs to find a suitable investor.
A proprietary algorithm sets the business up with investors that are the best match for them. This allows emerging companies, particularly those located in the regions, to have a better opportunity to find a potential investor who ‘speaks their language’. For a small subscription, a service like Qodeo gives entrepreneurs guidance on their profile and valuation, access to research and connects them with the smart money by identifying specialism matches or skills gaps that can be filled, preparing the groundwork for a relationship that will be mutually beneficial.
The aim of a service like Qodeo is not to educate entrepreneurs in raising finance, it is simply to give them the tools to make them visible and filter out the noise so they can connect quickly and successfully with funders.
To date entrepreneurs have been kissing a lot of frogs on their journey to securing finance and it is no longer necessary. With big venture capitalists withdrawing funds for the time being, the nature of funding can evolve as networks open to greater diversity, broader opportunities and ultimately more profitable relationships. It’s time for the funding dating scene to change.