So you have a killer pitch deck and a detailed business plan – but it may still not be enough to secure that coveted first round of investment.
Giovanni Finocchio, investment director at venture capital firm Midven’s MEIF West Midlands Equity fund, recently saw its first successful exits after pumping more £30 million into ambitious growth companies in the Midlands since 2018.
He says investors have a high bar when it comes to backing startups and urges founders to do their homework before meeting them for the first time.
“Investors typically expect founders and entrepreneurs to discuss potential exit opportunities – and recent exits of comparable companies in the same market – at the first meeting,” he tells TechBlast. “This helps investors evaluate if the entrepreneur plans to exit the business in the future, typically in 3-6 years.
“Having a pitch deck or business plan doesn’t necessarily mean that your company is ready for investment. Before seeking investment, it’s crucial to ensure that your business is fully prepared and can withstand the scrutiny of a due diligence process.
“This means examining all aspects of your business, including whether there is a shareholder agreement in place; whether company filings are up to date at Companies House; whether management accounts are current, if board minutes exist and if customer records are current; if the company owns its intellectual property and if this is documented; and if you understand your cost structure, profit margins and cost of acquiring a customer.”
Despite this early focus on potential exit opportunities, he says that the approach of Midven – part of the Future Planet Capital Group – is to wait for suitable exit opportunities to arise and work towards optimising them, rather than identifying an ideal exit point at the outset and working backwards.
Natural HR
The recent exits of Natural HR and Sign Solutions set the precedent for future MEIF exits, says Finocchio.
Natural HR joined Midven’s portfolio in 2016 with investment from the Early Advantage Fund along with support from private investors. MEIF investment followed in 2019 and 2021 when the company’s needs grew beyond the capacity of the Early Advantage Fund.
During the seven-year partnership, the HR software provider saw significant growth, creating more than 50 jobs in the Birmingham region. Natural HR also grew its customer base by nearly 2,000%, now serving more than 250 customers across the UK
“When evaluating a startup, we consider market size, competition, funding needs, team experience, and how the investment will be used. We assess if the market can support revenue goals, if the startup has a unique offering, if funding aligns with milestones, and if the team has necessary skills. We also review investment plans of the business,” he explains.
“The level of support we provide to portfolio businesses depends on their stage of development. For startups, we not only provide investment but also help in building a team. Our investor network includes individuals with relevant skills and experience in finance, sales, marketing, and operations, who can help the company progress quickly and avoid costly mistakes.
“For instance, when NaturalHR approached us for investment, it was clear that they needed additional personnel with board-level experience. We connected them with a private investor who had HR expertise and introduced another non-executive to supplement the team and invest. Over the years, the founders learned and relied on this additional expertise.”
Sign Solutions
Deaf-to-hearing language specialist Sign Solutions received investment from the MEIF in 2019. Since then it has more than doubled its number of full-time employees from 17 to 36 – with a network of over 600 freelance BSL interpreters and translators.
During the four-year relationship, the company also increased its revenue by 150% and is expected to reach 200% by the end of Q2 2023.
“With Sign Solutions, we provided growth capital and connected them with a seasoned CEO to lead the business and a non-executive director to supplement the team. By working closely with the founders/teams, we aim to help our portfolio companies achieve their full potential,” says Finocchio.
He adds: “Our ideal investment opportunity is one that can yield a return greater than 10X. However, it’s important to acknowledge that some investments may not perform as well, resulting in lower returns of 2-4X.
“At the same time, some investments may exceed our expectations and yield stellar returns. In our experience, some of Midven’s best exits have generated returns ranging between 16X and 34X.”
Midven’s MEIF team currently comprises seven members, with 35 portfolio companies. It is actively investing in new opportunities and expects the portfolio to expand to 40+ companies.
Growth tips
Asked for tips for startups seeking investment and growth, Finocchio answers: “Ensure that your business plan is robust enough to withstand investor scrutiny. It’s a good idea to have someone knowledgeable review it before presenting it to investors.
“Be mindful of your valuation and the amount of money you are seeking. Asking for too much or valuing your company too high may put off potential investors.
“Identify potential risks and devise strategies to mitigate them. This demonstrates that you have thought through potential obstacles and have a plan in place to address them.
“Research the investment process and seek advice from advisers and entrepreneurs who have previously raised investment. This will help you better understand the process and what to expect.
“Be prepared to have your idea and plan questioned. Investors aren’t trying to prove you wrong, but rather seeking to fully understand your opportunity before making an investment decision. Be open to feedback and willing to make adjustments to your plan if necessary.”
The Midlands Engine Investment Fund project is supported financially by the European Union using funding from the European Regional Development Fund (ERDF) as part of the European Structural and Investment Funds Growth Programme 2014-2022 and the European Investment Bank.