According to a report for London and Partners earlier this year, $1.35bn (£0.9bn) was invested in London tech startups in 2014. That compares to $100m invested in 2010. The same report states that $682.5m was invested into tech startups in London in the first financial quarter of 2015 alone.
Certainly, it’s a good time for tech startups to raise money in London – but that doesn’t mean that all startups will be able to easily attract investment. Access to larger amounts of capital is still very competitive.
I am not a professional investor. I’m a corporate lawyer who has done a lot of work for both investors and investee companies in the tech sector over the last five years. I am also on the selection panel for the Microsoft Ventures accelerator programme and am well-versed in the perspectives of angel and venture capital (VC) investors.
So what are investors looking for in a tech business?
Active sub-sectors
As a starting point, some sub-sectors are attracting more investment than others. Fintech (or financial technology) is especially strong in London– where there is a world-class financial services industry and access to talent. There was $623m investment in Fintech across the whole of the UK and Ireland in 2014, according to a report by Accenture. Retail technology, cyber security, virtual reality, medical technology and internet of things businesses also continue to attract significant investment.
‘Fundability’
There are also some common “fundability” criteria, which are often important to investment decisions, including (but not limited to):
• Strong team — in particular the main founder(s)
Ideally, the team will be able to demonstrate a track record of business success.
• Comprehensive business plan
Demonstrating a clear understanding of the path to growth for the business, in addition to setting out how money raised will be deployed.
• Realistic valuation
One that is justifiable on the basis of the current business and the market opportunity.
• Product/market fit
A phrase attributed to high-profile entrepreneur and venture capital investor Marc Andreessen (founder of blue-chip Silicon Valley VC firm Andreessen Horowitz) which means to be in a good market with a product that can satisfy the market.
• Business model
Will the financial models and projections for revenue and profit bear investor scrutiny?
However, different investors (and different types of investor) will be looking for different things and each will lend different weight to different criteria. For example, some of my investor clients consider ‘product/market fit’ to be the most important factor. To put it simply, these investors believe that even a world-beating team would struggle to succeed in the wrong market, even with a good product – and vice versa .
Crowdfunding
For some investors, a business that has been through a successful crowdfunding campaign is attractive because it demonstrates that people are prepared to back the business and, in some cases, it can create a customer base or at least a level of awareness around the product.
However, some investors, in particular some VCs, have concerns over the administrative burdens created by a large minority shareholder base, which crowdfunding usually brings.
Preparation for investment
Given the rise of accelerators and other support networks for tech startups, there are now more startups competing for funding and many are better prepared for that competition.
While I can’t cover preparation for investment in great detail, it is worth mentioning Intellectual Property Rights (IPR), which will often be a tech business’s most valuable assets . Investors will want to see that they have been properly protected and that they allow the business to scale.
Good business practices like IPR protection can often be construed as an indication of how the business is being run generally.
Do your own due diligence
Research into potential investors can help entrepreneurs to glean valuable information, such as what the investor’s standard investment criteria are and the types of businesses and sectors they have invested in previously. This should help entrepreneurs to target investors who are more likely to be attracted to their business and allow them to better prepare their business for the investment process.
For most VCs, some of this information is available on their websites. But entrepreneurs should also use their networks to find contacts who have first-hand experience of a particular investor, whether that be a VC or an angel.
Ciaran Hickey, is corporate and technology partner at Wiggin LLP
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