Startups rate personal chemistry with investors above all else

Today's startup founders in the UK have a lot of funding options available to them. But what are the key factors they now use to assess what the best options are?

A new survey reveals the true investment needs of the UK’s early-stage startups. The research conducted by UK Innovation Hub and Tech City UK shows that the most important factor for companies considering raising external investment was personal chemistry and trust with the investor.

The UK Innovation Hub, a new startup programme from Innogy the Germany-based energy company, is focussed on investing into early-stage startups. Together with Tech City UK, the government-backed initiative to support the growth of the country’s digital startups, and community partners Seedcamp and 500 Startups, both early-stage investors, the survey highlights what UK startups really want, creating it’s own Hierarchy of Needs.

Fulfilment

Access to a wide network of investors is the most important higher level need – three-fifths say this is key. Reflecting the importance of the personal relationship, over three-fifths would also value an investor who provides informal guidance and coaching.

Psychological

Personal chemistry emerges as perhaps the critical factor – there is near consensus from founders that the ideal investor will be someone they like and trust, and who is in tune with their product and vision.

Basic

The priority hygiene factors relate to the ease of on-boarding and reassurance that the investor has a strong track record. A low maintenance relationship is also important for over two-fifths of founders.

Thomas Birr, SVP, Innovation & Business Transformation at Innogy, comments, ‘With a huge array of different startup programmes and investment options available, we wanted to get to the heart of what really matters to Founders when considering funding.

‘With the majority looking to Angels and VC’s for funding, and just over two-fifths looking to accelerator programmes, finding someone they liked or trusted with an understanding of their product and vision, was incredibly important. Access to further funding and a great track record were also key considerations, while the add-ons many programmes provide – such as free office space and pitch training – were a low priority.’

Birr continues, ‘At the Innovation Hub we’re eager to challenge convention and develop dynamic partnerships that advance the ambition of our founders. This research has provided us with a guide to ensure we can work with our future investments in the best way possible – as determined by them.’

Future investment channels

The majority of aspiring founders would turn to angel investors (66 per cent) or VC’s (54 per cent).

Only 4 per cent would consider a P2P loan and 14 per cent would consider a bank loan.

Nearly half (43 per cent) would turn to a strategic investor and 39 per cent would consider an accelerator programme.

Where will the money go

Customer acquisition (27 per cent) and product development (26 per cent) were the two key stand out uses of investment, followed by talent (19 per cent).

Talent pinchpoints

Programming skills are in demand. Front end and back end developers are the most challenging hires for new businesses (47 per cent).

This was followed by other product related roles, UI/UX designer (29 per cent), mobile applications developer (24 per cent) and product (24 per cent).

Investment information sources

Two thirds (63 per cent) use word of mouth to find out about investors. A majority rely on Angel List (57 per cent) TechCrunch (51 per cent) and Crunchbase (50 per cent)

Topics of interest

Two topics hold particular appeal for founders – learning more about other startups in their space (68 per cent) and information on new funds (65 per cent).

Advice from investors is also of interest to a majority of founders (57 per cent).

Legal information was the topic of the least interest (20 per cent).

The survey of 164 startup companies across the UK took place from January until March 2017. Of the respondents, three-quarters have global ambitions, while 44 per cent believe they have the potential to become a billion dollar company.

While the startups were bullish about their growth ambitions, over two-thirds were pre-revenue in the last financial year. A third (36 per cent) have already raised funding, with a majority funded by family and friends or a pre-seed programme. Only 9 per cent of funded businesses had received a Series A equivalent investment.

Gerard Grech, CEO of Tech City UK, adds, ‘As the UK’s digital startups have continued to develop over the past decade, we’ve seen a huge support network of investors develop alongside them. From crowdfunding to accelerators, and angels to large VC’s, there is a huge array of options out there for founders to consider.

‘It’s no surprise that this survey has highlighted the global ambitions of our next generation of companies, who have developed in the shadow of some of the UK’s leading unicorns. It’s reassuring to see that with so many options before them, they consider personal relationships, trust and previous success to be key when considering an investor.’

Lack of skills

Tech City UK’s Tech Nation 2017 survey finds that just over half (51 per cent) of business founders or CEOs cite lack of supply of skilled workers as a challenge, whilst just over two-fifths (42 per cent) mentioned access to finance. In this survey, however, access to capital emerges as the number one growth challenge for entrepreneurs and aspiring entrepreneurs.

Nine in ten say this is a challenge, some way ahead of marketing, sales and access to talent. With the majority of survey participants being early stage businesses where they perform all the important tasks with the help of a small team, cash flow and sales are pivotal, while the challenges of growing a larger team are some way off.

Carlos Espinal, partner at Seedcamp, comments, ‘When looking for investment, it’s critical to identify your point of need (in excess of capital) and ensure the investor or fund you’re approaching is the right fit; they understand your stage of development, invest at the right stage for you and have a proven background to support you. We are incredibly proud to have built strong relationships with the founders we’ve backed over the past ten years and in a time of crisis or when looking for advice or counsel, our founders know they can talk openly with us.

‘It’s certainly not a case of investor injects capital and then the relationship ends. It’s critical that both founder and investor feel they have a fair deal that will allow them to work together for a long time after the investment is complete.’

Matt Lerner, venture partner at 500 Startups, adds, ‘These founders are dead-on. Taking money from a VC is like a ten-year marriage. It really has to come down to trust and chemistry. That’s why it’s great to reference check your VCs before you take their money. My old roommate used to say ‘I only trust God and my Mom. And with my Mom, I cut the cards.’

London still king

Just over half of survey participants (54 per cent) were based in London, while 12 per cent were located elsewhere in Southern England and 20 per cent were from the Midlands or Northern England.

Men outnumber women by almost four to one in our sample, which is broadly representative of the profile of tech founders in the UK. Over half (52 per cent) are under 36 years old.

Thomas Birr, SVP, innovation and business transformation at Innogy, says, ‘We’re excited to open in the UK and to work alongside brilliant startups developing products and services that could make a huge impact. We believe there is a great opportunity to support more startups across the country and work with them closely to support them as they scale to find product market fit and accelerate their customer acquisition.’

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