If you’re a VC, how do you find the next generation of U.K. startup companies?
Those wanting to take the easy option might begin by looking at the well-established tech hubs. After all, you won’t go far wrong by scouring the shared workspaces of London, Manchester, Bristol or Cambridge for talent.
Then you might narrow things down by focusing on a few hot sectors and ask around your network for examples of founders who are doing interesting things. Doubtless, your search will come up with some promising candidates and you might even invest in some of them.
But are you missing out? If you look in the usual places and find founders who are well-networked enough to find their way onto investor radar screens, might you be overlooking innovators from smaller towns, ethnic minorities or backgrounds that sit outside the usual socio-economic catchment zones? The companies you might call the unknown unknowns. And will you, perhaps, find yourself talking mainly to men, even though there are plenty of women starting and growing good companies?
In other words, could the narrowness of your network coupled with certain unconscious biases be restricting the size of the pool that you fish from?
Well, maybe so. But even if a VC is keen to seek investment opportunities from the widest possible range of sources, it might be impossible to find enough time to assess and filter a larger number of hopeful companies. Best perhaps to stick to the usual channels, even if that means a few opportunities will be overlooked.
Capital Pilot founder, Richard Blakesley believes he has an answer to this dilemma. Originally an investment banker he is seeking to provide high-quality startups with a route to finding investors while also providing VCs and angels with a wider range of suitably qualified prospects.
Capital Pilot is essentially a rating company. Early-stage companies upload their company details – including pitch decks – and Capital Pilot will deliver an investability rating – plus detailed feedback on what can be improved – within a few days. The idea is that startups should use the service before they embark on a funding journey. The feedback will help them address and fix issues that might be red flags to VCs. To date around 2,500 companies have been rated.
“The evidence is that if you have a high rating you will complete your next fundraising,” says Blakesley. “If you have a low rating you won’t.” In addition to the rating, the company will also help to match good startups to investors.
But let’s step back a second. This is also a service for VCs and angels, but surely they are quite capable of rating companies for themselves. They are industry insiders with their owncriteria, after all. Blakesley says Capital Pilot provides a quality control filter across a broad swathe of potential investments. Equally important, he says the ratings are comprehensive and systematic. “A VC will say it wants a good team. How do you know what a good team looks like. We break down all the components that make a good team,” he says as an example.
A Bigger Pool
So what effect could this have on the market? Well, Blakesley says one by-product of Capital Pilot’s approach is a widening of the founder talent pool. The rating system identifies companies that might otherwise struggle to get a hearing. “Our rating system is looking companies that VCs wouldn’t normally see,” he says.
This, in turn, leads to more diversity, he argues. More companies from outside the major hubs, more female leaders, and a significantly higher percentage of founders are from ethnic minorities.
All well and good. But regardless of how effective the rating system is, it will only reach its full potential if VCs sit up and take note. Blakesley acknowledges that Capital Pilot is on a journey with the VC and angel community. “You will have fund managers who will be opposed to any system that questions their own expertise, Expertise is what fund managers are selling,” he says..
On the other hand, he says fund managers are receptive to a system that offers qualified deal flow.
Latterly, Capital Pilot has added to its offer with the creation of a £5 million Boost Fund. It’s open to highly rated companies going through its system. Those with a suitable score can secure £50,000 in pre-valuation money. The startups can then seek additional finance elsewhere.
The Fund – which has made 100 allocations – suggests that the Capital Pilot Approach does indeed result in more diversity. Forty percent of those who have accessed Boost Fund cash are based outside London, a similar percentage have BAME founders and 50 percent are led by women.” A Boost Fund 2 is planned.
That said, more than 70 percent of the companies that put themselves forward for rating have participated in accelerator programs. That does suggest that these startups are not emerging from thin air. They have already begun to make their presence felt within the startup ecosystem.
Looking to the future, Blakesley hopes to increase the pool of funds available to early-stage businesses. By creating a pool of qualified leads, he aims to attract Institutional cash. “We want to create a new system where institutions like Legal & General can invest,” he says.