Effective Sourcing. One of the most important factors when it comes to being a successful VC is deal flow. It is imperative that VCs see as many deals as possible, as finding the best deals is a numbers game. It is important to not be too London-centric. Amazing businesses are being created all across the country, and by ignoring these businesses simply due to their geographical location, VCs are missing out on some great opportunities.
Sourcing isn’t just about deal flow though. It is also important to have a network of trusted NEDs and chairs, who are willing and able to assist the founders and their businesses to be as successful as possible. It is important that the VC you choose is longestablished and has as big a network of contacts, to provide the most support and guidance to the companies within its portfolio.
Portfolio Construction. So, we have the strategy, and we have approved a company for investment. What does that mean for investors, and what will their portfolio look like? While deployment time will vary across VC investors, it’s important that an EIS portfolio is comprised of companies at different stages of growth. For example, at Oxford Capital a client will typically have 9-12 companies within their portfolio which will be a mix of new “seed” stage investments, these are the highest risk so we will look to limit allocation to no more than 5% per company.
There will also generally be 4-6 companies that will be at follow-on stage and they will have typically hit their revenue/growth KPIs. The remaining 2-3 companies will be more mature, and therefore less likely to fail. This approach spreads the risk significantly, and also helps with liquidity, as naturally, the more mature companies will be much closer to exit than the seed stage companies.
Portfolio Management. The client portfolio has been created, and now the VC needs to manage it to provide investors with the greatest chance of positive outcomes. By leveraging experience, the VC can support the businesses they invest in, and the founders they place their faith in. Companies that retain their founder at exit generally provide more successful outcomes than those companies who lose their founder somewhere along the way. It is imperative that VCs give the founders all the support and guidance they need. Creating and building a business is hard. It takes a toll not only on the founder, but their friends and family too. Backing founders isn’t just about backing them financially – it is important to support them emotionally too, to help them grow in to strong, resilient leaders, to help them build teams that will complement their vision, and to provide strategic advice along the way.
When a VC closes a funding round, one of the first conversations they should be having with the founder is about the next funding round. New businesses burn through cash quickly, and in some instances, it can take quite some time for them to become profitable, so it is important that they plan ahead and have sufficient cash runway to continue trading for at least 12-18 months. There are countless examples of companies with great ideas, who would have been a huge success, only for them to run out of money at a crucial time. It is important that, for those businesses we have great confidence in, they have sufficient cash available, which will create a stable working environment, where the focus can be on growing the business, rather than constantly worrying about funding.
In conclusion, there is no magic bullet that will eliminate risk but still provide significant returns and all the tax reliefs EIS provide. Even with the risk mitigation techniques summarised above, EIS is still high risk. However, what the best VCs are trying to do is manage those risks as much as possible, to provide their investors with the best opportunity for positive investment returns. Lose small, win big – that is the aim, and that is what we are doing.
For more information on Oxford Capital and the Oxford Capital Growth EIS, click here
