How valuable would it be for a startup to know what a family office looks for in an investment opportunity?
Extremely valuable, we can assume.
And so we thought we’d have a chat with James Merryweather from KM Capital: to shed some light into how a family office actually picks startups to invest in.
James manages the venture arm of a family office. He is, therefore, front and centre of many opportunities to evaluate startup pitches. We were joined by Sam Luckett, co-founder of Connectd, our community partner that helps Silicon Roundabout startups be prepared for, and meet, seed investors.
Investor Focus
First rule for Founders, right at the start of this fireside chat: know and understand the focus of the investor you are pitching to.
Some investors favour certain industries, markets, or opportunities. This is usually determined by the background, experience, and expertise of the people making the investment.
VC funds have their theme, like our very own Silicon Roundabout Ventures, which invests in Hi-tech Startups.
Family offices may not be as strict with their fucus as a VC, but they often tend to have at least some criteria as per what they want to invest in. If they do, they often state it on their website (if they have one!). Otherwise, you can assume their remit to be much more similar to that of an opportunistic super-angel.
James told us that the family office he manages started with a £5 million fund without a clear focus on what to pursue. It was just general and opportunistic, relying on connections in the early-stage space. Over time, they figured out where they can be useful to the founders they were backing. They set their sights on consumer-facing businesses they could help to scale up and that target tech-enabled markets.
James emphasised that more and more family offices are not passive investors. They like to offer advice and expertise. He projects that areas such as digital health will merge and explode in the next few years. He thinks that his group do not have enough investment in this rapidly emerging market and would like to see more opportunities here.
Catching the Investors’ Attention
There are a few vital elements that investors look out for in a pitch, regardless of the investor focus. James outlines these as follows.
- Experts who may know something that other people do not. This is all about projecting expertise, particularly within the industry the startup seeks to enter.
- The more barriers there are to scaling up, the more difficult it is for them to get excited about the venture. Scale is important to ensuring that the venture is prepared to exploit opportunities that arise as it grows.
- A large potential market. Of course, the market projection needs to be realistic. Anyone that claims to have the next big thing will always be regarded with caution, if not outright skepticism. But if the projection is backed by realistic numbers and well-thought calculations, then it could be enticing to the family office.
- The impression the founder makes. First impressions matter. In this case, it could set the tone and the expectation of the investor. Remember that investors are looking for expertise and competence.
- Who the referrer is. James also likes to check out who referred the founders to their family office. Of course, if the referrer is someone trustworthy or with a successful track record of referring promising startups, the family office is more likely to seriously consider the opportunity.
- Investment materials. This may seem retro, but a potential investor will consider the quality of the materials handed to them during the pitch
Investing Outside the Comfort Zone
Earlier James mentioned that family offices tend to invest in ventures within their expertise and experience. But are there factors that would compel them to seriously consider funding a startup outside of this “box”?
Apparently, there are, according to James. If the concept and the pitch are compelling, then they spark interest. The family office will then seriously consider the opportunity. One example, says James, is a pitch they entertained for a digital healthcare venture. It was uncharacteristic of the family office’s bias toward consumer brands and fashion.
James adds that it’s hard to spot trends and blind spots if you’re locked into a comfort zone. He also says that this is why it is important to carefully analyse performance data.
The Ideal Pitch Deck
Sam asked if there was such a thing as “the perfect pitch deck”. James said that there isn’t really a preference for one approach or another to preparing one. But whatever path the founders take, they must ensure that projections and data be realistic, credible, and involve thoughtful calculation. He warned that a pitch can lose credibility if the projected market is too big. Conversely, a chat with a charismatic founder may win the hearts of his audience. But tepid forecasts could deflate the startup’s chances.
Sam cited this as a common problem for investors. He said that people massively overcook things or massively undercook things. This, he added, underscores the importance of offering hands-on services for financial modeling and pitch deck development. These help to make sure that by the time the investors get to see the pitch deck, it’s already concise, tells a good story, it’s commercial, it makes sense, and it’s going to be exciting for the investor to want to turn the page to see what comes next.
James further suggested that founders not go too far outside the formula for an effective pitch deck. It is only a tool to get in the room with an investor. Attention to detail is absolutely needed. It is also helpful to include some kind of indicator of the startup’s stage of maturity. Overall, James and Sam agreed that founders need to keep the deck simple. Focus on the problem, the opportunity, and why your team is the best to provide a solution and exploit the opportunity.
The Deal-Making Process
Finally, James discussed the process his team has in place to evaluate these opportunities. After he reads a pitch deck and studied the opportunity, and if he finds it compelling, he schedules an initial call. There will be perhaps 3 or 4 more calls to go through details such as forecasting, getting to know who the lead is. At the end, a decision will be made on whether to fund the venture or to pass on it.
A surprising insight is that Covid appears to have made things more productive and efficient for both investors and founders. As Sam pointed out, digitisation imposed by the pandemic appears to have facilitated getting connected more easily and more efficiently. It’s easier to get more people to more meetings through the Internet. The meetings can be brief and not have problems with attendance or dealing with traffic snarls.