Every investor wants to find a hidden gem — a company that will go on to hit the big time, but which few others have discovered.
This, of course, is easier said than done.
“There’s a lot of great entrepreneurs out there, but it’s tough to identify the people who are going to make it big,” says Kristina Pereckaite, the founder of South East Angels, an angel investor community based in Brighton.
It can be time consuming for investors to discover new and sometimes secretive early-stage startups. Meanwhile, the volume of inbound pitches firms receive can be overwhelming, encouraging investors to take shortcuts like introductions from people they already know.
The result: a lot of missed opportunities, and a lot of overlooked founders.
In the UK, where men hold 87% of general partner roles at VC firms, just 18% of startup funding goes to mixed-gender teams, while Boston Consulting Group estimates that 30% of deals completed by diverse-owned VC firms aren’t even assessed by non-diverse firms.
“There are set networks where deals flow in, but if a founder isn’t in those networks it means we’re less likely to see [them],” says Pereckaite. “As investors, we’re having to find unique ways to spot these founders.”
Founders outside of major hubs of startup activity may also lose out simply by being a train, rather than a tube or bus ride away.
There’s a lot of great entrepreneurs out there, but it’s tough to identify the people who are going to make it big.
For instance, Benjamin Storey, head of investor connectivity and platforms at Barclays, and founder of the Barclays Demo Directory, a platform that matches startups and investors, lives in Cambridge, but he’s conscious if he were a founder his perfect investor might not live nearby.
“They might live in Aberdeen or Bournemouth, and unless we get connected we are never going to find each other,” he says.
So what can be done?
Widening the net
Michael Rees, investment manager at Manchester-based Praetura Ventures, says investors should think creatively about where intelligence on up-and-coming startups can be found.
People make dealflow complicated, but it’s not. It’s a time thing.
Accountants, lawyers and advisors (“businesses which startups go to prior to [looking for] investments,” Rees explains) who work with entrepreneurs are good people to have on your side, while events — such as regional networking events in the UK like Fhunded in Lancashire or Fund Her North — also provide good opportunities to tap into new networks of founders.
Rees estimates that while Praetura receives around 200 inbound introductions per month, its partners receive a far greater number of warm introductions as a result of this focus on building broad networks. “People make dealflow complicated, but it’s not. It’s a time thing,” he says.
Searching strategically
Lists of early-stage startups can be found by scouring the websites of accelerators and innovation labs. And platforms like Barclays’ Demo Directory allow investors to filter on metrics such as location, industry and founder identity.
I don’t think anybody’s struggling for inbound, but what they are struggling for is quality.
On this platform, startups upload demo videos to their profile, which provide a handy snapshot of who runs the company. There are currently 642 founders seeking a combined £780m. Around half of these are based outside of London, Cambridge or Oxford, 39% have a female founder and 54% have an ethnically diverse founder.
“Investors thrive off deal flow, but you can now buy lists of investors’ names and email addresses, and they’re getting inundated,” Storey says. “I don’t think anybody’s struggling for inbound, but what they are struggling for is quality. We’re trying to make life easier.”
Looking within
Investors can also set up processes that create a dealflow flywheel, where founders outside a firm’s network are continuously fed into the pipeline. South East Angels runs monthly pitch events for its members, which always has at least one female-run company on the panel.
“It’s easy to find companies run by men,” says Pereckaite. “You have to proactively make sure you’re being inclusive. It doesn’t mean we’re putting anybody in there just because they’re a woman. We have to have the same quality as we do with everything else, but by putting that internal rule in place it means we have to be proactive in finding great women founders. We’re very strict on it.”
As a result, a third of South East Angel’s portfolio is women-led, putting it ahead of the industry-wide 27% of deals that went to UK teams with at least one female founder in 2023.
At Sie Ventures, which focuses on closing diversity gaps in startup funding, 40% of deals are sourced through the 8-week education programmes it runs for female founders, Sie Catalyst.
It’s easy to de-prioritise outbound, yet we have found the best companies by being more proactive and tapping into communities that have access to diverse founders.
“[It] acts as a flywheel for our syndicate,” says founding partner Triin Linamagi. “When we run sourcing cycles for Sie Catalyst we do a lot of outbound and reach-out to different networks and communities.” For the past two years, it has been focusing efforts on reaching founders from ethnically diverse teams and teams based outside of London.
It’s something smaller funds and individual angel investors may feel they can’t find time for — but it’s important to look beyond immediate networks wherever possible, Linamagi says.
“It’s easy to de-prioritise outbound, yet we have found the best companies by being more proactive and tapping into communities that have access to diverse founders,” she says.
Read the orginal article: https://sifted.eu/articles/find-the-best-startups-to-invest-in-brnd/
