Navigating startup funding: lessons from an active investor

On Wednesday 24th April, we hosted the first of our Founders Fireside Chats, focusing on funding, kicking off the series with Paul Atkinson, Founding Partner and active investor of Par Equity.

How it all started for Par Equity

Paul started as an angel investor and invested in 10+ companies over a few years: “I was lucky enough to be involved in companies that did well.” Building on that experience, he started Par Equity in 2008. Little did he know that the financial crisis would hit just at the time, and the startup landscape would not be spared. “It was a hard start”, he recollected, “but we did well and invested in 70+ companies. We exited some of them, half of them good, half of them bad.”

That’s something that has stayed with the way Par Equity does business even today: “We go from the assumption that half of the companies we invest in are not going to make it.”

He reckons that what allows them to have this consistent track record is that they work with investors that not only have an interest in the sector they’re involved in, but all have direct, relevant experience of whatever the business they’re investing in is doing.

This seems to be working well for them, as they’re the most prolific investor in early stage startups in Scotland. You’re probably familiar with some of the startups they got involved with, primarily spanning industrial technology, healthcare, clean tech, enterprise SaaS: CurrentHealth, Gigged.ai, GSI, DirectID, Amiqus, Cyacomb, MoneyDashboard, Machines With Vision, novosound and more.

With that in mind, Paul shared some insights on how best to approach investors for your startup, and challenges of the current investment landscape. The following reflects Paul’s own perspective and Par Equity’s preferences – which might differ from other investors’.

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1. Do your research!

It might sound obvious but Paul recommends targeting investors who actually have an interest in what you are doing. For example, Par Equity only does B2B investment so there’s no point in approaching them if you do B2C.

If you approach any VC, they'll all have a cheque size that they'll write, depending on how big their current fund is. So go to the investor with the right cheque size for you. For example, Par Equity writes big cheques at the moment: “we probably don't write cheques under 1.5 million so we can't help you if you want half a million, we just can't write a cheque that small.”

He recommends resources like the UK Business Angels Association, Pitchbook, and Beauhurst to look for information.

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2. Be clear about what your proposition to market is

Be ready to answer the following questions: what's your route to market? How are you going to make money? How much return can you offer investors?

Be realistic about numbers. But also know that “we don’t believe your business plan”. In his experience, “founders that have actually hit their financial projections is less than 0.1%” – but they still want to see those numbers.

As Paul was speaking about the size of cheques, I couldn’t help but think of those giant cheques that lottery winners get. But in practice, what do they want to see you achieve with that money? Ultimately, it’s quite simple: “we don't want to invest in companies burning cash, we want to invest in companies making cash”’ and they expect a cash return in 18-24 months.

The good news is that you’re not on your own: “After I invest in your company, we're in the same team. So it benefits us both to make money.” Paul says that they’re able to support with financial aspects, but also specific market and industry knowledge. Par Equity is also very much interested in the people side of business, always ready to jump in to help founders and their teams, and they have been described as “helpfully interfering”.

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3. Watch your cap table

If you're at the start of the journey you don't want the wrong people in your cap table. What does wrong mean here? Well, there’s space for discussion but essentially “investors want to control the company so too many early stage investors = too much equity diluted = VC don't want that.”

In practice: no, don’t give away 40% of equity to a friend or family member against a small amount of money. Be careful also of board positions given away early on against money when those people aren't bringing value

Paul also warns against Crowdcube for companies who later plan to raise through VC: “We don't want hundreds of investors in a cap table. Because it's too much work when trying to do anything.” For him, the ideal is a very small group of investors who actually know what they’re doing.

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4. Pitch deck do’s and don’ts

Paul reviews thousands of pitch decks every year. And in case you want him to read yours, please don’t send it to him directly. The best way is to follow the pitch deck submission process on the Par Equity website.

The team slide is important to them. They’re looking for a balance of skills in the team: an inventor, a sales person, an ops person. They’re not after perfection: you could have 2 out of 3 stool legs, but as long as you understand that 1 leg is missing, they can work with that.

He added that founders often undervalue the non-executive advisory board, but also the lawyers and accountants involved: “If you're still using the family accountant, we're not going to take you seriously.”

He reiterated that stating your route to market and proposition to market is key and warned not to be naive about competitors. He said it was still far too common that founders say “no one is doing this” in their pitch deck but a quick Google search shows the contrary. He had some reassuring words: “Competitors are good as it means there's a market.”

The best way to show you’ve done your research is to include a market research slide: “10 companies do what we do but here is our differentiation.”

As a final advice, he recommended not to put too much emphasis on technology in the pitch deck.

Investment landscape: it’s looking better but more support is needed for smaller deals

Just the morning the event took place, KPMG put a report out stating that there were more investments in Q1 2024 compared to Q1 2023. This is welcome news after the 2022 to 2023 figures in the UK showed a 40% downturn in VC investment year on year. For the same period, Par Equity took on 20%: GBP 30 million investment in 2022-2023, 36.5 millions in 2023-2024, and now targeting 40-45 millions for the coming year.

Paul stated there were multiple challenges: a combination of geopolitics and high interest rates. As a result, “if your business model was derived from a very low interest rate, then your business model is broken with higher interest rates.”

There might be lots of cash around but the historical debt strategy was no longer sustainable. However, Paul reminded us that “a 10% interest rate or less is unusual” and that people have forgotten about this in the past few years.He remains optimistic about the future saying, “we’re now through most of it and we see good signs”, but this hasn’t come without difficulties.”we've sold 1-2 companies every year until 18 months ago. We haven't exited a company in 18 months.” The interest rates are still high, and may not decrease as quickly as people think, but Paul says there’s a recovery in public markets. Although this might not sound relevant to startups at first, he insists it is “because the money flows down”.

The best time to invest in companies is at the start of their journey, not at the end. When questioned about the lack of investors based in Scotland willing to be lead investors on small deals, Paul recognises this is a fair comment: “Par Equity only leads big deals but I'm going to suggest there's a gap in the market for people investing and leading small deals.”

The reason this is not something Par Equity focuses on is due to the frictional costs that are disproportionately high for small deals: “legal fees on small deals outweigh the benefits compared to larger deals. They are hugely important but legal fees are too high for early stage investment.”

He says some organisations do it (Archangels, Equity Gap) but in order to grow this model at scale, initiatives like funds for university spinouts “will need to be quite prescriptive, including keeping legal fees very low.”

Paul also touched on cross-nation aspects of funding. Even if “in general terms, not much London money comes to Scotland”, he reassured that UK investors are unlikely to invest outside of the UK due to regulations. This has mainly got to do with capital gain tax: “UK investing in the UK, I have no capital gain tax if I make money and I can write it as a loss and get a big tax relief if I lose money.”

When it comes to international markets, he said it’s often irrelevant under 5 or even 10  million: “it's just pretty unusual, although there are some sectors where if you have the right product then it can work. For example, enterprise blockchain or enterprise Greentech or even in some Adtech.”

To support a sustainable startup ecosystem, Paul shared a message with founders on the importance of recycling capital. He shared the example of Gareth Williams who made money after his Skyscanner exit and “must have reinvested 100 millions”, positively impacting the Scottish startup landscape.

We wrapped up the evening with a positive note.

“Despite the recent challenges, the market now is so much more positive than 2008. There's probably never been a better place to start a business than Edinburgh, and Glasgow and Scotland. After London and Cambridge, Edinburgh is the next best place!”

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If you want to ignite your investment journey (and keep doing that research!), join Techscaler to take part in Startup Basics' new educational module all about startup funding.

‍This event was made possible thanks to Eden Scott – with thanks to The Raging Bull for hosting us in Edinburgh, Barry McDonald for facilitating the discussion, Kelly Gardner and Claire Taylor from Team CodeBase for organising.