We Built A Fund ! Here's Our Experience...

Building a Fund at Founder + Lightning has been the hardest experiences of my career so far. I knew it would be tough, but it’s been another level !

On the flipside, I’ve learnt more than I ever thought I would– it’s been a huge learning curve.

We’ve had a lot of fantastic successes, a few failures and had to deal with a lot of regulations. Building a fund had been on the roadmap since starting F+L and I am very proud of where we’ve managed to get to so far.

OUR INVESTMENT JOURNEY
How We Started The Fund

We’ve been building tech companies for almost 10 years now. Our previous business model was to discount our fees in return for equity. This meant we were aligned with the founders upside and not just a typical dev agency. In that time, we have learnt what works and doesn’t work, and where most founders go wrong. As mentioned above, it was always our intention to become true investors, but we knew we needed to create that credibility first that only comes with experience - about two years ago we kicked off that process.

The regulations involved in raising as fund are extremely onerous and expensive. So, we kicked it off with just two investors and started with a “quasi fund”. This allowed us to start allocating capital and completely flip our business model but without the time and expense of setting up a regulated fund. The downside of this was that we tuned down a lot of funding as that model only worked with a couple of investors who each backed us with a significant amount - we couldn’t take smaller cheques. Another downside was that on each deal we ultimately had to get “sign off” from our investors which was a stressful process.

Off the back of running our initial investment vehicle like this, we were able to select our fund managers Sapphire and now we have an EIS fund fully set up, and onboarding investors. We had the credibility not only of our previous business model but also of showcasing our capital allocation process, and dealflow process.

Now, getting the fund live was still painful - it took a lot longer to get fully set up that originally thought, and the process of onboarding investors is painful. Plus, it’s a difficult time to be raising investment right now, but we are on our way.

Emerging funds are absolutely key the success of the UK. As they can deploy smaller cheque sizes they are often able to back more niche, and earlier companies and as they’re often a small team with deep domain expertise they’re often at the coalface of their chosen vertical. For example with Founder + Lightning we are often backing companies that other VC’s aren't (yet) interested in, as we have the strategic edge of being able to digitise companies. We are completely engrained in the UK’s startups ecosystem and are now every well known meaning we get access to deals and opportunities thats many larger funds and Family Offices don't have, or don't have the ability to impact like we do.

As a country we need to make it way easier to set up a small emerging fund. Or, fund managers wont bother and that will be a crying shame.

BUILDING IN PUBLIC
Fund Updates

👉 We’ve just invested into Cybaverse, a cybersecurity service provider firm targeting the SME market, with an incredible yearly revenue. They began as an analog service provider, but decided to digitise and automate their services this year – this is where we come in and fits our thesis at F+L perfectly ! They’re also still raising !

👉 Prior to that, we’ve made 2 investments in the last 6 or so months which is less that we had planned. But, we’re being very very selective, and we are also prepared to walk away from deals to ensure we get sensible valuations. This means that we sometimes miss out, but it's for the right reasons.

👉 Despite only doing 2 new deals, we provided follow on funding to our portfolio companies Tradeaze, Editorielle, UJJI, LDC and Tidal.

👉 EIS investments are down by 50%. Despite there being a good amount of money out there, it’s clear that a lot of angel investors are waiting for liquidity before investing further. This means that it's a great time to invest as there is less competition from other investors ! (More on that below).

👉 Valuations are down, and like many our view is the market will bounce back. The companies that have survived the last couple of years are stronger than ever and EIS tax breaks still offer great downside mitigation.

👉 But, fundraising is tough right now… whether you’re a fund or an individual company. I’m spending most of my time fundraising for the fund right now. This has meant I haven’t been doing as much CEO-ing as usual. Fundraising is a full time job.

👉 Our first close for the EIS fund is this month.

For more information click here.

INVESTMENT
Our Biggest Struggle… Rules and Regulations

Because we’re a smaller emerging fund, we can’t be fully regulated in the same ways as the big VCs of the world. What this has meant for us, and a big source of frustration is, we can’t actually talk about the fund in certain ways before people have self-certified themselves as a High Net Worth Individual or Sophisticated Investor.

We can’t say anything that would persuade people to potentially invest before certification… fine but we can’t even use words like invest, investor or investment or refer to the fund as ‘our fund’.

I understand there needs to be regulation and we need to stick to it. My problem is how restrictive the regulation is for smaller emerging funds. It really puts us at a disadvantage !

Especially when smaller funds tend to perform better than larger ones. You’d think the government would want to do everything in their power to help boost emerging funds.

Anyway, rant over, but it’s totally counterintuitive for us, really hard for us to get potential investors interested without being able to talk about the fund itself and has massively limited us !

Ok, rant over now (promise).

DEAL ORIGINATION
Where We Find Deals

Preface: Because we have a pretty niche thesis, there isn’t one place our deals can be found. So, we look far and wide to find the best deals possible.

1) LinkedIn

We’ve often come across profiles of Founders who we have then reached out to or they reach out to us. On the other hand we also search for startups and founders we think fit what we’re looking for.

2) Connectd and other investment platforms

These platforms allow us to connect with founders who are actively fundraising. We love to find deals who aren’t actively fundraising too - this is something we haven’t yet nailed, and need to work harder on !

3) Beauhurst

Beauhurst has been a solid tool for us. It lists most companies and startups and has good filters so we can narrow down to find what we’re looking for.

4) Co-founding websites

Founders looking for co-founder, especially tech co-founders are a great fit for us. Many founders rush to find a co-founder because they feel they need immediate support. We can offer a great alternative for them- a team that feels like an in-house team without the pressure of bringing us on as a co-founder.

5) Inbound and referrals

We also see a lot of inbound through our website, referrals and network which we have built up over the past 9+ years. We work with a number of partners where there is a natural synergy to push dealflow to each other.

6) Events

We hold regular events for our ecosystem, and the multi-prong approach of offline, online events coupled with outbound methods and content has allowed us to create a solid deal flow funnel.

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Always open to feedback, content suggestions or collaborations. Tell me your thoughts.

All the best,

Matt Jonns